Instimatch - FX morning commentary - 6/6/25

Good morning

The call between US President Trump and Chinese President Xi has apparently ended on a positive note, with Trump saying the call resulted in a very positive conclusion. The discussion was mainly on trade and both parties will meet again shortly. There was no discussion about Russia/Ukraine or Iran during the call. The US dollar reversed its initial intraday losses, but it remained under cyclical downward pressure.

Beyond policy uncertainty, soft US economic data have also weighed on the US dollar. Initial jobless claims rose to 247k for the week ended 31 May, up from 239k in the prior week and higher than the consensus estimate of 235k. This could potentially signal emerging softness in labour market. Bloomberg consensus forecasts today's nonfarm payrolls to slow to 125k in May, from 177k in April.  Meanwhile, the frontloading of US imports in Q1 appears to have ended, with imports plunging in April and the trade deficit narrowing sharply to $61.6bn from $138.3bn in March.

The US Treasury in its semi-annual currency report yesterday, the first since Trump’s second presidency, said that no major trading partners have manipulated their currencies in 2024. It uses three criteria: a trade surplus with the US of at least $15bln, a global current account surplus above 3% of GDP and persistent, one-way net FX purchases. Only when the three are met the country is possibly (but not necessarily, e.g. Switzerland in 2022) labelled as such. Meeting two of those criteria will get you on the so-called monitoring list. Ireland and Switzerland were added to that list in yesterday’s report, along with Germany, Japan, South Korea, Singapore, Taiwan, Vietnam and China.

The ECB cut rates by 25bp to 2.00% yesterday, as widely expected. ECB President Lagarde has signalled that the policy easing cycle is nearing its end, inflation has been largely contained, and the growth outlook could be revised up. With the Fed currently on hold, the ECB’s move has widened the policy rate gap with the US. The US dollar is trading even weaker than what rate differentials would suggest. While rate differentials have recently lost their influence on FX dynamics, this disconnect may not persist for long.

In the euro area, focus turns to the third estimate of the national accounts data for the euro area in Q1. The estimate will include details on how exports and private consumption fared in Q1 as well as the ECB's preferred wage measure, compensation per employee, which will be interesting to watch following the decline in negotiated wages in Q1. Also, there will be interest in April retail sales data, which will be important to follow to see if the lower consumer confidence has translated into lower spending.

More interesting may be the various ECB speakers slated. Holzmann from Austria will undoubtedly voice more hawkish comments, whilst Portugal's Centeno may voice more dovish sounds. Going forward, we could see more disagreement within the Governing Council about the ECB’s next steps.

In geopolitics, Russia has launched a large-scale drone and missile attack on Ukraine, including residential areas in Kyiv. Earlier this week, President Putin warned of Kremlin's retaliatory actions against Kyiv in response to Ukrainian strikes on Russian air bases.

The dollar index was steady around 98.80 in Asian trade, remaining near a recent six-week low. The greenback was also down about 0.6% this week. 

EUR/USD was broadly supported during yesterday's session sending the pair close to 1.15 before a bout of profit taking erased most of its gains. Overall, traders continue to see EUR/USD as a reflection of USD vulnerability rather than EUR strength. On the back of this significant shift in communication from Lagarde, some analysts have revised their ECB call now expecting only one final cut in September to leave their terminal rate forecast now at 1.75% (prior 1.50%). 

USD/JPY rose 0.2% overnight to 143.93, with the yen pressured by growing doubts over whether the BoJ has sufficient headroom to raise interest rates further. 

Weak household spending data, coupled with yesterday’s soft overall wage income data, sparked some concerns over just how much private spending will improve in the coming months. Weak spending stands to undermine Japanese growth and inflation, and could raise the BOJ’s threshold for more rate hikes. 

USD/CNY was steady around 7.1825 despite the positive overtones from the Trump-Xi call

The Indian rupee’s USD/INR pair fell 0.1% to 85.793, but remained largely range bound following the RBI decision to cut its benchmark policy repo rate by a bigger-than-expected 50bp to 5.5% from 6.0% given recent signs of cooling inflation and growing risks to Indian economic growth.  The cut was the RBI’s third reduction after two 25 bps cuts earlier in the year, bringing its total rate cuts this year to a full 1%. RBI Governor Sanjay Malhotra also said that the central bank had now shifted its stance to ‘neutral’ from ‘accommodative,’ citing heightened global economic uncertainty. Malhotra also cut the RBI’s CPI inflation outlook for the current fiscal year.