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Overview: The dollar is mostly consolidating yesterday's CPI-inspired decline. The main features include the market bidding the US dollar back above JPY159 despite more speculation that the BOJ did in fact intervene yesterday and checked on the euro-yen cross in the local session today, and unexpectedly soft Swedish inflation, which the swaps market says could spur three rate cuts here in second half. A record trade surplus and strong aggregate lending figures did not prevent the offshore yuan paring yesterday's gains. Sterling is pushing to new highs for the year above $1.2950, while the euro holds in a narrow range below $1.0890. Most emerging market currencies are firmer, with the notable exception of Taiwan, South Korea, and Türkiye. 

The rebound in the yen appeared to weigh on Japanese stocks, where the Nikkei tumbled nearly 2.5%, its largest loss in nearly three months. The biggest drop in the NASDAQ since late April took a toll on Taiwan and South Korean equities, where the main index fell nearly 2% and 1.2%, respectively. Mainland shares that trade in Hong Kong jumped 2.5% while the CSI 300 eked out a small gain. Less-tech-intensive, Europe's Stoxx 600 is up a little more than a quarter of a percent, for what could be the third consecutive advance, the longest in more than a month. US index futures are narrowly mixed, ahead of the US PPI. Asia Pacific bonds played catch up after strong US rally yesterday, while European yields are 3-5 bp higher, except in Sweden after its CPI report. UK Gilts have been hit the hardest and the 10-year yield is up a little more than seven basis points. The 10-year US Treasury yield fell seven basis points yesterday to about 4.21% and is now a little more than a single basis point higher. Gold surged through $2400 yesterday to almost $2425 is softer today and testing the $2400 area from above. September WTI is at a four-day high above $82. Monday's high was $82.50. 
 

Asia Pacific

The market is trying to figure out if the BOJ intervened after yesterday's soft US CPI. A Japanese TV claimed intervention took place, citing one unnamed person. A newspaper cited an unnamed government official, and earlier today, the press reported BOJ checked on the euro-yen cross. Still, we will not know for sure until the end of the month but there may be some indication by early next week. We think in both word and deed, Japan does not appear to be defending a level. Instead, broadly understood, there are three criteria:  one-way market, volatile market, or one that is not responding as it should to fundamental developments. None of those conditions existed yesterday, which would seem to make a high bar for Japan intervention during US hours. It might not be a decisive factor one way or the other. The dollar held yesterday's lows and recouped almost half of yesterday's decline. Of course, Beijing closely manages the yuan, but we see the PBOC have slowed the yuan's depreciation, which is the exact opposite it would do if it were using its foreign exchange policy to supplement it mercantilist practices. The yuan's surge yesterday by a little more than 0.25%, is its largest advance in two months. It was a function of 1), the dollar's broad weakness, 2) the yen's surge, and 3) the drop in US rates. Although we see China as an aggressor in its foreign policy, in the foreign exchange market is seems to be more passive and desires, like many other countries, especially in the area, to have a relatively stable exchange rate. Incidentally, until it no longer suited, high-income countries wanted stable exchange rates too--hence Bretton Woods. After it collapsed, European countries which trade so intensely, tried various schemes to keep their currencies stable against each other, until finally adopting a single currency. China reported a record trade surplus ($99 bln after $82.6 bln in May). Exports rose 8.6% year-over-year (up from 7.6%) and imports unexpectedly fell by 2.3% (from +1.8%). Separately, China reported a surge in aggregate lending last month (CNY18.1 trillion from CNY14.8 trillion), largely in line with expectations. 

Amid the uncertainty over the yen, what we do know is that the dollar was coming off from around JPY161.60 a few minutes before the US CPI and within a few minutes after the report was a big figure lower. A short-lived attempt to buy the dollar faltered near JPY161, which was not to be seen again. Within about a half an hour, it had dropped to about JPY157.45 the session low. Hence, the speculation of intervention speculation. The greenback calmed down before Europe closed yesterday in about a third of a yean range above JPY158.50. Today's session high was set early Japanese trading near JPY159.45. It was sold to JPY157.75 before returning to JPY159, and traded around there in the European morning. After holding support near $0.6750, the Australian dollar jumped to almost $0.6800 after the US CPI. After a few tries in vain, the Aussie surrendered its gains and returned to status quo ante. It is trading with a firmer bias today but in a little more than a quarter of a cent below $0.6780. The soft US CPI, broad dollar sell-off, especially against the yen, and drop in US rates did more to helped Chinese officials steady the yuan. The yuan, both onshore and off, reached the best level in nearly a month. The offshore yuan has risen in five of the past seven sessions coming into today, but yesterday's 0.33% advance was more than the other four advancing sessions combined. The five-day moving average has crossed below the 20-day moving average for the first time since in a month and a half. This may have matched or confirmed a signal for short covering. The PBOC reduced the dollar's reference rate for second consecutive session to CNY7.1315 from CNY7.1329 yesterday and CNY7.1342 on Wednesday. Against the offshore yuan, the dollar is holding above CNH7.26 today after falling to CNH7.2580 yesterday. It has held below CNH7.28. 
 

Europe

Norway reported softer than expected CPI earlier this week and the krone fell 1.2% against the dollar in response. Sweden reported a sharp decline in its June CPI today. The krona had strengthened in the past three sessions coming into today, including yesterday's surge (~0.9%), the largest gain in a month, before consolidating today. Headline CPI slowed to 2.6% from 3.7%, while the underlying rate, which it targets (uses a fixed interest rate) fell to 1.3% from 2.3%. A Swedish rate cut at it August 20 meeting is fully discounted, as is at least one more this year. In fact, the swaps market has about an 90% chance of three cuts before the end of the year. The Swedish krona is the weakest of the G10 currencies today, off nearly 0.5% against the dollar. Meanwhile, the political uncertainty in France and its fiscal challenges did not prevent the euro from trading at its best level in a month yesterday. It underscores our belief that the key driver is on the US side of the equation. The French 10-year premium over Germany is essentially flat on the week near 65 bp. 

The euro rallied a half of a cent to $1.09 on the US CPI, breaking out of the short-term flag pattern higher. It stalled as it approached the upper end of where it has been since the spring equinox. It pulled back to around $1.0860 as it appeared late longs and momentum traders were forced to the sidelines. The euro remains firm in a roughly $1.0860-$1.0890 range today. The US two-year premium over Germany continues to hover around 170 bp. We anticipate a consolidative phase or the euro in the coming days. Sterling rose to almost $1.2950 yesterday, its best level since last July. That was three-standard deviations above the 20-day moving average (Bollinger Band is two standard deviations). After the initial surge, sterling gains were gently pared until new buyers emerged $1.2900. It has held $1.29 today and pushing above $1.2950 in the European morning. The upper Bollinger Band is near $1.2915 today. Sterling has had quite an impressive run, falling in only three sessions in the past three weeks. Last year, sterling peaked in the middle of July near $1.3140. 
 

America

There can be little doubt that the soft June CPI will boost the Fed's confidence that inflation is moving toward its target. Headline CPI rose at an annualized pace of 0.8% in Q2 24, down from 4.4% in Q1. In H1, the annualized pace rate was 2.6%. In H2 23, it was 3.2%. The core rate rose at an annualized rate of 2.4%, half of the Q1 pace. Though the echo of Q1's disappointing performance linkers as core CPI rose at an annualized clip of 3.6% in H1 24, up from 3.0% in H2 23. There is still little chance of a cut at this month's FOMC meeting, but the derivatives market shows full confidence of a cut in September and another one before the end of the year. There seems to an increase in bank's anticipating cuts at each of the last three meetings of the year. The Fed funds futures are pricing in around a 40% chance of that third cut. Today's PPI report will help economists finalize forecasts for the PCE deflator, but the die has been cast. Barring a shock, the headline and core PCE deflators are likely to soften by about 0.1% (2.4% and 2.5%, respectively). 

The US dollar recorded an outside day against the Canadian dollar, trading on both sides of Wednesday's range yesterday. Even though the close was inside that range, the price action disappointed those looking for a breakout when the greenback was sold through CAD1.3600. The Canadian dollar was one of two G10 currencies that could not find traction against the US dollar (the other being the Norwegian krone). Even the false break of CAD1.3600 reinforced the significance of its support. The CAD1.3650 area has capped the upside since last Thursday. It is consolidating in a narrow range today between about CAD1.3610 and CAD1.3635. Meanwhile, the greenback recorded the seventh consecutive session of lower highs and lower lows against the Mexican peso. It fell to almost MXN17.7025 yesterday, down from MXN18.1060 at the end of last week. The dollar frayed the lower Bollinger Band (~MXN17.76) for the second session. It is found near MXN17.70 today. While the Mexican peso remained firm, the three poorest performing emerging market currencies were the Brazilian real (~-0.40%), Chilean peso (~-0.33%), and the Colombian peso (~-0.20%), each apparently with idiosyncratic drivers. 

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