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Overview: A powerful short squeeze has lifted the yen by the most in two months this week. The dollar's push today below JPY143 was encouraged by the stronger-than-expected wage growth. The US jobs report will test its strength. The PBOC fixed the yuan sharply higher today and it is the only emerging market currency that is higher on the day, ahead of the Latam open. The dollar has not drawn much support for the surge in US yields. The 10-year yield came within a whisker of the year's high set in March near 4.09% and the two-year yield set a new multiyear high near 5.12% yesterday, bolstered by a series of stronger-than-expected data. Both are firm today but off yesterday's highs. The euro, Swiss, franc, and Canadian dollar are slightly softer today, with the yen and Antipodeans the strongest.

Higher yields took a toll on equities yesterday and follow-through selling saw all the large bourses in Asia Pacific fall. The Stoxx 600 in Europe is flat after being tagged for 2.3% yesterday, the most in four months. US index futures are softer. Benchmark 10-year yields are 1-3 bp higher in Europe after the Antipodean yield jumped 12-13 bp to play catch-up. The 10-year JGB yield approached 0.45%, which it has not settled above since late April. Gold is in a narrow range around $1913 after holding $1900 in yesterday's test. August WTI is edging higher and reaching $72.40, a two-week high on the extension of output cuts from Saudi Arabia (and maybe Russia) and falling US inventories.
 

Asia Pacific

Japan's labor cash earnings jumped 2.5% in May from a year ago. It was twice what economists expected. In May 2022, it had risen by 1.0% year-over-year and in May 2021, it was 1.9% higher than the previous 12 months. When adjusted for inflation, the 1.2% decline in real cash earnings are the least of the year. While officials must be pleased with the surge in labor earnings, they must be disappointed that it did not translate to stronger spending. Household spending slumped 4% from a year ago. It is slightly better than April's 4.4% decline. The 2.5% year-over-year decline in May, while better than the 4.4% decline in April, it is still weaker than any month last year and H2 22.

Given the tit-for-tat US-China sanctions that seem to be escalating, Treasury Secretary Yellen's visit to China, where she won't meet with Xi, seemed to be more about signaling than substance. Yellen's trip follows Secretary of State Blinken's visit and will be followed by climate envoy Kerry. Some press reports indicate that Yellen signaled that tariffs imposed by the Trump administration will be rescinded. Yet, the sanctions imposed by the Biden administration look set to escalate, probably after Yellen's trip is over. More export/sales restrictions on chips and cloud services have been reported in the press. 

The stronger Japanese wages spurred another round of yen short covering, sending the greenback below JPY143 for the first time in two weeks. There are about $630 mln in options expiring there today and near $1.05 bln on Monday. The 20-day moving average, which the dollar has not traded below since mid-June is around JPY142.80, and the (38.2%) retracement of the last leg up that began on June 9 (~JPY138.75) is found by JPY142.66. The dollar's pullback against the yen has occurred despite higher US rates, but the test of the yen's recovery may be seen following the US jobs report. Support for the Australian dollar near $0.6600 held again. It has not been able to rise above $0.6650 and the week's high is slightly above $0.6700. The highs were recorded in the European morning and the intraday momentum indicators are stretched. Ahead of next week's central bank meeting, the New Zealand dollar is the strongest of the G10 currencies, rising nearly 0.95% this week, followed by the yen's roughly 0.9% gain. The Aussie is nearly about a 0.33% loss. Over the past 100 and 1000 sessions, the Chinese yuan and yen move in the same direction against the US dollar about 2/3 of the time. Today is not an exception. The yuan strengthened for the fourth session this week. It is up almost 0.25% today and about 0.3% for the week. For the last three months, the yuan rose one week a month. The PBOC set the dollar's reference rate aggressively below market expectations (CNY7.2054 vs. CNY7.2455). Lastly, China reported a $16.5 bln increase in June foreign reserves to $3.19 trillion. Of note, it added about 23 tons of gold (value of roughly $1.5 bln).
 

Europe

German May industrial output disappointed, falling by 0.2%, despite yesterday's unexpected 6.4% surge in factory orders. Earlier this week, France and Spain reported stronger-than-expected industrial output figures for May. French industrial production jumped 1.2%. The median forecast in Bloomberg's survey was for a 0.2% decline. It was led by a 1.4% jump in manufacturing output. Economists had expected a decline. It was the second consecutive monthly gain after falling in Q1. Spain's industrial production rose by 0.6% in May, edging above the 0.4% median forecast in Bloomberg's survey. Italy will report its figures on July 11, and the aggregate report is due on July 13.

