Overview: The little emphasis on tariffs initially yesterday saw the US dollar pullback, the renewed threat of 25% tariffs on Canada and Mexico as of February 1 roiled the foreign exchange market and the dollar has come back bid. The Canadian dollar, among the G10, and the Mexican peso, among emerging market currencies have been the hardest hit, but the greenback is broadly higher. All the G10 currencies, but the yen and Swiss franc are off at least 0.5%. A few Asia Pacific currencies managed to resist the dollar's surge, but the rest are lower. Gold reached a two-month high near $2733 before steadying. March WTI has been sold and kissed last week's low near $75.65. The high from the middle of last week was almost $79.40. Trump's "energy emergency" and threat of a trade war with Canada and Mexico is the main driver.
Equities are do not mind the turmoil. Most of the large equity markets in Asia Pacific rallied. The mainland shares that trade in Hong Kong led the region with a nearly 1.2% gain. South Korea and India were notable exceptions, and India's indices are off 1.35%-1.60%. Europe's Stoxx 600 holding on to minor gain, but sufficient to extend the advance for the fifth consecutive session. US index futures are up about 0.5%. Bond markets are mostly firmer. In Europe, most benchmark yields are a little softer, though the UK Gilts yield is slightly firmer. The 10-year US Treasury yield is off six basis points to 4.57%. It had approached the low for the month, which was set January 2 a little below 4.52%. It settled before the weekend slightly above 4.61%.
USD: The dollar was sold yesterday as it became clearer that new US tariffs would not be implemented on "day one." Still Trump's threat of 25% tariffs on Mexico and Canada on February 1 saw the greenback sold in the Asia Pacific region early today and it remains under pressure. Data on tap today includes the Philadelphia Fed's non-manufacturing survey. Recall that the manufacturing survey surged to 44.3 from a revised -10.9 (from -16.4). That is the highest since April 2021. The Federal Reserve is in its self-imposed quiet period ahead of next week's FOMC meeting.
EURO: The euro extended its recovery from last Monday's two-year low near $1.0170 to trade up to $1.0430 amid relief that the US did not levy new tariffs immediately. This month's high is near $1.0435, was tested initially in Asia Pacific turnover over today before Trump's tariff threat, and it as sold to nearly $1.0340. The $1.0330 area is the (61.8%) retracement of yesterday's bounce. A break signals a return to yesterday's low near $1.0265. In a subdued week for economic data, Germany reported a preliminary sign of stabilizing sentiment. The ZEW survey of the current situation did not fall for the first time since July and improved to -90.4 (-93.1 in December). The expectations component has been in a sawtooth pattern since bottoming in September and alternating between monthly gains and losses. It more than doubled in December to 15.7 (from 7.4 in November) and retreated in January (10.3).
CNY: The broad dollar pullback yesterday saw the greenback fall sharply against the Chinese yuan. Reports linked the yuan's recovery to the Trump-Xi call, which seemed perfunctory at the time and had little noticeable impact when the new first broke before the weekend. The dollar fell to about CNY7.2615, a new low since mid-December. It recovered to CNY7.2840 today. The PBOC set the dollar's reference rate at CNY7.1703 today after CNY7.1886 yesterday. Against the offshore yuan, the dollar fell to CNH7.2600 and the drop was sufficient to drive the five-day moving average below the 20-day moving average for the first since being whipsawed in early November. It extended the losses to CNH7.2525 today before recovering. The greenback pushed to almost CNH7.2940. The loan prime rates were held steady yesterday (3.10% for the one-year and 3.60% for the five-year) as widely expected.
JPY: The yen was a laggard in yesterday's move against the dollar. It rose by a little less than 0.5%. The dollar initially rose marginally above the high seen last Thursday (~JPY156.50), which it held below before the weekend. However, the dollar reversed and fell to almost JPY155.40. It was sold to nearly JPY154.75 today, a new low for the month. The five-day moving average (~JPY155.90) slipped through the 20-day moving average in the middle of last week (~JPY157.20) for the first time since mid-December. The BOJ meets at the end of the week and the market is still feeling confident of a 25 bp hike, which would double the target rate to 0.50%.
GBP: In the broad dollar pullback yesterday, sterling briefly and marginally traded above last week's high to reach nearly $1.2345. Sterling's last leg down began from the January 7 high near $1.2575. Within a week it had fallen to $1.2100. Yesterday's gains were sufficient for sterling to meet the (50%) retracement objective (~$1.2280) of the downdraft. It was sold to $1.2235 today, which retraces (61.8%) of yesterday's gains. Earlier today, the UK reported an acceleration of labor earnings (5.6%, a six-month high), a slowing of job growth, and a tick up in the unemployment rate to 4.4% from 4.3%. Despite the mixed signals from the employment data, the market is still confident (92%) of a quarter-point rate cut when the BOE meets on February 6.
CAD: The US dollar fell by about 1.15% against the Canadian dollar yesterday, its biggest since day decline since May 2023. The greenback rose by about 0.95% against the Canadian dollar in the previous two sessions. The US dollar fell to almost CAD1.4260, its lowest level since mid-December but recovered and settled above last week's low (~CAD1.4300). The tariff threat saw the greenback surge to CAD1.4515, a new four-year high. Recall that during early days of the pandemic, the US dollar reached almost CAD1.4670. Before that, the US dollar reached nearly CAD1.47 nine years ago. Since today's high was set, the greenback has heled above CAD1.4400. Business sentiment improved in the Bank of Canada's Q4 survey, but today's CPI is more important. Price pressure is expected to have moderated, and this may support expectations of a rate cut next week. Headline CPI is expected to fall by 0.4%, which given the base effect, allows the year-over-year pace to slip to 1.8% from 1.9%. It bottomed last September at 1.6%. Note that a temporary sales tax holiday started on December 14. Canada has also reported strong gains in in employment, aggregate hours worked, and compensation, which could some upside risks. Central bank officials put more emphasis on the underlying core measures, both of which are expected to have fallen by 0.2% to average 2.45%, down from 2.65% average in November.
AUD: The Australian dollar rallied 1.3% yesterday, its best showing since November 7, when the Fed cut rates a couple of days after the US election. The Aussie had fallen by about 0.55% last Thursday and Friday. The Australian dollar set nearly four-year lows on January 13 around $0.6130 and yesterday pushed briefly above $0.6285. It extended the gains by a couple hundredths of a cent before it was sold to about $0.6210. The five-day moving average crossed above the 20-day moving average for the first time a little more than three months. The Aussie closed above the down trendline drawn off last September's high (~$0.6940) and the November high (~$0.6690) and caught the highs in December and earlier this month. It came in around $0.6230 yesterday and about $0.6220 today. The local economic news is light until the flash PMI at the end of the week.
MXN: Most emerging market currencies traded higher yesterday. The two notable exceptions were the Argentina peso and Turkish lira. The Mexican peso was the best performing Latam currencies with a 1.35% gain, outperforming the second-place Brazilian real, which appreciated by about 0.75%. The dollar fell to a three-day low against the peso, near MXN20.44. The peso's gains were pared after Trump said he would declare a national emergency at the southern border. Trump also indicated he will begin the process to designation Mexico's drug cartels as "terrorist organizations," and use the "Alien Enemies Act to remove them. The new threat of tariffs sent the greenback back to almost MXN20.80. Recall that the high at the end of last week was near MXN20.9380 and it settled close to MXN20.7860. Mexico will report November retail sales shortly. They are expected to recover from the 0.3% decline in October, but the year-over-year rate has been falling since last March. However, most of the weakness was in Q1 and in the six-months through October, Mexico's retail sales were flat.
Reviewed by Marc Chandler
on
January 21, 2025
Rating:
