Overview: Tariffs and the Federal Reserve meeting are center stage today. Yesterday, the White House reiterated that tariffs on Canada and Mexico could be announced this weekend. The Canadian dollar is softer, and the Bank of Canada is widely expected deliver a quarter-point cut today and hint at a pause. There is practically no question about the Fed. It will stand pat, and we expect it to defend its independence. The Mexican peso, on the other hand, is firmer. In fact, it joins the Thai baht today as the only two emerging market currencies that higher on the day. We cannot fully explain the peso's resilience yesterday and today. It as if there is a skepticism that the tariffs will be implemented and the carry makes it easier to express the view with the peso than the Canadian dollar, which has the policy divergence to cope with today. The greenback is firmer against all the G10 currencies by the Japanese yen. Australia's softer than expected quarterly CPI boosts the chances that the RBA will begin its easing cycle next month, while Sweden's Riksbank cut rates by a quarter-point and indicated its easing cycle may be over.
Many of the large equity markets in Asia Pacific are closed today for the Lunar New Year. Yet, Japanese, Australian, and Indian markets rose. Encouraged by stronger than expected earnings for ASML, Europe's Stoxx 600 is up about 0.60% to new record highs. US index futures are firm. Benchmark 10-year bond yields are 2-5 bp lower in Europe. Australian yields are 5-6 bp lower. The 10-year US Treasury yield is a little softer, near 4.52%. Gold barely and briefly extended yesterday’s recovery, but after poking above $2766 has come back off and is trading below $2760 in late European morning turnover. Meanwhile, March WTI met sellers above $74 and is threatening yesterday's low near $72.95 and looks poised to test support near $72.00, around where the 200-day moving average is found.
USD: The outcome of today's FOMC meeting is a forgone conclusion. The central bank will stand pat after reducing rates by 100 bp over the past several months. After straying, the market has once again converged with the Fed's guidance and has nearly two cuts discounted for this year (~48 bp). At his December press conference, Powell indicated that some members had incorporated some assumptions about the policies of the administration. Some did not. And some did not say. The substance, timing, and sequence of new initiatives are not yet clear. Still, the new development since the December FOMC meeting has been the president's push for lower rates. In Federalist 51, Madison famously writes, "Ambition must be made to counteract ambition," emphasizing that the structure of government should pit the ambitions of individuals and branches against each other to ensure that no single entity can dominate. This is to say, the Chair Powell can be expected to jealously guard the Fed's independence from partisan politics and will adjustment monetary policy in line with its evolving economic assessment. Nearby resistance for the Dollar Index is seen in the 108.20-50 area.
EURO: There is little doubt in the market's mind that the ECB will cut rates by 25 bp tomorrow regardless of the what the Federal Reserve does today. The swaps market has nearly 75 bp of cuts discounted for the first half and about 60% chance of another cut in the second half. The euro stalled earlier this week near $1.0535, a bit shy of the (50%) retracement of the losses since the US election on November 5. The euro is straddling $1.04 support in European turnover. It is the (38.2%) retracement of the gains from the January 13 low near $1.0180 and the break signals the risk of a move toward the $1.0355-$1.0380 area. There were two developments to note. First, Sweden's Riksbank cut its policy rate by 25 bp to 2.25% and signaled that its easing campaign may be over, though the forward guidance extends only through H1 25. It reduced rates by 150 bp last year, starting in May. CPI remains below the 2% target. Sweden reported earlier today that its economy expanded by 0.2% in Q4 after contracting for the previous three quarters. Second, Spain reported 0.8% growth in Q4, matching the Q3 performance, and slightly better than expected.
CNY: The greenback trading firmly yesterday and rose by about 0.3% against the offshore yuan, its largest since day gain this month. Still, the dollar held below the pre-weekend high (~CNH7.2880). It is trading in about a CNH7.2565-CNH7.2780 range today, inside the range seen yesterday. The dollar settled slightly below CNY7.2450 against the onshore yuan before the extended holiday. While market participants may not want to pull the offshore yuan too far away from it, but if the greenback continues to strengthen, they may have little choice.
