Dollar Yields to BOJ Hike Bets, Ceasefire Limits Risk-On

A ceasefire between Israel and Lebanon raised expectations of a breakthrough in US-Iran talks. The deal does not include Hezbollah, limiting its scope. Oil prices reacted with caution: July WTI settled near the middle of the $94-$96 range. The dollar softened across G10 currencies. The Canadian dollar was the weakest. The swaps market has a BOJ hike nearly fully discounted for later this month. The greenback hovered near JPY160. Japan's finance minister reiterated intervention readiness. The market is cautious ahead of tomorrow's US May jobs data. The bar to a change in Fed policy this month, as Warsh chairs his first meeting, remains very high.

Ceasefire, BOJ Hike Reshape Dollar Landscape

The Israel-Lebanon ceasefire triggered a modest risk-on shift. The exclusion of Hezbollah from the deal underscores its fragility. July WTI settled near the middle of the $94-$96 range. The dollar's softness was most pronounced against the euro and the yen. The moves remained contained.

Ceasefire: Limited Scope, Limited Impact

The deal does not include Hezbollah. The low-intensity conflict under the flag of a ceasefire could continue. The market is not pricing in a lasting reduction in geopolitical risk. The dollar's decline was modest. The greenback recovered some ground in European trading.

BOJ Hike Expectations: A Rare Hawkish Signal

The swaps market has a BOJ hike nearly fully discounted for later this month. The dollar was pushed to JPY160.10 in North American trading yesterday. Finance Minister Katayama reiterated that officials are in contact with Washington and are prepared to take action. The US has remained quiet, unlike in late January. Options for $2.7 billion at JPY160 expire today, adding a technical layer.

Euro Tests Key Support After Two-Week High

The euro reached a two-week high near $1.1685 at the end of May. It eased below $1.1600 yesterday in North American trading. In the last two weeks of May, it traded below $1.16 on an intraday basis several times. It did not close below it once until yesterday. There was no follow-through selling. The euro recovered to almost $1.1635 in European turnover. A close above yesterday's high, a little below $1.1635, would help lift the tone ahead of tomorrow's US jobs data.

Eurozone retail sales fell 0.4% in April. The March series was revised to 0.8% from -0.1% initially reported, softening the April decline.

Sterling Range-Bound, CAD Nears Year High

Sterling continues to chop within last Friday's trading range, roughly $1.3410-$1.3485. The lower end of the range held yesterday and today. This sets the stage to test the upper end. Yesterday's high was slightly above $1.3470. The 20-day moving average is near $1.3460. Sterling has settled above that moving average only once since May 11.

The Canadian dollar fell to its lowest level since early April. Risk-off and a poor macro backdrop drove the move. The greenback approached CAD1.39 yesterday and reached CAD1.3925 today. The year's high was recorded at the end of March slightly above CAD1.3965. The dollar settled above the upper Bollinger Band (~CAD1.3910 today).

Aussie Recovers on Trade Surplus, Yuan Slides

The Australian dollar slipped through yesterday's low near $0.7130 to almost $0.7120 today, a five-day low. It recovered with the help of the swing back into a trade surplus in April. The surplus was A$1.79 billion, reversing the first monthly deficit since 2017. The recovery stalled near $0.7140. Options for A$625 million at $0.7155 expire today.

The offshore yuan declined nearly 0.30% yesterday, the largest drop in two-and-a-half weeks. The dollar's broad gains played a role. The move followed the threat of new US tariffs. For the first time since August 2024, the PBOC skipped its open-market operation. The dollar has drifted toward CNH6.7730 today. The PBOC set the dollar's reference rate at CNY6.8203.