The US 2-year premium over Germany rose to 178 bp briefly yesterday. before settling at 170 bp. It was the most since late February. The premium is a little wider today. The year's high was set on February 6 near 187 bp. The lowest the premium got so far this year was about 112 bp on April 24. The euro topped out on April 26. It recovered from a marginal new three-week low but peaked at $1.09, where the near-term trendline, drawn off the June 22 high (~$1.1010) and June 27 high (~$1.0975), and July 3 high (~$1.0935) was found. Today, the euro has been turned back from $1.09, where about 900 mln euro in options expire today and another one billion euros are struck at $1.0920 that expires Monday. Buying on pullbacks was still evident yesterday as the single currency recovered smartly from a three-week low near $1.0835 despite the strong US data and risk-off. Sterling enjoyed a big outside-up day by trading on both sides of Wednesday's range and then settling above its high. While the five-day moving average is drifting further below the 20-day moving average for the euro, it has crossed higher again for sterling, where it has whipsawed this week. Yesterday's high was near $1.2780, a two-week high. It is consolidating in about a quarter-of-a-cent below $1.2750 today. A push above yesterday's high targets the $1.2850 area approached in the second half of June. 
 

America

A string of better-than-expected US data, and especially about the labor market has expectations running high for the nonfarm payroll report today. Challenger jobs cuts in June moderated to 40k from January's peak of over 100k. The ADP estimate of private sector job growth surged by 497k, more than twice the median forecast in Bloomberg's survey. Although weekly jobless claims rose, the four-week moving average edged lower to stand at a three-week low (~253k). The employment component of the ISM services survey rose to 53.1 from 49.2. It is the highest since February and the second highest since March 2022. The one disappointment was with JOLTS job openings, but here the lower-than-expected number was blunted by an upward revision in the April series. The decline was the largest in the three months, but the 9.8 mln openings remain well above pre-pandemic levels. Moreover, the quit rate, rose to the most in nearly a year, which is seen as a sign of job security.

Fed Chief Powell has often argued that there is not one labor market reading that captures the multidimensional and that officials review many different metrics. That suggests that barring a significant downside surprise, the June nonfarm payroll report will not have much impact on expectations for a hike late this month. Given the strength of yesterday's reports, it may take more than a 225k increase, which is the median forecast in Bloomberg's survey to surprise the market. Moreover, growth of more than 217k jobs will translate to the second consecutive monthly increase in the three-month average and more than 239k would do the same for the six-month average. 

Canada also reports its June employment data. It lost full-time positions in April and May (cumulative loss of ~39k). Indeed, since the January jump of 121k full-time jobs, every month has been weaker than the previous month. While US average hourly earnings are seen slowing to a 4.2% year-over-year pace (from 4.3%), Canada's hourly wage rate for permanent employees may slow to 4.6% (from 5.1%). The Bank of Canada meets on July 12. In Bloomberg's survey of 21 economists, 12 look for a 25 bp hike and nine see it standing pat. Similarly, the swaps market is pricing in almost a 60% chance. A weak employment report would likely see the odds fall.

Mexico reports June CPI figures today. The year-over-year pace of headline and core CPI are expected to continue declining and the readings for the second half of the month after lower than the first half. This suggests the momentum is in the right direction, but even with the anticipated decline, the headline rate is still more than 100 bp above the upper end of the 3% target (+/-1%). Banxico meets next on August 10. Its overnight target rate is 11.25%. It is not seen cutting until Q4, by which time CPI will likely be closer to 4%. Indeed, Mexico's CPI rose at an annualized rate of 3.05% in the first five months of this year.

The poor Canadian May trade figures (C$3.44 bln deficit compared with median forecasts of a C$1.2 bln surplus, the largest shortfall since October 2020, and a downward revision to the April surplus that halved it to less than C$900 mln) coupled with risk-off mood, (equities sold off sharply) and a jump in US rates, delivered the largest loss to the Canadian dollar in more than a month. The greenback reached CAD1.3370, a little shy of the (50%) retracement objective of last month's slide, and today it edged up slightly through CAD!.3385. A break above CAD1.3400 could spur a move toward the next retracement target (61.8%) near CAD1.3450. The Mexican peso got clocked. Its 1.3% loss was the largest since early March. The greenback had fallen to its lowest level since the end of 2015 on Wednesday (~MXN16.9810) and reached a high yesterday of MXN17.3820. Today, a marginal new high near MXN17.3960 was recorded. A combination of risk-off, the jump in US rates, and the unwinding of some carry positions appears to fuel the move that saw the US dollar meet the (38.2%) retracement objective of the last leg lower than began from about MXN18.00 on May 23-24. The next retracement (50%) is near MXN17.49. Given that the macro considerations have not changed (carry, relatively low vol currency, strong external position, institutional strength, and independence of the central bank and Supreme Court) remain in place, we suspect that the peso's pullback will entice new buyers. 

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