Forex overview. US Swap Spreads Signal Rising Concern Over Treasury Market Conditions – ForexNews.PRO
As the US and UK approach a long weekend, currency markets are experiencing a period of relative stability. This week’s G7 meeting saw finance leaders reiterate their support for freely fluctuating exchange rates, but also voice worries about “unsustainable macro imbalances,” potentially acknowledging US apprehensions regarding its trade deficit. The economic calendar for today is uneventful.
USD: G7 Maintains Existing FX Stance
Earlier this week, there was speculation about a slight chance of a significant shift in the G7’s official statement on foreign exchange policy following the meeting of Finance Ministers and Central Bank governors in Canada. Ultimately, the statement largely echoed the 2017 stance, advocating for free-floating exchange rates and discouraging competitive devaluations.
However, the statement did appear to reflect US anxieties about inequitable trade practices, manifesting as concerns over “unsustainable macro imbalances.” This phrase can be interpreted as the G7 scrutinizing China’s substantial trade surplus, although global investors might similarly focus on the US’s own trade and budget deficits.
Given that the US Treasury refrained from directly altering the G7 statement to weaken the US dollar, what are the implications? Concerns persist regarding US Treasuries this summer, as indicated by the US 10-year swap spread remaining elevated at 55bp. We are also closely monitoring frequent data releases concerning foreign official holdings of US Treasuries.
Data on the Federal Reserve’s custody holdings indicate a decrease of
30 billion. Market participants are eagerly awaiting the release of the April US Treasury International Capital (TIC) data in mid-June, which will reveal the specific countries involved in selling assets during April.
As the US and UK approach extended holiday weekends, the actual volatility in the foreign exchange market is trending downward. However, both the volatility currently being traded and the anticipated volatility remain elevated for the EUR/USD and USD/JPY currency pairs. Specifically, one-month trading levels are holding above 8% and 11%, respectively, suggesting that investors remain hesitant to price in volatility levels seen before the upcoming “Liberation Day.”
The DXY (U.S. Dollar Index) is likely to experience slight selling pressure and remain within a trading range of 99.20 to 100.20 today.
Regarding the Euro, the European Central Bank (ECB) is widely expected to implement a 25 basis point rate cut in June. The recent release of the ECB’s meeting minutes and related commentary strongly suggests this move, which would reduce the deposit rate to 2.00%. This scenario is already fully factored into market expectations, as is an additional 25 basis point rate cut in December. The recently released flash Purchasing Managers’ Index (PMI) data for May appears to corroborate these expectations, with noticeable declines in the services sector component. Uncertainty appears to be negatively impacting economic activity, and attention will be heavily focused on upcoming EU-US trade negotiations, which are expected to gain momentum next month.
The Euro continues to benefit from its position as the most liquid alternative to the US dollar. Portfolio re-allocation trends are also supporting the Euro’s strength. Balance of Payments data from the Eurozone for March revealed that eurozone residents repatriated EUR40 billion of foreign equity positions, marking the largest inflow since September 2022. The equity portfolio flow account currently appears favorable for the Euro.
Today’s focus in the Eurozone will be on two key events: a speech by ECB Chief Economist Philip Lane at 10:30 CET in Florence, where his comments on disinflation will be closely watched, and the latest update from the ECB on negotiated wages at 11:00 CET. The previous ECB negotiated wage tracker, released in April, indicated wage growth of 4.8% in 2024 and 3.1% in 2025. Any reduction in the 2025 figure could have a slightly negative impact on the EUR/USD exchange rate today.
The EUR/USD is expected to trade within a range of 1.1280 to 1.1380 today.
The market is significantly underestimating the possibility of a Bank of Japan (BoJ) interest rate hike in July, currently assigning it only a 10% probability. However, the recent release of April’s Consumer Price Index (CPI) data should raise concerns within the BoJ and potentially lead to a 25 basis point rate increase. Given the relative weakness of the US dollar, the USD/JPY currency pair is likely to encounter strong selling interest if it rises back to the 145 level.
The overall sentiment for Asian currencies remains reasonably positive against the US dollar. It is unclear whether this reflects a more optimistic outlook on Chinese and global demand, driven by signs of progress in US-China trade negotiations, or a belief that the US Treasury will succeed in pushing for stronger Asian currencies. Asia accounts for roughly two-thirds of the US trade deficit in goods. With trade agreements between the US and Asia set to be a key topic of discussion in the coming months, the dollar may remain under pressure against Asian currencies.
