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Overview: Position adjustments ahead of today's US CPI and FOMC meeting are giving the dollar a modestly heavier tone today. Each of these events are typically a source of volatility in their own right and together they promise an eventful North American session. The yen is the only exception among the G10 currencies, but even there, the dollar is holding below yesterday's highs. Even sterling's relative resilience this week was unmarred by the flat April GDP. Led by central Europe, most emerging market currencies are firmer too. The beleaguered Mexican peso remains under pressures and has taken another leg lower amid the political backdrop. 

The sell-off of the French bonds slowed today. Last Wednesday, the 10-year French bond yield was a little below 3% and it is consolidating about 3.22%. The sell-off of French bonds weighed on the peripheral bond markets too and widened premiums over Germany. However, the markets are calmer today. Yields are 1-3 bp lower. The 10-year US Treasury yield is a little softer and has slipped below 4.40%. Equity markets were mixed in the Asia Pacific region, with Hong Kong off 1.3%, Japan down 0.6%-0.7%, and Australia off 0.5%. Mainland Chinese shares were slightly higher. Europe's Stoxx 600 is rising for the first day in four, and US index futures are slightly firmer. Gold is trading a little softer after rising about 1% over the past two sessions. It is in a narrow range mostly between $2311 and $2318. July WTI continues its recovery from last week’s five-month low near $72.50. It is trading at a new high for the month near $79 today. API reported a 2.4 mln barrel drop in US inventories and this is being cited by accounts to explain the firmer price, but IEA downgraded its estimate for demand growth this year and warned of a persistent surplus.
 

Asia Pacific

Japan reported an acceleration of PPI. The 0.7% increase last month topped expectations and was the largest increase since November 2022. The year-over-year pace more than doubled to 2.4% from 1.1% in April. It did not seem to impact expectations for the BOJ, which is expected to hike rates next month. The yield on the 10-year JGB slipped by nearly four basis points from a little over 1% yesterday. Meanwhile China reported unchanged consumer prices (0.3% year-over-year) and less deflation in producer prices (-1.4% vs. -2.5% in April). The main narrative is one of weak consumer demand, but it seems more complicated. Food prices are 2% lower year-over-year, and this cannot be explained by shifts in demand. Non-food prices rose by 0.8%, which is about what it has averaged this year. Consumer goods prices were flat for the second month and services rose by 0.8% year-over-year for the third consecutive month. Still, the soft CPI may spur speculation that the PBOC cold cut the one-year Medium-Term Lending Rate (2.50%) at the start of next week. Tomorrow, Australia reports May jobs data. The unemployment rate has been volatile in recent months, rising from a five-month low of 3.7% in February back to January's 4.1% rate in April, which was the highest since January 2022. It is expected to have eased to 4.0% in May. Separately, Indian begin to be including the JP Morgan EM bond index starting this month. The RBI left rates on hold last week, but with two dissents what is expected to be tighter fiscal policy under the new Modi-led government, a cut could come as early as the next meeting (August). Tomorrow's CPI May CPI is expected to have inched higher (4.85% from 4.83%), its first increase this year, but is not a game changer, plus, it the RBI will see another CPI report before it meets again.

The yen made little headway yesterday, despite the nearly six basis point pullback in the US 10-year yield, which unwound Monday's gain in full and ate a little into the surge spurred by last Friday's jobs data. Since the BOJ intervened a few hours after the last FOMC meeting on May 1, the greenback has not traded above JPY157.70. Yesterday's session high was recorded in North American near JPY157.40. It has held just below it today. The dollar has held above JPY157. At the end of last week, the Australian dollar settled below $0.6600 for the first time since May 8. It traded below $0.6600 on an intraday basis on Monday and yesterday, but settled above it, almost as if the market is rejecting the break. Still, it remained in the lower end of the recent range and has not been able to resurface above $0.6615 until today, where options for A$1.3 bln expire today. It has traded slightly above $0.6620 today, and the intraday momentum indicators suggest the day's high may not be in place. The dollar remains firm against the offshore yuan at the upper end of the recent range but stalled near CNH7.2750. The PBOC set the dollar's reference CNY7.1133 (CNY7.1135 yesterday) and the average CNY7.2544 (CNY7.2621). The greenback has held above CNY7.25 today after moving above it for the first time since last November yesterday. 
 

Europe

The UK's economy stagnated in April after growing by 0.4% in March. The weakness was widespread. Industrial output fell by a sharp 0.9% (median forecast in Bloomberg's survey was -0.1% after +0.2% in March), with manufacturing output collapsed by 1.4% (+0.3% in March), the largest decline since 2020. The index of services rose by 0.2% (+0.5% in March) and was the positive sign. The trade deficit blew out GBP6.75 bln from almost GBP1.1 bln in March. The construction output, which had been expected to be flat plummeted by 1.4% after falling by 0.4% in March and 2.0% in February. Even if April's decline can be attributed to the poor weather, it does not seem a very satisfying explanation. On a quarterly basis, construction output has not risen since Q2 23. Still, the expectation for a BOE cut in August (a move next week is all but ruled out) is little changed slightly below 45%.

Yesterday's euro low was recorded in early North American trading near $1.0720. It had been trading near $1.09 before last Friday's US employment data. The selling pressure eased the euro recovered to around $1.0750. It edged up to nearly $1.0755 today and has held above $1.0735. Previous support we identified (~$1.0785) now offers resistance. There is little technical reason to think a low of any import is place, though the $1.0720 area corresponds to the (61.8%) retracement of the euro's rally from the mid-April low (~$1.06). The momentum indicators are falling, and in any event, did not confirm the highs set earlier this month ("bearish divergence), and the five-day moving average has fallen below the 20-day moving average. Sterling, on the other hand, is buoyant. It rose through yesterday's high to reach $1.2760. Sterling has recovered more than half of what it lost since Friday's US jobs data. Still, the underlying technical tone looks soft. The momentum indicators have turned down, and the five- and 20-day moving averages could cross tomorrow. Perhaps sterling's resilience is from the bid it has on the crosses. The euro slumped to a new low yesterday, slightly below GBP0.8420, approaching support near GBP0.8400. It is little changed today. After falling around 2.7% against the Swiss franc in late May and into early June, sterling has appears to have based and is trading at a six-day high today. Against the yen, sterling closed above JPY200 yesterday for the first time this month. The 16-year high was set in late May near JPY200.75. It briefly traded above JPY200.70 today. 
 

America

US May CPI is expected to have edged up by 0.1%, the least since last October. While the year-over-year rate may be unchanged, the three-month annualized rate would ease to 3.2% from 4.4%. The core rate is expected to have risen by 0.3%, the same as in April. The year-over-year rate may slip to 3.5% from 3.6%. The three-month annualized rate would moderate to 4.0% from 4.4%. Such a report would help reduce perceptions of the tail risk of new acceleration of inflation, it is unlikely to move the Fed's needle. The focus of today's FOMC meeting is not on what it does. The market has long given up ideas of a rate cut today. Rather, the forward guidance via the new economic projections is key, mediated, at least partly by comments from Chair Powell. Despite the leading the central bank in its most aggressive tightening cycle in history, the market often hears a more dovish message from Powell. The most important part of the Summary of Economic Projections is the median forecast for the number of rate cuts this year. In March, the median dot was for three cuts. This no longer seems likely. It would not take a large swing for the median dot to fall below two (cuts). The derivative market is pricing in one cut fully and little more than half of a second cut. Can the Fed be more dovish than the market, which priced in better than six cuts as recently as mid-January--more than twice the Fed's median dot? 

The US dollar reached its highest level against the Canadian dollar yesterday in nearly two months but stopped slightly shy of CAD1.38. There are options for around $320 mln that expire there today. It reversed lower and briefly traded below CAD1.3750. However, it managed to settle above that key level (and Monday's low). The US dollar has edged lower to about CAD1.3740 today. Given the momentum indicators, today's big events, and the largest two-year premium (85 bp now 90 bp before the weekend) since 2005, the Canadian dollar's recovery looks more like consolidation than the start of a strong recovery. A recovery in the Canadian dollar seems more likely to be fueled by a broader pullback in the US dollar than domestic Canadian developments. The pressure on the Mexican peso post-election persists. The dollar was confined to Monday's range yesterday (~MXN18.2150-MXN18.6580). It did not trade much above MXN18.58 yesterday, but today has pushed to MXN18.7250. Given the prior positioning, and the news stream from Mexico, the adjustment does not appear over. Because of the market's seeming imbalance, i.e., the weakness of the peso buyers, the sellers step back to minimize the damage being done to the remaining portfolio, the peso bounces, a little. The dollar remained firm yesterday against the Brazilian real, trading inside Monday's range. It reached almost BRL5.39 on Monday, its highest level since early last year. The slightly higher than expected inflation report yesterday gave new fodder to the swaps market, which continues to see the next move by the central bank as a hike and about a two-thirds chance it takes place in the next three months. 

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