Overview: The US dollar enjoys a firmer tone today after falling to new two-month lows against several of the G10 currencies. The market lacks near-term conviction as the US tariff threat looms after next week. US Secretary of State Rubio and Treasury Secretary Bessent have not attended the G20 meetings in South Africa due to tension in the bilateral relationship but adds to sense of US unilateralism, which is often mischaracterized as isolationist. Eurozone and the UK's preliminary PMI disappointed, and British retail sales rebound masks underlying weakness. The dollar has rebounded against the Japanese yen, helped by BOJ Governor Ueda's threat to purchases of JGBs to stabilize the market. The 10-year yield has risen by almost 25 bp over the past month. In contrast, the US 10-year yields is off nine basis points. Even with today's gain, the dollar is off about 1.25% against this week. The euro has been unable to sustain a foothold above $1.05, and near $1.0470 is off about 0.2% on the week.
Equities are trading higher today. Only Australia and India among the large Asia Pacific bourses did not rally. The index of mainland shares that trade in Hong Kong soared by over 4% to reverse the week's decline was the leader. Europe's Stoxx 600 is up about 0.40% after falling for the past two sessions. A close here would mark the ninth consecutive weekly gain. It has not fallen on a weekly basis since before Christmas. US index futures are practically flat now and for the week coming into today. Bonds are also firmer. The 10-year yields in Europe are mostly 2-4 bp lower, though Gilts are unchanged. The 10-year US yield is slipping back below 4.50%. Gold is softer, near $2930, after setting a record of almost $2955 yesterday. April WTI set the week's high yesterday near $73.15 and has been sold below $72 today. The 200-day moving average is near $71.45.
USD: The Dollar Index was sold to new two-month lows yesterday near 106.35, meeting the (38.2%) retracement of the rally from the late September low (~100.15). It has steadied today and has returned to last week's settlement (~106.70). Failure to close about it would record the third consecutive weekly decline. It stalled near in the middle of the week by 107.40. Today's preliminary February PMI is unlikely to have much impact. After a sharp fall in January (to 52.7, its lowest level since last April) the composite is expected to have risen to 53.2. The preliminary University of Michigan survey may draw more attention. Remember the January survey saw a jump in the one-year inflation expectations to 4.3% (from 3.3%), the highest since November 2023. The 5-10-year inflation expectations ticked up to 3.3% to match its highest since 2008. Market-measures of inflation expectations, like the one-year breakeven rose by about 85 bp last month and is up another 70 bp this month. In fact, it has not fallen in a single session this month and is now slightly below 4.10%. The 10-year breakeven rose eight basis points last month and is up a couple more this month to 2.46%.
EURO: The near-term range has been set by last Friday's high, following the weak January US retail sales and a contraction in manufacturing output, near $1.0515, and Wednesday's low near $1.04. Options for almost 800 mln euros at $1.05 expire today. There is another set of options for almost 950 mln euros at $1.0442 that expire as well. The euro rose yesterday for the first time in four sessions and pushed above $1.05 the North American afternoon. It is nearly flat this week coming into today, and it is nursing a modest loss back toward $1.0460. The composite aggregate flash February PMI was unchanged at 50.2, which is the highest since last August. The economic traction looks fragile. Manufacturing continues to contract (47.3 vs. 46.6) and services growth slowed (50.7 vs. 51.3). Germany's composite held above 50 for the second consecutive month (51.0 vs. 50.5) but the manufacturing PMI has not been above 50 since June 2022. France's composite unexpectedly fell (44.5 vs 47.6) after rising for the previous two months, and it has not been above 50 since last August, where may have been related to the Olympics. Outside of the other fluke last April, France’s composite PMI has not been above 50 since May 2023. Today's preliminary reading is the lowest since September 2023. Germany goes to the polls on Sunday. The CDU will most likely head up the next government, but the SPD is likely to be part of the government, even if the Freedom Democrats clear the 5% representation threshold. The Greens may also be asked to join the government. However, even if the AfD garners a fifth of the popular vote, and receives the second most votes behind the CDU, we expect it will continue to be excluded from government.
CNY: The broader dollar pullback yesterday saw it return to the CNH7.23 area, a new three-month low. It has come back firmer today and is has approached CNH7.2600. It reached a four-day high on Wednesday near CNH7.2930. The dollar settled slightly below CNH7.2580 last week and a close below there would be third consecutive weekly decline for the greenback, which would match its longest losing streak since April-May 2021. The PBOC set the dollar's reference rate today at CNY7.1696, the lower end of the range since returning from the Lunar New Year holiday.
