Overview: The US dollar enjoys a firmer tone against most of the G10 currencies in relatively quiet turnover. Ironically, the Australian dollar is the best performer and it is virtually flat, despite the beginning of the central bank's easing cycle earlier today. Governor Bullock pulled over a hawkish cut in the sense and futures market pushed out the next cut until August. The UK report stronger wage growth and the first increase in employment in three months but it did not prevent sterling was softening. New Zealand's central bank is widely expected to deliver its third consecutive half-point cut tomorrow, and the New Zealand dollar is the weakest among the major currencies, off nearly 0.50%. Most emerging market currencies from central Europe and Asia Pacific are softer. The Mexican peso's 0.20% gain puts it on the top of the EM leaders' board.
Equities are mixed. In Asia Pacific trading Tokyo, Hong Kong, South Korea, and Taiwan rallied. Profit-taking was seen in China, though mainland shares that trade in Hong Kong continued to outperform. Australia, New Zealand, and Indian equities fell. Europe's Stoxx 600 is virtually flat, while US index futures are slightly firmer. After rising yesterday, European benchmark 10-year yields are narrowly mixed today, while the 10-year Gilts yield is up almost two basis points. The 10-year US Treasury, which settled below 4.50% before the long holiday weekend on the back of disappointing data, is trading slightly above that threshold now. Gold was tagged for 1.5% before the weekend. It rose by 0.5% yesterday and is up almost as much today. It is re-establishing a foothold above $2900. Talk that OPEC may delay its output increase may be behind the firmer prices today. April WTI held support near $70, this year's low and has approached $72.
USD: The Dollar Index is set to snap a five-day decline today that had brought it to a two-month low. Appreciation that the higher-than-expected US CPI and PPI will still allow a decline in the Fed's targeted measure of inflation followed by the dismal retail sales report weighed on the greenback. Recall that the Dollar Index peaked a week before the inauguration (slightly shy 110.20) and fell to almost 106.55 at the end of last week. The downside correction is well advanced. The 106.35 area corresponds to the (38.2%) retracement of the rally from last September's low. It reached 107.05 today. A move above the 107.30 would lend credence to our suspicions that the pullback may be over. Today's economic calendar features the NY Fed's Empire State manufacturing survey and TIC data. Neither are typically market movers. The Fed President Daly and Governor Barr speak today, but it seems that a clear consensus exists among Fed officials in favor of patience. There is practically no chance of a change in policy at next month's FOMC meeting, where the updated Summary of Economic Projections will be the main interest.
EURO: The January high on January 13 near $1.0535. Last week's high was about $1.0515. That may prove to be February's high. It tested support near $1.0450. A break of it weakens the technical tone after last week's 1.6% advance. The $1.0550 area corresponds to the (38.2%) retracement of the euro's downtrend since last September's high around $1.1215. Germany's ZEW survey improved. The assessment of the current situation improved for the second consecutive month but at -88.5, it remains in the trough for all practical purposes. The low point as -93.1 in December 2024 (the pandemic low was -93.5). The expectations component has been alternating between gains and losses since last September. It rose to 26 from 10.3 in January. It was at 19.9 in February 2024.
CNY: The dollar fell to almost CNH7.2425 yesterday, a new low for the month, before recovering to new session highs near CNH7.2680. Amid its broad recovery today, the dollar reached almost CNH7.2865. Since returning from the Lunar New Year holiday, the PBOC has set the dollar's reference rate in a narrow range of CNY7.1691-CNY7.1719. Yesterday's fix was at CNY7.1702 and today's was at CNY7.1697. The index of Chinese shares that trade in Hong Kong has rallied about 16.25% so far this year, making it among the best performers. Meanwhile, China's 10-year yield discount to the US has narrowed from the record of around 315 bp in mid-January to around 280 bp now, the least since mid-December.
