The currency market is less volatile and the US dollar has strengthened against most currencies. US economic data shows that inflation continues to fall while the employment situation remains robust. The May employment situation surprised the market with a non-farm payroll increase of 339,000 jobs (forecast 195k) and a tick-up in the rate to 3.7%. Interest rates, along with the dollar, have moved higher. The FOMC announcement is on June 14 and at this point Fed Fund futures are pricing a 63% probability that the Fed will leave rates unchanged. Equity markets have responded positively to the employment numbers, the Dow has rallied 600 points (1.9%), and the S&P is higher by 1.40%.

EUR (1.0700): The rally in the single-currency, which has dominated the market since November of ’22, stalled near 1.1100. The ECB, which is slightly more hawkish than the Fed, will most likely pause from additional rate hikes. The energy sector has fallen in price more than the ECB has planned. This removes a major inflationary factor from the Eurozone countries. We expect the euro to trade between 1.1000 and 1.0500 in the near term.

GBP (1.2460): Pound sterling has been resistant to moving outside the narrow range of 1.2350 and 1.2680. The Bank of England is still expected to adjust its interest rates by 0.25% at its next two meetings. This is bullish for the GBP. On the other hand, the trade negotiations between Britain, Northern Ireland, and Brussels are not moving forward as quickly as Britain would like. This is a major factor in keeping the GBP from rallying above its recent high. Major support for the pound is at 1.2350.

JPY (140.00): The Japanese yen has been the weakest of the major currencies. There are a couple of reasons. The new BOJ governor, Kazuo Ueda, has been more dovish than the market expected. The near-zero interest rate policy will not change for the time being. This has investors selling yen (borrowing Yen) and moving those funds to higher-yielding assets. This flow called the “carry trade,” has been a popular way to pick up yield. USD/JPY now trades at 139.80, which is a 9.6% increase in the US dollar in 2023.

CAD (1.3425): USD/CAD has moved in a very narrow range of 1.3300 and 1.3600. This reflects the lack of movement in the oil market. Keep in mind that the correlation between the CAD and crude oil prices is about 70%. With the energy market subdued and with Canadian interest rates at par with the US, there is no reason to expect a move outside of this tight range.

MXN (17.5500): Banixco, the Mexican Central Bank, left interest rates unchanged at last week’s meeting. The overnight rate remains at 11.25%. The interest rate differential with the US drove the USD/MXN rate to a 6-year low of 17.3400. We still believe that the pair end 2023 near 16.5000.

CNH (7.1000): The dollar has stretched against the CNH. The last weeks have had two specific issues that may be a reason for the weaker CNH. First, the Chinese defense minister, Li Shangfu, refused to meet with US Pentagon chief Lloyd Austin. Then the US Navy and the Chinese Navy had a close call in the Taiwan Straight. These, along with overall dollar strength, are keeping the CNH under pressure. The upside of the weaker currency is that products coming from China may be cheaper. Keep an eye on the 7.3750, which was the high print for USD/CNH on October 23, 2022.