US 10-year Yield Falls to New Low for the Year, while Dollar has Muted Reaction to Trump's Affirmation of Tariffs on Canada and Mexico

Overview: The US 10-year yield has fallen to a new two-month low near 4.33% today, ahead of the $70 bln sale of five-year notes, following strong demand at the two-year floating note sale yesterday. The 200-day moving average is near 4.25%. The 10-year yield peaked in mid-January near 4.80%. The dollar initially rallied on President Trump's acknowledgement that tariffs on Mexico and Canada were still on track, though another official was quoted on the wires suggested the timeframe had not been set. In any event, follow-through dollar gains were limited, and the greenback is mixed, with the dollar-bloc and the Norwegian krone bearing the brunt of the dollar's gains. Most emerging market currencies outside of a handful from central Europe are softer. As expected, South Korea delivered its third cut in the cycle and its base rate is now at 2.75%. Hungary is expected to standpat with its key rate at 6.5%. 

Asia-Pacific bonds played catch-up after the rally in US Treasuries yesterday. The 10-year JGB yield fell nearly six basis points while Australia and New Zealand yield fell four basis points. European benchmark yields are mostly around one basis point softer. Germany Bunds yields are bucking the move and are slightly higher, encouraged by talk of a large boost in military spending, possibly before the new parliament sits following the weekend election. On the other hand, the UK 10-year Gilt yield is off three basis points to 4.53% Gold is consolidating at lower levels after set a record a little above $2956 yesterday. April WTI extended yesterday's recovery from the dip below $70 yesterday, the low since late December. It reached almost $71 yesterday and edged up to $71.25 today. Resistance is seen in the $71.50-60 area. 

USD:  The Dollar Index made a new low for the move early yesterday and recovered to leave a potentially bullish hammer candle stick is it wake. Yet, it stalled today, slightly below 106.80. The dollar initially drew bids from Trump's assertion that tariffs on Mexico and Canada were still on track. Still, many see the tariff threats as negotiating ploys and reports suggesting Mexico faces pressure to raise tariffs om Chinese imports to avoid US tariffs reinforce the view. Today's US economic data consist of more Fed surveys (Philadelphia non-manufacturing, Richmond manufacturing, and Dallas services), and December house prices. The Conference Board's measure of consumer confidence may draw attention after the sharp decline reported by the University of Michigan last week. It deteriorated further between the preliminary and final estimate. At 64.7, sentiment is the lowest since November 2023. Still, the data seems secondary to the tariff threats and possibly looming trade war. The early call for February non-farm payrolls is coming in little changed from January's 143k and a steady unemployment rate (4.0%).

EURO:  The euro's reversal yesterday from nearly $1.0530, a marginal new high for the month looks like a bearish shoot star candle stick. It has found support slightly ahead of $1.0450 and a break targets last week low near $1.04, and then $1.0380. The eurozone reported January car registrations, which are a proxy for sales. Registrations fell by 2.6% in January after they soared by 5.1% in December, the strongest gain since April 2024, and rose by an average of 1.0% over the course of last year. Tesla's sales will draw some interest. Its market share fell to 1.0% in January, down from 1.8% in January 2024. Sales fell 45% to 9.9k vehicles last month, down from 18.2k in January 2024. Separately, and more important for the monetary policy, the eurozone indicator of negotiated wage was reported. It slowed to 4.1% year-over-year, down from 5.4% in Q3 24. Meanwhile, Germany reportedly will consider passing a 200 bln euro defense bill under the current parliament rather than the new parliament, which does not sit until late March and opposition parties could block the initiative. German Bund bonds are underperforming today. 

CNY: China's economic calendar is light until the PMI this weekend. A small gain is expected, and despite some high-profile technological successes, and the economy has yet to establish convincing forward momentum. The US dollar's broad rebound saw it recover from around CNH7.2290 yesterday to almost CNH7.2700 today. The next target is last week's high around CNH7.2865. The PBOC set the dollar's reference rate at CNY7.1726 (CNY7.1717 yesterday), the highest since January 20. 

