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Soft US Jobs Data, Lower Yields End Dollar's June Rally
Two-year yield falls from 4.20% peak. Euro, yen, sterling test key levels. PBOC sets yuan reference at three-year lows. Canada jobs, Mexico CPI ahead.
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The dollar's June rally stalled last week after a disappointing jobs report cut the two-year US yield from its post-FOMC peak. Payroll growth came in at half the expected rate. Oil kept sliding. Fed Chair Warsh acknowledged in Sintra that inflation expectations had eased. The two-year yield finished the shortened week at 4.14%, down from 4.18% after the Fed's hawkish hold and a high above 4.20%. The Dollar Index dropped from its year high of 101.80 to 100.55.
The two-year yield and the dollar move in close lockstep. A yield drop reduces the dollar's carry advantage. The 30-day inverse correlation between the euro and the two-year yield hit −0.87 around the June FOMC meeting, the most extreme in more than a decade. That correlation remains near −0.70. Lower short-term rates pressure the greenback across the board.
The euro bottomed on June 24 at $1.1325 and rallied to $1.1475 after the jobs data. It stalled at the halfway mark of the decline since mid-June. The next retracement objective is $1.1510. Momentum indicators turned higher. The euro's sensitivity to the two-year yield is far stronger than to German yields or the rate differential, meaning the dollar's direction remains the primary driver. For specific pair levels, see our EUR/USD profile.
Japan's yen hit a 40-year high of JPY162.85 on July 1 before pulling back to JPY160.50. It settled above JPY161. The market is watching for intervention. One-month volatility rose to 7.15% from 6.85%. The premium for dollar puts increased to 1.5%, up from 1.1%, suggesting large pools of capital bought protection against a yen spike. The PBOC set the dollar's reference rate at new three-year lows last week, signaling continued yuan appreciation. The offshore yuan fell to CNH6.7850, probing its 20-day moving average.