Overview: The renewed threat of a 25% tariff on Canada and Mexico as soon as tomorrow has lifted the US dollar broadly and has not derailed the firmer tone in global equities. There are still many unknowns and questions, and this will keep investors and businesses on tenterhooks. The greenback is mixed against the G10 currencies in Europe and is mostly +/- 0.25%. The Canadian dollar and Mexican peso are little changed now after selling off late in the North American session yesterday. Coming into North American session, all the G10 currencies but the yen are softer on the week. The Canadian dollar is off about 1%. On the other hand, the Mexican peso is off about 2.2% this week, making it the worst among the emerging market currencies. Brazil and Colombia, with 0.5%-0.6% currency gains the strongest emerging market currencies this week, coming into today.
Most of the large equity markets in the Asia Pacific region that were open today rose, and that includes Japan, India, Australia. South Korea was an exception, and its 0.75% loss put it lower on the week. Europe's Stoxx 600 is up for the fourth consecutive session and the 11th advance in the past 13 sessions. US index futures are also trading with a firmer bias. European benchmark yields are mostly 2-4 bp lower today, though the UK Gilt yield is practically flat. The US 10-year yield is a little firmer at 4.53%, which unchanged from last week's settlement. Gold set a record high today near $2811 but is consolidating closer to $2793. The US has made no announcement whether threaten tariffs on Canada and Mexico will include oil. March WTI is trading between roughly $72.40 and $73.50, inside yesterday's range. The 200-day moving average, which is has not closed below since the end of last year is a little above $72 today. A tariff on Canadian oil would likely lift gasoline prices in the US.
USD: The Dollar Index held technical support near 107.50 yesterday and has risen to a marginal new six-day high today near 108.35, helped by the US latest tariff threat. Nearby resistance is seen near 108.60. The recovery since Monday's low, slightly below 107.00 has cast doubts on the possible topping pattern, it appeared to have been tracing. President Trump renewed his threat to slap a 25% tariff on goods from Canada and Mexico as early as tomorrow. Today's data are unlikely to move the Fed's needle, and therefore, pose little more than headline risk. That said, yesterday's GDP suggests upside risk to consumption. Economists have a very good handle on the PCE deflators after being given the CPI and PPI: the headline accelerates to 2.6% from 2.4%, while the core holds steady at 2.8%. Economists arguably more than the markets will pay attention to the Q4 Employment Cost Index. It is a more comprehensive measure than wages of the cost of labor. The takeaway is that labor cost growth moderated a little last year, it is still rising faster than average pace in the five years before the pandemic.
EURO: The euro is trading lower for the fifth consecutive session. The short squeeze apparently spurred by ECB President Lagarde's refusal to pre-commit, while recognizing elevated uncertainty, as Fed's Powell seemed to the day before, fizzled out slightly shy of $1.0470. The gains were unwound, with new session lows recorded after the Trump's tariff comments. The euro fell to about $1.0385 yesterday and to $1.0365 today, which is where the 20-day moving average is found. The swaps market seems more confident of at least two more quarter-point rate cuts here in H1 than it was prior to the ECB meeting. Given Lagarde's contention that the ECB is data dependent, how important is the preliminary CPI due Monday? German states reporting today appears consistent with small month-over-month decline, which would keep the year-over-year rate steady at 2.8%. France already reported that on the harmonized measure its CPI slipped by 0.2%, but the year-over-year rate was unchanged at 1.8%. Spain reported yesterday a 0.1% decline, but also a rise in the year-over-year pace to 2.9% from 2.8%. Offering some consolation, the core measure eased to 2.4% from 2.6%.
CNY: Without signals from the onshore market, which reopen on February 5, the offshore yuan is prone to consolidate. The dollar had remained within the range set last Friday (~CNH7.2345-CNH7.2880) until today. The broader gains have helped lift the greenback above CNH7.30 for the first time Trump's inauguration on January 20. Despite still being holiday, Caixin January PMI is expected early Monday. An inconsequential uptick is expected. The larger development this week has been the unveiling of DeepSeek (and apparently others) that appear to challenge the dominance of the US and its "containment" strategy regarding semiconductors and fabrication technology. Estimate suggest that China grants 10x more bachelor’s degrees in engineering than the US.
JPY: The US 10-year yield slipped to a marginal new low for the month yesterday near 4.48% and the greenback posted its lowest settlement against the yen of since mid-December. The dollar traded to about JPY153.80 to test the month's low set Monday closer to JPY153.70. The dollar's broadly firmer tone and slightly higher US yields helped fuel the greenback's recovery today to almost JPY155. The Deputy Governor of the BOJ underscored the plan to continue to hike rates provided the economy performs as expected. In addition to the tightening bias, the BOJ recently indicated plans to phase out a fund-provisioning program that will remove JPY77 trillion (~$500 bln) from its JPY740 trillion balance sheet over the next few years. The BOJ purchases commercial paper and corporate bonds is ending this month. All told, there measures can be expected to reduce the BOJ balance sheet by around 15%. Japan's data was mixed today. It reported a larger than expected decline in December retail sales (-0.7%) after a 1.9% jump in November. Industrial output steadied (+0.3%) after plummeting 2.2% in November. The December unemployment rate unexpectedly eased to at 2.4%. from 2.5%. Most important, the Tokyo CPI, which is a useful guide of the national estimate due in a few weeks, accelerated to 3.4% (from 3.1%) and a tick up in the core to 2.5% from 2.4%. The measure that excludes fresh food and energy edged up to 1.9% from 1.8%.
GBP: Sterling remains resilient. It pulled back about 1.25-cents from Monday's high and found support slightly below $1.24 in the middle of the week. It rose to almost $1.2480 yesterday. It is consolidating in a narrow $1.2400-40 range so far today. The upside correction from the test of $1.21 in mid-January does not look complete. A push above $1.2540 could spur a test on $1.26, and it is around there that we look for the correction to be exhausted. Next week's highlight is the Bank of England meeting, and a quarter-point cut is discounted as is another one by the end of Q2. We note that mini-Gilt meltdown earlier this month is not only over, but the 10-year yield slipped below 4.52% today, matching the low for the month. It peaked around 4.92% on Jan 9.
CAD: US President Trump reaffirmed the 25% tariff threat on Canada yesterday, which sent the greenback to almost CAD1.46 from about CAD1.4415 in a few minutes late in the North American session yesterday. It is trading firmly in a CAD1.4430-CAD1.4510 range today. Reports suggest the around 1.5% of the people picked up for illegal border crossing are on the US northern border and Canada accounts for 0.2% of the fentanyl that is confiscated. The US threat, like the one toward BRICS where there is no evidence that it will issue a rival to the dollar, seems disproportionate with the threat. In any event, volatility is elevated, with the benchmark three-month vol is around 7.3%-7.5% (the 100- and 200-day moving averages are near 5.7% and 5.4%, respectively). The sideways trend can be a base or a top and given that the momentum indicators look poised to turn up and the continued widening of the US two-year premium over Canada, we suspect the breakout comes to the US dollar's upside. Canada is expected to report that the economy contracted by 0.1% in November. It grew by 0.3% in October.
AUD: The Australian dollar fell for the fourth consecutive session yesterday and slipped below $0.6200 for the first time in eight sessions. It is holding above $0.6200 today but a close below $0.6200 would signal a test on the $0.6130 area seen in the middle of the month. The daily momentum indicators look poised to turn lower. Today's Q4 PPI report (0.8% quarter-over-quarter, and 3.7% year-over-year) and December private sector credit (0.6%) had little impact on prices or expectations for the RBA's easing cycle to begin next month.
MXN: The Mexican economy contracted more than expected in Q4 (-0.6% vs. -0.2%) and this seemed to put a floor under the dollar after falling to a three-day low as the market had begun feeling more comfortable that the US tariff threat for as early as tomorrow will not be implemented. Still, the poor GDP reading makes a 50 bp rate cut at the Banxico meeting at the end of next week more likely. Before last weekend, the dollar bottomed slightly below MXN20.1350. It peaked earlier this week near MXN20.7835. Yesterday's renew tariff threat saw lifted the greenback to MXN20.7580. So far today's high is around MXN20.7370. Recall that the dollar's high on was set January 20 a little shy of MXN20.94.
Reviewed by Marc Chandler
on
January 31, 2025
Rating:
