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Dollar Steadies Ahead of Equity Market ‘Triple Witching’

The US dollar looks set to consolidate its weekly gains in today’s session as traders remain cautious, but equity markets could exhibit some volatility as a ‘triple witching’ episode – when stock options, stock index futures, and stock index options expire on the same day – contributes to abnormal activity. Treasury yields are holding steady, and oil prices are inching higher.

The Mexican peso staged a modest recovery late in yesterday’s session after Claudia Sheinbaum said she would appoint former foreign minister Marcelo Ebrard to head the economic ministry, helping assuage market concerns around a lurch toward populist policymaking. Ebrard is widely seen as an experienced and skilled moderate – he represented Mexico in trade negotiations with former president Donald Trump – and a political heavyweight in his own right, suggesting that Sheinbaum intends to govern in a more decentralised (read: less personality cult-driven) manner than her predecessor. Prior to the announcement, the president-elect confirmed that Finance Minister Rogelio Ramirez de la O would stay in his role, and pledged a commitment to re-establishing fiscal discipline in 2025, aiming to bring the deficit down to 3.5 percent of gross domestic product, from this year’s 5 percent.

Implied volatility in the peso has collapsed relative to last week’s levels, dramatically improving the currency’s risk-adjusted carry profile. The central bank is now seen delivering just three cuts over the next year, down from eight just after the March move, meaning that the prospective returns on borrowing remain extremely elevated. But risks remain: developments north of the Rio Grande loom as the clearest threat to a longer-term recovery – moves in the Treasury markets have triggered most peso volatility shocks in recent history, and the upcoming US election will bring its own dangers.

The euro is beating a slow retreat after a slew of private-sector activity surveys missed estimates in early June, suggesting that uncertainty surrounding France’s snap election is affecting the broader economy. S&P Global’s composite purchasing manager index fell to 50.8 – above the 50 threshold that separates expansion from contraction – but well below estimates set closer to the 52.5 mark. While the services sector provided the motive power for growth, manufacturing slowed by more than anticipated, and new orders, which typically foreshadow future activity, dropped at a much faster rate than in May. Germany’s economic recovery slowed, and French output contracted at an accelerating pace.

Markets expect the European Central Bank to cut rates once more this year, but with disinflation progressing at an inconsistent pace, the likelihood of a second consecutive move at the July meeting remains low.

Earlier data showed consumer confidence jumping to a two-and-a-half year high in the United Kingdom, with retail sales rising by much more than expected as anticipation builds ahead of a change in political leadership and rate cuts from the Bank of England. GfK Consumer Confidence Barometer rose by 3 points to -14 in June, hitting levels last seen before the Russian invasion of Ukraine, and sentiment on the 12-month economic outlook climbed 6 points to -11. Receipts at retailers climbed 2.9 percent month-over-month in May, overshooting the 1.8 percent consensus forecast, and pointing to a recovery driven by warmer weather and real wage gains. The Bank of England described yesterday’s decision to hold interest rates as “finely balanced,” raising odds on a cautious easing cycle beginning in August.

Today’s economic agenda looks relatively threadbare, with US purchasing manager surveys set to drop at 9:45, followed by home sales data and leading economic indicators at 10:00. A smaller number of Fed officials will make appearances, with the party line remaining intact: policymakers need to see further evidence of disinflation before beginning to cut rates.

Statistics Canada is shortly expected to report a modest increase in retail spending in April, with gasoline and auto sales doing much of the heavy lifting in keeping the headline in positive territory. So-called “control group” sales – a US concept that excludes gas stations, vehicle and parts dealers, building-materials retailers, and office supply stores – likely remained close to flat in the month. A preliminary estimate for May might show a rebound however, with warmer weather and the prospect of easier borrowing conditions translating into higher outlays.

We are sceptical that this level of spending can be sustained beyond the summer months. We know not to step between Canadians and their credit lines when they think rates are going down, but stress is clearly increasing in the household sector over time. Consumer insolvencies remain below their recent peaks, yet debt burdens and borrowing costs continue to rise – and on the current trajectory, the Bank of Canada’s rate cuts won’t significantly alleviate the growing pressure on consumption levels.

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