JPY: After approaching the last December's low (~JPY148.65), the dollar recovered to JPY149.80 yesterday and Trump's tariff talk saw it rise to around JPY150.30 early today before falling back to JPY149.20, where it found bid in early European turnover to recover to around JPY149.85. To improve the technical tone, the greenback must recover above the JPY150.40-JPY150.75 area. It is not getting much support from the US 10-year yield, which has fallen to a new two-month low near 4.33%. It was nearly 20 bp higher at the end of January. The week's economic highlight comes on Friday for Japan. It is expected to report softer Tokyo February CPI, a rebound in retail sales and the third consecutive monthly decline in industrial production. Surveys show many expected the new BOJ hike to come in July, but the swaps market did not have it fully discounted until October. 

GBP:  Sterling reached $1.2690 yesterday, a marginal new high since mid-December, were it met sellers that pushed it to almost $1.2610. It made a marginal new low today but held above $1.2600. A break targets $1.2550-60 initially. Data this week for the UK is marginal at best, but Prime Minister Starmer's visit to Washington on Thursday is the standout event. Starmer, knowing full well that the UK, using democratic-means suspended parliament elections during WWII, and Churchill was not regarded as a dictator, has endorsed Ukraine and Zelenskyy. Ukraine's laws around the declaration of martial law are the operative reason for no election in Ukraine during this existential threat.

CAD: The US dollar rose to almost CAD1.4270 after Trump's tariff affirmation last yesterday. The gains were extended marginally today to almost CAD1.4280, a new eight-day high. The 20-day moving average is near CAD1.4300 and the greenback has not closed above it since February 3. After falling to CAD1.4150 on February 14, a two-month low, the US dollar had consolidating mostly below CAD1.4250. The daily momentum indicators look poised to turn higher, and with several US tariffs returning to the fore starting next week, the Canadian dollar looks vulnerable. December and Q4 GDP 24 will be reported at the end of the week. The trade disruption emanating from the US is more important for the trajectory of monetary policy than the GDP data. That said, after contracting by 0.2% in November, the Canadian economy is expected to have growth by 0.3% in December, helped by the temporary suspension of the sales tax.

AUD: The Australian dollar stalled last Thursday and Friday after poking above $0.6400 and nearly meeting the (38.2%) retracement objective of the sell-off from last September's high (~$0.6940). It was unable to resurface above $0.6400 yesterday but held above the pre-weekend low around $0.6350. Follow-through selling today brought it back to last week's lows near $0.6325, last week's low. A break targets the $0.6285 area initially. The daily momentum indicators have not turned but appear poised to in the coming days. Australia reports January CPI first thing tomorrow. It is expected to have ticked up for the third consecutive month from 2.5% in December 2024. The median forecast in Bloomberg's survey is for 2.6%, which would be the highest since last August. The futures market has about an 80% chance of the next cut in May but does not have it fully discounted until July.

MXN: The dollar was trading within the range set last Wednesday against the peso (~MXN20.2015-MXN20.4770) before Trump reaffirmed the tariff threat on Mexico (and Canada). The dollar rose to nearly MXN20.5250 in late activity yesterday. It has held below MXN20.50 so far today. The peso looks vulnerable given the potential US tariffs and technically given the stretched momentum indicators that look about to turn higher. Mexico is expected to report late today that its Q4 24 current account balance was about $9 bln. Mexico's current account deficit was about 0.4% of GDP in 2023 and likely widened to around 0.7% last year. In 2019, before the pandemic, Mexico's reported a 0.3% current deficit. Brazil report IBGE CPI measures. Prices may have jumped 1.3-1.4% month-over-month, which would lift the year-over-year rate back above 5% for the first time since October 2023. Brazil's central bank is engaged in an aggressive tightening operation. It meets against on March 19 and has already telegraphed its intention to raise the Selic rate by another 100 bp (the third hike in a row of such magnitude) to 14.25%. The swaps market is pricing in a 14.75%-15.00% terminal rate. 

 

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