US
Brent crude oil prices extended gains above $98 a barrel, the highest since June 3, reflecting mounting supply fears and rapidly shrinking global oil inventories. The rebound in energy prices is rekindling inflation pressures and weighing on global bonds. US 10-year treasury yields are up above 4.67% ,the highest since January 2025, and German 10-year bund yields surged to 3.19%, the highest since May 2011.
Global equities are mixed. S&P500 futures and European stocks are down while the KOSPI led the gains in Asia surging more than 4%. The AI-capex boost outweighed the drag from higher crude oil prices and bond yields in Asia, but not in the US and Europe.
USD is clinging to most of this week’s advance, though performance is uneven. KRW is outperforming on improved foreign flow sentiment toward Korean assets, while NOK and CAD are benefitting from higher crude oil prices. JPY fell to fresh multi-decade lows against USD as the rally in energy prices worsens Japan’s terms of trade.
In our view, USD risk remains skewed to the upside in the near-term underpinned by: (i) US economic outperformance, (ii) the Fed's resolve to get inflation back to 2% anchoring hawkish rate pricing, and (iii) strong foreign demand for US long term securities.
The July PMI readings for the major economies, due tomorrow, will test whether the US growth advantage remains intact. Today, second-tier US economic data is on deck: weekly jobless claims, June Chicago Fed activity index, and July Kansas City Fed manufacturing index.
EUROZONE
EUR/USD is holding above 1.1400. The ECB is widely expected to leave the policy rate unchanged at 2.25% after delivering a well-telegraphed 25bps hike in June (1:15pm London, 8:15am New York). The ECB is also poised to stick to its data-dependent, meeting-by-meeting approach without pre-committing to any particular rate path. There are no updated macroeconomic projections associated with this meeting.
The swaps curve fully price in a 25bps hike in September and nearly 75bps of tightening over the next twelve months to 3.00%. That would leave the policy rate at the top of the ECB’s estimated neutral range (1.75%-3.00%).
Tighter monetary policy when the Eurozone economy is still operating below potential is more likely to limit EUR downside than push the currency higher because it raises the likelihood of a downward adjustment to ECB rate expectations.
AUSTRALIA
AUD/USD is consolidating around 0.7000. Australia’s solid June labor force survey will keep RBA rate hike bets live. The economy added more jobs than anticipated in June (actual+76.3k, consensus: +15.0k, May: +44.0k), with full-time employment up +29.3k and part-time employment up +47.0k.
In line with consensus, the unemployment rate was unchanged at 4.4% for a second straight month, leaving it marginally above the RBA’s 4.2% projection. But that’s largely because more people entered the labor force as the participation rate rose +0.3ppt to near a one year high at 67.0%.
RBA cash rate futures virtually fully price in a 25bps hike to 4.60% by year end, up from roughly 60% before the data. In our view, the risk is skewed towards a more extended pause in the RBA tightening cycle which is a headwind for AUD. First, the RBA projects real GDP growth to be below potential over the next two years. Second, the RBA cash rate at 4.35% currently sits near the top of the range of model-based central estimates of the nominal neutral rate.
EM CENTRAL BANK WATCH
South African Reserve Bank (SARB) is expected to deliver a follow-up 25bps rate hike to 7.25% (2:00pm London, 9:00am New York). The swaps curve price in 75bps of hikes in the next twelve months. That’s too aggressive given the economy is operating below capacity and the policy rate is already above the SARB’s estimate of the neutral rate (5.80%).
Türkiye central bank (CBTR) is widely expected to keep rates on hold at 37.00% for a fourth straight meeting (12:00pm London, 7:00am New York). Headline inflation has been sticky above 32% y/y since April, and tracking above the bank’s year-end forecast of 26% y/y.
Beyond the relative monetary policy dynamics, EMFX winners and losers depends on a country’s commodity leverage, global supply-chain dependency, AI preparedness, and external vulnerability.
In our framework, TRY stands to underperform the most, reflecting Turkey's low commodity leverage, high supply chain dependency, and relatively low AI preparedness. ZAR is neutral. South Africa’s low AI preparedness is offset by limited supply-chain dependency, external vulnerability, and commodity leverage.