JPY: Firmer US yields seemed to help stabilize the dollar against the yen yesterday, after a new low for the month was recorded on Monday near JPY153.70. It stalled near JPY156 yesterday to hold below the Monday high (~JPY156.25). It is trading quietly today in a JPY155.00-80 range. A move above JPY156 could spur a test on last week's high around JPY156.75. Taking it out would lift the dollar's technical tone and could coincide with a push back above 4.60% in the 10-year US yield, which briefly dipped below 4.50% on Monday.
GBP: Sterling rose in four of last week's five sessions. That is the most since the end of last November. It extended the advance Monday to reach almost $1.2525. The momentum stalled and sterling pulled back to $1.2415 yesterday, which has been frayed today. Support is seen in the $1.2385-$1.2400 area. The Bank of England meets next Thursday, and the market is confident that the easing cycle will resume with a quarter-point cut. The swaps market has another cut fully discounted for the end of Q2. For the entire year, nearly three cuts are priced in (74 bp), up from about 60 bp at the end of December.
CAD: As confident as the market is that the Fed is on hold, it is as sure that the Bank of Canada will extend last year's easing cycle with a quarter-point cut today. That would bring the target rate to 3.0%, which is upper end of the Bank of Canada's estimate of the neutral rate (2%-3%). This is likely an important consideration for officials that cut delivered back-to-back 50 bp cuts in Q4 24. Indeed, there is some risk of a hawkish cut today, where the central bank signals it may pause and monitor the effects of the cumulative easing that has been delivered. Yet, in the current context, the Canadian dollar seems more sensitive to the tariff threat. Yesterday, the White House press secretary reiterated the possibility of that tariffs will be announced on Canada and Mexico as early as this weekend. The Canadian dollar is trading at six-day lows, while the peso, as we will see is trading slightly firmer. Many people seem skeptical of the February 1 time frame. The US dollar is testing the CAD1.4435 area and a convincing break could target the multi-year high set the day after Trump's inauguration near CAD!.4515.
AUD: The Australian dollar's pullback brought in new buyers on the dip below $0.6240. It held above the (50%) retracement of its recovery off the mid-January lows and the 20-day moving average both of which were found near $0.6230. However, the losses have been extended today to slightly below $0.6225. The technical tone has softened, and a break of the $0.6200-10 area warns of a return toward the month's low near $0.6130. Australia reported that the CPI slowed to 2.4% year-over-year in Q4 from 2.8% in Q3. The underlying measures also softened. The trimmed mean measure slowed to 3.2% from 3.6% and the weighted median slowed to 3.4% from 3.7%. Of note, non-discretionary goods prices fell by 0.5%, while discretionary goods prices rose by 1.1%. The futures market anticipates the beginning of the Reserve Bank of Australia's easing cycle next month and has a nearly 95% chance of a quarter-point cut discounted. The odds were closer to 70% at the end of last year.
MXN: The Mexican peso showed unexpected resilience yesterday after initially falling to a five-day low amid a generally stronger US dollar. The greenback initially extended Monday's 2% gain yesterday, rising to almost MXN20.7850 before being sold in Europe and North America. It retreated to almost MXN20.51 and a little through MXN20.48 today to meet the (50%) retracement of the jump since last Friday's low (~MXN20.1450). It slipped through the 20-day moving average (~MXN20.5555) but settled back above it. The Mexican peso and the Brazilian real were the strongest among emerging market currencies yesterday with roughly 0.60% gains. The dollar made a marginal new January low against the real yesterday, slightly below BRL5.8680. Brazil's central bank has already committed to a 100 bp hike of the Selic rate today to 13.25%. It raised the Selic by 100 bp in December. It has signaled its intention to hike again by 100 bp at the March 19 meeting.
Reviewed by Marc Chandler
on
January 29, 2025
Rating:
