Foreign Exchange Commentary

Summary

• DXY is down 10% YTD
• U.S. May CPI: 0.1%
• U.S. YoY CPI: 2.4%
• U.S. May PPI: 0.1%
• U.S. YoY PPI: 2.6%
• Core inflation has risen less than expected for 4 straight months
• Jobless Claims: 248k
• Continuing claims 1,956k are the highest since 2021
• Michigan Sentiment index; 60.5
• Oil is up amid Israel/Iran airstrikes
• U.S. and China will restore the Geneva Truce
• Mexico and U.S.  announce Steel agreement
• Euro has broken out of its 1.12-1.14 range
• Gold is up 23% YTD
• FED meeting June 18^th

U.S. Economic Landscape: dollar declines, CPI, and labor slack
The U.S. Dollar Index is down more than 10% YTD stooping as low as 97.6; a 3-year low after weaker inflation data tamed market sentiment. Before Israel’s airstrike against Iran, all G-10 currencies had gained against the U.S. dollar however the latest developments seem to have sparked a flight-to-safety, with the index currently at 98.09. May’s CPI print was 0.1% vs (expected 0.2%) with YoY coming at 2.4%. PPI reports were also lower than expected, with MoM coming at 0.1% (expected 0.2%), April’s revision corrected to -0.2%, and year over year PPI is sitting at 2.6%. It appears that tariffs have not been fully absorbed by U.S. markets, most likely stemming from the, front-loaded buying of foreign good during initial tariff pauses. Core inflation has risen less than forecast for the fourth straight month due to lowering energy costs, as well as decreasing housing and core services costs. This data suggests that the inflationary pressures of the pandemic have eased, and we are getting closer to alignment with the Fed’s 2% inflation goal- though the recent oil spike may complicate these efforts.

Initial U.S. jobless claims posted 248k (expected 242k). In addition, continuing unemployment claims came in at 1,956k vs 1,910k, the highest levels since 2021, suggesting unemployed workers are struggling to find new opportunities. However, The University of Michigan Consumer Sentiment Index, which was estimated to be in line with May’s 52.4 read (the lowest since summer 2022) rebounded positively at 60.5. Questions regarding a dovish Fed pivot are mounting- the Fed currently is currently in its blackout period before the June 18^th meeting. Futures are now pricing a cut in September at a 60% probability.

Middle East tensions
Steve Witkoff’s trip to Muscat, Oman on behalf of the Trump Administration for the sixth round of Iran Nuclear talks was cancelled after Israel struck key Iranian nuclear facilities and killed dozens of military targets including multiple generals. Earlier this week, amid growing concern of an impending Israeli airstrike, the U.S. pulled key personnel out of Bahrain, Iraq, and Kuwait, reflecting Trump’s dwindling confidence in a peaceful resolution. President Trump, who this morning confirmed his administration was briefed on the airstrikes, alluded that markets would react positively to the destruction of Iran’s nuclear facilities and urged their officials to accept a deal warning time was running out. Iran has vowed a swift response despite Israeli Prime Minister Benjamin Netanyahu announcing that his operation would last “as many days as it takes,” keeping oil, gold, and other safe-haven assets higher.

U.S. China trade
Beijing and Washington agreed to restore the “Geneva Truce.” China will temporarily restore licenses of U.S. manufacturers and automakers for 6 months. They also agreed to approve rare-earth license applications for U.S companies immediately- pending the signoff of President Trump and Xi Jinping. Additionally, the U.S. will drop counter export controls on jet engine, ethane, semiconductors, and restrictions on international students from China. This agreement restores a total of 55% tariffs against China: 10% baseline duty, 20% fentanyl trafficking, and 25% from preexisting tariffs from his first term. Offshore CNH has strengthened to 7.18, YTD highs as supply chain pressure eases, though onshore CNY may weaken to facilitate exports to the rest of the world. This may pose a challenge amid their deflation problems. Chinese PPI YoY was -3.3% and YoY CPI was -0.1%.

A Euro summer
After ECB President Lagarde’s message on ending the easing cycle and an eighth straight cut from the ECB last week, the Euro has continued to face heightened demand for liquidity after liberation day though appeared to be trading sideways, between 1.12-1.14 until Thursday when it finally broke its resistance. After trading as high as 1.1630 the Euro is resting around 1.1545. Despite a weaker U.S.  dollar, momentum remains muted for two primary reasons: low volatility and limited Central Bank reserve demand. Central Banks around the world continue to stockpile gold, with reserves held by central bank close to levels last seen in the Bretton Woods Era (~36,000 tons.) An ECB report this week also reported that gold comprises of 20% of foreign reserves, surpassing the Euro at 16%. The U.S. dollar is still the dominant reserve currency, composing some 44% of the globe’s total reserves.

Going forward
Global trade tensions remain the dominant drivers of currency moves - FX markets will continue to monitor geopolitical developments and monetary policy decisions as well as the continued effects of inflation and a cracking labor market. The Trump administration announced they will be sending letters to trading partners in the next 1-2 weeks settling unilateral tariffs, well before the July 9^th headline which will add volatility to markets in the coming weeks. Meanwhile, the Federal Reserve, currently in its blackout period, will provide a much-needed update on the state of Capital Markets at their next meeting on June 18^th. The prospects of an Israeli Iranian conflict, U.S. tariffs, and China discussions have inspired investors to move into other safe-haven assets like the Japanese Yen(up 1.2% month-to-date against the greenback), the Swiss Franc(up 3% month-to-date) and gold trading at $3430 per ounce, up 23% YTD. The Bank of England and Swiss National Bank will have policy decisions next week.