JPY: We often see two main drivers of the exchange rate: changes in the US 10-year yield and anticipated changes in BOJ policy. The dollar extended its pullback against the yen yesterday for the third consecutive sessions. The first two days of declines were on back of the nearly 15 bp decline in the US 10-year yield. Yesterday's drop to JPY151.35 was sparked by the stronger-than-expected Japanese economic performance. Q4 GDP rose 2.8%, more than twice the median projection in Bloomberg's survey, and Q3 GDP was revised to 1.7% from 1.2%. The report boosted confidence that the BOJ will proceed with the normalization of monetary policy. The dollar made a marginal new low today near JPY151.25 before recovering, ostensibly with the help of firmer US rates. It has held below yesterday's high (~JPY152.40). A move above there targets JPY153.00 initially. Japan reports the January trade figures tomorrow. The trade deficit always deteriorates in January (30 consecutive January's). Although Japan records an overall trade deficit, it recorded roughly a $68.5 bln trade surplus with the US in 2024.
GBP: Sterling hovered in a narrow range around $1.26 yesterday but in thin trading after he European close, sterling made a marginal new two-month high around $1.2640. The $1.2610 area is where the (38.2%) retracement objective of sterling's slide from the late September high (~$1.3435) is found. The next retracement objective (50%) and the 200-day moving average are found in the $1.2765-90 area. Sterling is trading quietly inside yesterday's range today. Yesterday's low was near $1.2580 and below there initial support may be around $1.2550. Today's employment data showed a combination of stronger wage growth (regular pay growth in the private sector accelerated to 6.2% Q4 24, from 5.9% previously (revised from 6.0%, initially), and the first rise in payrolled employee in three months. The (ILO) three-month unemployment remained at 4.4%, the cyclical high. Jobless claims rose by 22. Expectations of BOE policy did not change much, ahead of tomorrow 's CPI. The swaps market sees little chance of a cut next month but more than a 90% chance of a cut at the following meeting (May 8).
CAD: From the February 3 tariff-threat high near CAD1.48 to the pre-weekend low (~CAD1.4150), the greenback dropped about 4.35%. We suspect the move is over or nearly so. A move back above CAD1.4230-40, and ideally the previous support near CAD1.4260. The greenback has frayed CAD1.42 today in Asia Pacific turnover but is hovering below thee in European turnover. Canada reports January CPI today. Canada's CPI was flat on an annualized basis in Q4 24 and fell by 0.8% at an annualized pace in Q3 24. It was flat in January 2024, so the 0.1% rise anticipated by economists (median) in Bloomberg's survey will translate to a tick-up in the year-over-year rate to 1.9% from 1.8%. The underlying core rates may also tick up slightly. Still, the key to the outlook of the Bank of Canada may be more about the economic fallout if the US tariffs materialize than the near-term inflation performance.
AUD: As widely expected, that Reserve Bank of Australia began its easing cycle earlier today with a 25 bp cut in the cash rate target to 4.10%. The market also anticipated the cautious tone by the central bank and does not have the next cut fully discounted until August. Earlier this month, Australia's two-year discount to the US reached nearly 55 bp, the most since last July. It is now near 35 bp. The Australian dollar reached a two-month high yesterday near $0.6375. It is holding below there today but recovered from initial weakness that saw $0.6335. The (38.2%) retracement objective of the Aussie's depreciation since last September's high (~$0.6940) comes in near $0.6415. Note that the Australian dollar settled above its upper Bollinger Band for the second consecutive session. It is found near $0.6365 today.
MXN: The dollar traded quietly against the Mexican peso yesterday inside the pre-weekend range (~MXN20.2625-MXN20.4370). It has slipped slightly below MXN20.2280 today, which is the lowest since last month's low was set on January 24 near MXN20.1345. Although the Mexico's high short-term rates make it expensive to be short the peso against the dollar without downside momentum, Mexico still looks vulnerable to the border tariff (undocumented immigrants and fentanyl), the tariff on steel and aluminum, and the auto tariff threat. Mexico's central bank releases its latest inflation report tomorrow.
Reviewed by Marc Chandler
on
February 18, 2025
Rating:
