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Overview: In the absence of fresh developments, the dollar is consolidating in narrow ranges today against the G10 currencies and enjoys as slight upward bias against most emerging market currencies but for a few currencies from the Asia Pacific region. With practically an empty US data calendar, Fed Chair Powell's testimony with be the highlight, and a soft headline CPI on Thursday anticipated. The US two-year premium over Germany has fallen from around 190 bp at the start of last week to 170 bp today, the narrowest in more than three months. This has coincided with the euro advancing every session last week, before slipping slightly yesterday. The greenback continues to hover around JPY161. 

Asia Pacific equities rallied but for Hong Kong, led by 1% gains by Japan and China. Europe's Stoxx 600 is slightly lower and is threatening to extend its slump for the third consecutive session and eight of the past 11 sessions. US index futures are trading with a firmer bias after the S&P 500 and Nasdaq set new record highs yesterday. Asia Pacific bond yields slipped earlier today, but European benchmark 10-year yields are 2-4 bp higher. The 10-year US Treasury yield is little changed at 4.28%. The US Treasury is selling nearly $175 bln in securities today (42-day cash management bill, 52-week bills, and three-year notes). Gold gave back its pre-weekend gains yesterday, perhaps weighed down by news that the PBOC did not add to its holdings for a second consecutive month in June, but support near $2350 remained intact. It is trading with a firmer bias today. After reversing lower before the weekend after reaching almost $83.60, September WTI fell nearly 1% yesterday and is off about 0.7% today to slip below $81. Initial support is seen around $80. 
 

Asia Pacific

It was a quiet regional session with a light news stream. That will end tomorrow with China's CPI and PPI. Yesterday, the PBOC introduced a new mechanism to manage short-term borrowing costs. The takeaway is that the seven-day reverse repo rate will be more important and an additional daily open-market operation window (4:00 -4:20 pm) has been introduced. These overnight repo and reverse repo operations will conduct at rates 20 bp below and 50 bp above the seven-day repo rate, respectively. The net effect may be to narrow the interest rate corridor and reduce interbank volatility. Separately, the PBOC has indicated it can borrow large amounts of bonds from banks that it could sell to slow or stop the decline in long-term Chinese yields. Together, the two measure give a sense of a soft form of yield curve control. Today, the PBOC began it bond repurchase operations and injected CNY2 bln into the banking system at 1.8% via the seven-day reverse repo. Meanwhile, The Reserve Bank of New Zealand meets first thing tomorrow and it is clearly on hold (official cash target rate has been at 5.5% since the last hike in May 2023. A couple of months ago, the RBNZ projected its first rate cut in Q3 25, but the market is unconvinced. The swaps market has around a 55% chance of a cut in October and has nearly 38 bp of cuts discounted for the last meeting of the year in late November. 

The dollar spent most of the North American session below JPY161 and continues to straddle it today. The US 10-year yield extended last week's decline and is now hovering around levels seen before the US presidential debate that sparked a sharp steepening of the US 2-10 yield curve (less inversion). After rising from around JPY155 in early June to almost JPY162 in the middle of last week, the greenback is consolidating. A convincing break of JPY160 is needed to denote anything of importance. Options there for almost $1.5 bln expire today. Nearby resistance may be encountered near JPY161.40. The Australian dollar traded on both sides of its pre-weekend range yesterday, but settled well within, leaving a sense of near-term consolidation. It broke above $0.6700 last week for the first time since January and briefly traded above $0.6760 yesterday before settling into roughly 15-tick range (~$0.6735-$0.6750). It remains mostly in that range today. A break back below $0.6700 would likely force out some late longs and momentum traders. The PBOC set the dollar's reference rate at CNY7.1310, (CNY7.1286 yesterday) after settling it slightly lower for the past three sessions. Against the offshore yuan, the dollar continues to trade within last Friday's range (~CNH7.2790-CNH7.2955). The dollar needs to fall below CNH7.2750 to boost the chances that a top is in place. Initial support may be found ahead of CNH7.25.
 

Europe

The market feels more comfortable with the likely political outcomes in France. The two most likely scenarios now are the caretaker government or a left-center coalition with part of the New Popular Front alliance and part of Macron's movement. It may take some time to sort things out, but the French 10-year premium over Germany is near 64 bp today, down from more than 80 bp in late June, though up from the sub-50 bp that prevailed before the European Parliament election and the snap French election. In the UK, the new Chancellor of the Exchequer Reeves quickly announced several new initiatives, including restoring a mandatory local housing targets that were abandoned by the Tories and will end what was tantamount to a ban on offshore wind farms. She reiterated Labour's pledges not to raise income tax, national insurance, or the VAT. A date for the first budget will be announced by the end of the month.

The euro was confined to about a fifth of a cent in North America yesterday. Though the session high was recorded near $1.0845., it slowly ground down to around $1.0825 in a summer afternoon and has spent the Asia Pacific and European morning in about a 10-tick range on either side of its today. The consolidation looks bullish provided it remains above $1.08, and a move above $1.0850 could spur another half-cent gain. Sterling snapped a seven-day rally yesterday with a minor loss. It is the longest advancing streak since a ten-day rally four years ago this month. The yield on the 10-year Gilt has fallen from near 4.20% before the election results to 4.10%. Sterling is in a narrow of less than a quarter-of-a-cent today above $1.2795. Nearby resistance is seen near last month's high (~$1.2860). The year's high was set four-months ago slightly below $1.29. 
 

America

The market-sensitive US CPI figure, which is the highlight of the week is due Thursday. Ahead of it, the focus is on Powell's testimony today before the Senate Banking Committee and tomorrow in front of the House panel. If it is not too cynical to suggest, with the election in November looming, the senators and representatives may press Powell on the rate cut outlook. Although the median dot last month was reduced to reflect one cut rather than two in the previous two iterations, the FOMC is still closely balanced. On occasion, Powell has acknowledged that the dot plot is a snapshot of the thinking and can be dated depending on incoming data. Recent data has seen the Atlanta Fed's GDP tracker slip to 1.5%. As recently, as June 20-26, it was at 3%. The Fed Chair may also intimate that the recent inflation readings are welcome and helping lift confidence that inflation is headed back to its target. Canada has a light economic calendar this week with May building permits and June existing home sales at the end of the week. Mexico reports its June CPI today. The year-over-year rate likely rose for the fourth consecutive month. It bottomed last October near 4.25% and has only fallen only one since then. On the other hand, the core rate has continued to trend lower. The year-over-year rate has not risen since January 2023. The core rate was near 5.10% at the end of last year and may have moderated to around 4.15% last month.

The greenback moved sideways in a narrow band in the upper end of the pre-weekend range against the Canadian dollar yesterday. It remains quiet today and looks comfortable for the time being in the CAD1.3600-CAD1.3650 trading range. After amassing a record net short Canadian dollar position in the week to June 18 (almost 148k contracts, notional value of ~$10.8 bln), speculators in the futures market covered 25.5k short contracts in the week ending June 15. It is the biggest weekly reductio in a year. The force that will push the US dollar below CAD1.36 seems more likely to be part of a broader greenback decline than a Canadian development. In an otherwise quiet session, the Mexican peso enjoyed its best session in two weeks, rising by about 0.75% against the US dollar. The dollar fell slightly below MXN17.9750 yesterday and has held above it today. The greenback's low since the MXN19.00 was approached on June 12 was around MXN17.8755 on June 24. A break of there would target the MXN17.76 area. Yet, the market looks reluctant to push the dollar much below MXN18.00. A push above MXN18.09 suggests a near-term low is in place. In Brazil, Petrobras announced its first gas price increase in nearly a year and this helped Brazilian equities recover early losses yesterday. The Brazilian real softened (~-0.3%), the most in Latam yesterday, but overall, the response to President Lula's announcement that Galipolo would replace Neto's whose term ends next month. The announcement was what most seemed to expect. A small shelf for the dollar has formed in the last few days near BRL5.45. A break targets BRL5.40 while the BRL5.54 area offers resistance. 

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