The Australian dollar has taken over leadership in the dollar bloc from the Canadian dollar. The Aussies are up about 0.35% today to extend this week’s gains to more than 2% and reach a new high for the year a little more than $0.7760. The Canadian dollar is up 1.1% this week, in comparison. The softer yields in European and the US appear to be at flows in Australia, which offers about 45 bp more than the US on two-year money, an 18 bp increase over the past month.  

The New Zealand dollar cannot keep pace here with its Tasmanian cousin following the disappointing June manufacturing PMI fell to 56.2 in June from a downward revision to the May series (to 58.2 from 58.5). The Australian dollar appears to be breaking out of a bottoming pattern against the New Zealand dollar after underperforming for most of the Q2.  After large gains (~1.3%) in the middle of the week in response to the Bank of Canada rate hike, the Canadian dollar is consolidating in narrow ranges.

Ahead of the weekend, the chief focus is on the flurry of US economic data that will be reported today. Given investors and policymakers sensitivity to inflation, we have highlighted the importance of today’s CPI report. Core CPI fell for the past four months, and if this trend is arrested in June, as we expect, it could give Yellen instant gratification, and move the flag a bit toward the Fed’s argument about the transitory nature of the recent softening. Despite many insisting that Yellen was dovish, we take seriously the line which the chair repeated in both her sessions, namely that it was “premature” to conclude that underlying inflation was falling short of its target.   

A steady or even a small increase in core CPI will not end the debate by any means. The Fed targets the core PCE deflator. One month does not make a trend. In our view, the various Fed comments are consistent with a sequencing that favors beginning of the balance sheet adjustment before the new move on rates.