Global Head of Macro Strategy
Summary: The strong May US job openings numbers yesterday didn’t suit the plot for USD bears, but tomorrow’s June US jobs report is far more important, followed by the deadline for US trade negotiations next Wednesday.
Note: I am away three weeks on a summer holiday after today. Stay safe out there!
What happened: wobbles in the weak USD narrative, JPY seesaw
The USD dollar weakness extended yesterday, particularly against the Japanese yen early in the session, perhaps as USDJPY traders finally noted the recent drop in US treasury yields. Alas, after posting new local lows, USDJPY backed up again as US Treasury yields rose, partially on Powell comments (US economy is in a pretty good position, expecting higher inflation readings over the summer from tariffs, but won’t rule out rate cuts for any meeting as watching labor market closely, one that is gradually cooling).
Later the very strong May JOLTS job openings survey didn’t fit the plot for US dollar bears and saw a further backup in the US dollar and US treasury yields. It is interesting to note that long US yields were far less reactive than short yields by the end of the day as US Treasury Secretary Bessent said at the start of the week that. Clearly, the intent of the Trump administration is to engineer low rates at the front-end of the curve by appointing a complicit Fed Chair to replace Powell, to heck with inflation levels and concentrate issuance in bills to deflate the real level of US debt (negative “real” yields). This is toxic stuff long term for the US dollar, though the US likely won’t be the only country engaged in such practices. Witness the recent Japan Ministry of Finance moves to limit long JGB issuance.
Later in the session, Trump showed clear signs of frustration with the status of US-Japan trade negotiations, saying that he doubted a trade deal could be reached with Japan before the July 9 deadline and that 30-35% tariffs would likely result. This is at odds with Treasury Secretary Bessent’s claim that negotiations could extend past the deadlines. The JPY was not reactive immediately to these comments but is busy backpedaling sharply from yesterday’s strong rally. USDJPY is more than 100 pips off yesterday’s lows, and GBPJPY, our focus pair yesterday, has rallied from a 196.29 low yesterday to trade as high as 197.50+ this morning.
Chart: USDJPY
USDJPY backed up sharply once again after trying to post new lows here – we have had a quarter-end and the market is clearly nervous ahead of the US June jobs report tomorrow. The setup is clear – a break of the 142.00 area range lows setting up the test of the titanic 140.00, but will the near term event risks line up for USD bears?
The three issues ahead for the USD
There are three critical issues for the US dollar and to some degree for risk sentiment as well in coming days. In general, any ugly decline in risk sentiment is likely to mean knee-jerk position squaring, so the US dollar could see consolidation on risk off as a first round effect. USD weakness feels very consensus at this point and probably very right longer term, but heavy positioning can possibly mean a short-term mishap for USD bears on the “wrong” data or development. The three issues:
US June jobs report tomorrow. This is an obvious one was we have seen some recent data pointing to softness (ex-yesterday’s strong JOLTS survey, which is of poor quality). The market is theoretically expecting the NFP change at +110k. Let’s call 80k-150k as no real surprise (depending slightly on revisions and whether unemployment rate rises to 4.3% as expected), but perhaps not really feeding the USD bears anything new. An ugly downside surprise begins perhaps below 50k but really bites at numbers close to- or below zero. Does that spell “hooray for coming July Fed cut” or “bad news is bad news, risk off”? The latter is better for USDJPY downside, the former is better for GBPUSD and AUDUSD upside. A real plot spoiler for positioning here, meanwhile, would be a strong NFP reading well above 150k – which likely boosts USDJPY the hardest on a tide of USD tactical short position covering
Trump’s July 9 negotiation deadline (next Wednesday). It feels like Trump wants deals done now and not to see the talks dragging out beyond the original deadline. The EU seems to be taking a more pragmatic stance recently, while Trump is clearly frustrated with Japan. In the meantime, we should see deals with other countries emerge before the deadline regardless (simply declared unilaterally from the US side for smaller partners). Is the market too complacent on the impact of tariffs or do the deals shape up in slightly friendlier terms than expected? I suspect the terms look a bit like the UK trade deal – a lot of room for uncertainty – and maybe the uncertainty is feature more than bug from the US point of view, allowing Ben Ansell’s “TOSTADA” principle to flourish: Trump often signs, then abandons deals anyway. This can work in a very ugly direction for the US dollar sooner rather than later if the terms are far harsher than expected . Watching the EU- and most of all Japan-negotiations the closest for currency impacts. (Believing that USDJPY is still too high for a harmonious relationship with the Trump administration.
The US Congressional spending bill. This is a critical one as well, with the bill back in the House after passage of the Senate version yesterday. The Senate version fits well with the aim of the Trump tariffs: encouraging huge company investment in the US to build out US productive capacity, not only with the tariff barriers, but also with the massive incentives to expense R&D and capital expenditures. Some version of this albatross of a bill must and surely will pass, but some House members look set to put up a fight as the bill defunds so much health coverage (Medicaid) to the poorest Americans, which is a bad look for Trump’s legacy and for their re-election chances when the bill is also extending tax cuts for the highest income earners. If something more fiscally responsible than expected emerges, this could mean a weaker USD (although first impact could be more positive if it is seen as shoring up treasury market credibility, etc.)
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
The Swiss franc is atop the leaderboard with the euro not far behind, while the USD remains in bear mode and JPY can’t put up a consistent fight to dig out of its broad relative weakness. Let’s see if our three event risks above can change the plot or deepen existing trends.
Table: NEW FX Board Trend Scoreboard for individual pairs.
USDJPY has finally tilted back into a downtrend – somewhat ironic as it has backed so sharply off yesterday’s lows – but the jobs report tomorrow is pivotal for that new trending status. Elsewhere, EURSEK bears watching, not for the local trend change that the FX board measures, but because it has worked back higher to the cusp of the pivotal 11.20-25 area, a structural zone that needs to provide resistance if the pair is to remain in the longer term downtrend.
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