The Currency Market’s Week in Review: Key Trends and Developments

( )

arkets are increasingly concerned with the prospect of endless fiscal deficits and rising government debt, particularly in the US. The lower chamber of US Congress last week approved a budget bill that implies yet another gusher of red ink, and investors reacted by selling US Treasuries and the dollar. The latter rose in response to higher US rates, but the polarity of that correlation has reversed since “Liberation Day”. Long bonds sold off worldwide, although US moves were generally sharper. The dollar fell against every major currency worldwide, albeit the greenback remains some way off its post 2nd April lows. The star of the week was the Japanese yen, which appears to be benefiting the most from the ongoing global repricing in interest rates.

There is a spate of economic reports on tap this week out of the US: orders for durable goods, personal income, spending, PCE inflation, and the newly relevant weekly jobless claims. Investors will be looking at all of these closely to assess any fallout from Trump’s tariffs. Headlines from Trump’s social media feed will also be important. Yet, markets are becoming somewhat numb to these, as was the case with the announcement and postponement of the 50% tariff on the European Union. Weekly auctions of US Treasury bonds will garner increased attention, after a weak 20-year bond sale turned out to be a catalyst for the long bond sell off.

AUD

The Australian dollar was one of the main under performers in the G10 last week, as some disappointing domestic data kept alive the chances of another rate cut from the Reserve Bank of Australia as soon as its July meeting. Retail sales unexpectedly contracted by 0.1% MoM in April, only the second monthly downturn in a little over a year. At its May meeting, not only did the RBA lower rates by another 25 basis points, but it explicitly said that a weak consumption outlook was one of the primary reasons for the cut, so last week’s data will be of particular concern for policymakers. We should receive much more colour on the thought process within the RBA when the May meeting minutes are released on Tuesday. The preliminary print of first quarter GDP growth will also be out on Wednesday. Economists are bracing for a mild slowdown, and any miss here could further support the case for another cut in July, which is currently still only around 65% priced in by swap markets.

NZD

As expected, the Reserve Bank of New Zealand slashed rates by another 25 basis points during its policy meeting on Wednesday. The kiwi currency bounced on the news, as not only was the vote on rates not unanimous (5-1), but the minutes suggested that the committee also discussed the possibility of keeping rates on hold. This has somewhat dampened expectations for cuts at the next few meetings, with the next 25bp rate reduction now not fully priced in until October. This partly contributed to the out performance in the New Zealand dollar relative to its Australian counterpart last week.

USD

The sell off in Treasury markets amid fears surrounding the President’s “Big, Beautiful Bill” is keeping the dollar down, in yet another reversal of currency correlations that had held for decades. On the positive side for the greenback, economic data shows little tariff-related damage, and now even business activity surveys, including last week’s composite PMI from S&P, are normalising. We’re also not seeing any signs of a deterioration in the labour market, with recent jobless claims figures not pointing to mass layoffs in the US economy. Paradoxically, sharply rising tariff revenue is providing the only positive fiscal news. The latter, together with sharply higher US Treasury yields and a very one-sided market where positioning data shows that speculators are significantly short the dollar, may provide some short term relief for the currency, but the longer trend is probably down.

CNY

The yuan gave up some of its earlier gains against the US dollar with USD/CNY ending the week back around 7.2. Thus far, tariffs have not resulted in a significant deterioration in Chinese data. Industrial profits showed a promising growth of 3% YoY in April seemingly confirming that policy action is yielding results. NBS PMIs, meanwhile, have continued to tread water around the 50 mark in May with the attention turning to Caixin PMI data out this week. Aside from checking the pulse of China’s economy, investors will continue to focus on the headlines surrounding the US-China relationship. Most recent signals from top officials have not been encouraging, with Trump accusing China of violating tariff agreement, which was met with a harsh response from the country. At least the 90-day deadline is still over two months away.

JPY

A surprise to the upside in the latest Tokyo inflation figures was not enough to prevent the yen from underperforming most major currencies last week. According to the data, underlying inflation in Japan’s capital jumped by 3.6% in May, above the 3.5% estimate. Swap markets have raised their bets in favour of higher BoJ rates in recent weeks, but with just 17bps of hikes priced in by year-end, this continues to appear underpriced. Meanwhile, the US court ruling on Trump’s tariffs was initially bearish for the safe-haven yen, but the USD/JPY exchange rate erased all of its gains (and then some) on Thursday as markets bet that the White House would find a workaround. Focus remains on US-Japan trade talks, which have thus far failed to bear fruit.