The Dollar continues recent gradual rebound

Markets

Markets headlines yesterday still were dominated by the ongoing flurry of trade‐war communication as launched by US president Trump. Even so, in particular on interest rate markets, global public debt sustainability was at least as important as a market driver. The trigger again came from two ‘market outsiders’: The UK and Japan, with the impact spilling over globally. In the UK, the publication by OBR of its yearly public risk and sustainability report served as another illustration that the country has no fiscal headroom to address new shocks or take any policy initiatives. In Japan, political uncertainty in the run‐up to the July 20 Upper House elections continues to nourish concerns on fiscal sustainability. In a steepening move, Japanese (+9 bp) and UK (+ 6.3 bps) 30‐y bonds again underperformed. The German yield curve followed this broader trend (steepening, 2‐y +3.5 bps, 30‐y +5.4 bps). Interestingly, the US even after OBBB was less affected (yields changing less than 2 bps across the curve). As indicated, the new avalanche of US trade (war) communication at first sight only has far less impact. US president Trump indicated that he won’t extend the tariff pause beyond August 1, threatened a 50% levy on copper imports and other sector tariffs, including a potential 200% levy on pharma imports. BRICS countries still risk an additional 10% levy. One might assume that, at some point, such measures should put upward pressure on US inflation and complicate planning by all economic agents. However, as was the case on Monday after announcing reciprocal tariffs, the impact on markets at the end of the day was modest. US equities finished little changed (S&P 500‐0.07%). USD again gained modestly (DXY close 97.52, EUR/USD little changed at 1.1725). Sterling (slightly) underperformed (EUR/GBP 0.863). The yen remained under pressure both against the dollar (USD/JPY close 146.6) and the euro (EUR/JPY 171.9).   

Asian equity markets this morning are again ‘meandering ‘, mostly holding in positive territory. The multiple, often diffuse, trade headlines still leave little visibility to set up directional trades and this pattern might continue today. A US‐EU trade deal is expected to be announced ‘in the near future’. The FT this morning reports this framework might leave the EU with higher tariffs than those granted to the UK. The eco calendar is again extremely thin with the Minutes of the June Fed policy meeting the exception to the rule. With debt sustainability in focus, we also keep a close eye at a $39 bln US treasury action, the first sale of LT US debt post OBBB and a precursor for tomorrow’s 30‐y sale. On FX markets, the dollar continues recent gradual rebound. However, in the likes of DXY or EUR/USD the technical picture hasn’t changed in any profound way.  

News and views

The central bank of New Zealand (Reserve Bank of New Zealand, RBNZ) kept the policy rate unchanged at 3.25% in a move expected by both markets and analysts. The case for another rate cut was considered, mainly over near‐term growth momentum and the risk of prolonged weakness in economic activity leading to downward pressure on medium‐term inflation. In the end, though, the benefits of waiting until August in light of near‐term inflation risks outweighed. Inflation is expected to rise further from the 2.5% in Q1 towards the top of the 1‐3% target band before returning to around 2% by early 2026 on spare productive capacity. It also allows the RBNZ to observe developments (ie tariffs) in the global economy and whether domestic economic weakness persists. New Zealand money markets are discounting a two‐in‐three chance for the RBNZ to cut rates next month. The kiwi dollar holds steady around USD/NZD 0.60.

Chinese consumer prices unexpectedly rose 0.1% year‐over‐year in June. Consensus was expecting CPI to match May’s ‐0.1%. Monthly prices fell for a second month straight, though, suggesting deflationary pressures are all but over. June printed ‐0.1% m/m following May’s ‐0.2%. Core inflation was flat on a monthly basis and edged up from 0.6% to 0.7% y/y. Government subsidies for home appliance purchases helped CPI to return to positive territory but that’s unlikely to be a lasting and in any case large driver. Services prices held at 0.5% y/y. Adding to evidence of still‐ strongly low (even negative) price pressures are the June PPIs, which dropped into deeper negative area at ‐3.6% y/y, a near 2‐year low. The Chinese yuan trades a tad weaker around USD/CNY 7.18.

Download The Full Sunrise Market Commentary