JPY: The dollar fell to JPY149.40 yesterday in North American turnover before steadying. It settled below JPY150.It made a marginal new low today near JPY149.29, before rebounding to almost JPY150.75. The dollar had not traded below JPY150 since early last December. The (50%) retracement of the greenback's rally since the middle of last September is found near JPY149.20. The move was well under way before the US 10-year yield pushed back below 4.50%, encouraged by the slide in stocks. Unlike last July and August yen rally, this does not appear to be unwinding of carry-trades as the likely candidates for the long side, like the Australian dollar, Mexican peso, and South African rand have rallied. Today, Japan reported a jump to 4% (from 2.6%) in the January CPI and a more modest increase in the core rate, which excludes fresh food, to 3.2% from 3.0%. This has been anticipated by the Tokyo CPI reported a few weeks ago. The Tokyo market does seem as sensitive to the PMI as say Europe, and recall Q4 24 GDP was stronger than expected and Q3 24 GDP was revised up. That said, the composite rose for a fourth consecutive month and 51.6, is the highest since last September.
GBP: Sterling set a new two-month high today near at $1.2680, a marginal extension of yesterday's gains, before meeting sellers who have driven it back to $1.2640. Earlier today, the UK reported a bounce back in January retail sales (1.7% after a revised 0.6% decline in December). Food led the rebound. Eating out slowed, and clothing and non-food store sales slowed. The flash composite PMI was at 50.5 down from 50.6 in January. It was at 53.0 last February. The net effect of this week's reports--employment, prices, and retail sale sales, PMI is that the odds of a May rate cut have been shaved to about 80% from around 90% at the end of last week. There are 50 bp of cuts discounted for this year, down from a little more than 57 bp a week ago.
CAD: The greenback fell against the Canadian dollar yesterday for the first time this week against the Canadian dollar marginally took out Wednesday's low near CAD1.4175. A two-month low was recorded at the end of last week closer to CAD1.4150. It is knocking on CAD1.4200 in Europe. In a recent comment, President Trump added to the list of industries that may face a tariff is lumber. As the largest source of US lumber imports (45%), Canada is exposed. As previously noted, the 25% tariff (10% on energy) there were postponed come back to the fore on March 4, and the metals tariff March 12 are also a source of vulnerability, not to mention the threatened tariffs on autos. One might have imagined that USMCA, which was negotiated in Trump's first terms, would exempt Canada, but this is not clear. There is no substitute for re-shoring. Statscan has suggested that December retail sales, which it will report, may have jumped 1.6% in December, flattered by a tax-holiday around the middle of the month. It expired on February 15.
AUD: After the Japanese yen, the Australian and New Zealand dollars have been the best performing G10 currencies this week, and this despite the former's quarter-point cut to begin the easing cycle, and the latter's third consecutive half-point cut. The Aussie settled near $0.6350 last week. Yesterday, it posted a bullish outside, up day, trading on both sides of Wednesday's range and closing above it high. It reached poked a little above $0.6400, its best level since mid-December and made marginal new high today before pulling back to around $0.6380. It stalled in front of $0.6424, where A$445 mln in options expire today. The (38.2%) retracement of the decline from last September's high (~$0.6940) is near $0.6415. The market took news of a small rise in Australia's flash composite February PMI in stride. It was stuck at 50.2 every month in Q4 24. It rose to 51.1 in January and 51.2 in February. In February 2024, it stood at 52.1.
MXN: The US dollar was turned back from the 20-day moving average on Wednesday (~MXN20.4850) and held below it yesterday. Wednesday's nearly 1% gain was pared and the greenback traded down to almost MXN20.29. Support is seen near MXN20.20, around the low from Tuesday-Wednesday. The dollar is trading with a firmer bias in the MXN20.34-MXN20.35 area in the European morning. Mexico surprised yesterday with a small rise in December retail sales and a revision to the November series to show a 0.2% gain instead of a 0.1% decline. The risk is that today's revisions of Q4 GDP is revised slightly higher from the initial estimate of a 0.6% contraction. Still, the peso is among the worst performing emerging market currencies this week, off about 0.4% coming into today. On the other hand, excluding the Russian ruble's 3.3% gain, the Colombian peso is strongest emerging market currency, rising by almost 1.2%.
Reviewed by Marc Chandler
on
February 21, 2025
Rating:
