Summer Breeze

June 03, 2024

Summer Breeze

  • USD kicked-off the summer month on a mixed tone. The US May manufacturing ISM is today’s data highlight.
  • MXN slides after Mexico’s election results.
  • China’s manufacturing sector expands at fastest pace in almost two years.

Please see our Drivers for the Week Ahead for an in-depth look at what markets are facing this week.

USD drifted lower in May against all major currencies. NOK was the top performer last month (up almost 6% versus USD) supported in large part by the Norges Bank’s hawkish hold. JPY managed to eke out a 0.3% gain versus USD in May underpinned by Bank of Japan intervention. Japanese officials disclosed it spent a record ¥9.79 trillion between April 26 and May 29 to curtail JPY weakness.

Meanwhile, soft US consumer spending data contributed to last month’s USD underperformance and modest gains in Treasuries. The control group retail sales and real personal consumption spending unexpectedly contracted in April weighing on US interest rate expectations.

Nevertheless, positive US real wage growth, rising house prices, loose financial market conditions and a strong labor market point to a solid recovery in household spending activity. The encouraging US domestic demand outlook justifies the Fed’s higher-for-longer policy rate narrative and supports the year-to-date USD uptrend.

USD kicked-off the summer month on a mixed tone and is holding above its key 200-day moving average. AUD is underperforming on lower iron ore prices. Asian stocks are up sharply as China’s Caixin manufacturing PMI increased a tick more than expected to near a two-year high at 51.7.

The US May manufacturing ISM is today’s data highlight (3:00pm London). Headline is projected to improve to 49.7 vs. 49.2 in April. Already released regional Fed manufacturing business surveys suggest risks are balanced. Of note the US S&P Global manufacturing PMI rose to a two-month high at 50.9 in May consistent with an expansion in the manufacturing sector.

The Bank of Canada (BOC) and European Central Bank (ECB) policy-setting meetings are the key events this week (Wednesday and Thursday, respectively). Interest rate futures imply over 80% probability of a 25bps BOC rate cut while an ECB cut is fully priced-in. In contrast, virtually all Fed officials are urging patience before easing. This underscores the monetary policy divergences theme that remain in play and favor USD.

USD/MXN rallied above 17.0000. Claudia Sheinbaum is on track to become Mexico’s President and her party is poised to maintain control of both houses of congress with a supermajority. Sheinbaum has pledged to continue President Andrés Manuel López Obrador's agenda. Beyond Mexico’s stable political landscape, the fundamental backdrop remains positive for MXN. Mexico has one of the highest real interest rates within the EMFX universe, a stimulative fiscal stance and boasts a favourable balance of payments backdrop (small current account deficit and large net FDI inflows).

 

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