Overview: The US is continuing to brandish the tariff threat. On top of the "reciprocal tariff" threat signaled before the weekend, yesterday, President Trump indicated he would announce 25% tariffs on all US steel and aluminum imports. As is true to the pattern, the greenback jumped in early Asia Pacific turnover. However, after the initial mark-up, the greenback has come off. By late European morning turnover, the US dollar was mostly softer against the G10 currencies, but the yen and Canadian dollar. Canada is the single biggest source of US steel and aluminum imports. Emerging market currencies are not as resilient and only a few from central Europe are firmer. It is tempting to talk about "tariff fatigue" but we are reluctant to draw hard conclusions without seeing the North American response and more details about the extent tariffs. Moreover, the tariff saga appears to still be in the early stages.
Among the large equity markets in the Asia Pacific, only China and Hong Kong managed to post gains. That said, the MSCI Asia Pacific Index has risen for the past four weeks. Europe's Stoxx 600 is up about 0.3% today, recouping the pre-weekend loss. Its seven-week rally began at the end of last year. US equity index futures are trading with a firmer bias. Meanwhile, European benchmark 10-year yields, and the US 10-year Treasury yield are little changed. Canadian bonds are under pressure, with the 10-year up a dozen basis points. Gold is at a record high above $2900, and March WTI is near a three-day high around $71.80. The 200-day moving average is slightly below $72.00.
USD: After threatening “reciprocal tariffs" before the weekend, yesterday, President Trump indicated he will announce 25% tariff on steel and aluminum today. At first the greenback rallied, but the early gains have been pared, except against the Japanese yen. The employment data and Wednesday's CPI leave little doubt that the Fed is on hold for several months at least. The next Fed cut is not fully discounted until September. The Dollar Index extended its pre-weekend gains marginally, rising to almost 108.45 after poking above 108.30 at the end of last week. US data today is typically not market-moving, yet after the jump in the University of Michigan's survey of one -year inflation expectations (4.3% vs. 3.3%), the NY Fed's survey inflation may draw extra attention today. It was at 3.0% in December. The three-year expectation rose to 3.0% from 2.6%, and the five-year projection slipped to 2.7% from 2.9%. Seven Fed officials are scheduled speakers this week but Chair Powell's semi-annual congressional testimony tomorrow and Wednesday are the highlight. He is likely to be non-committal about the rate outlook and stress how the recent readings will allow the Fed to be patient among the high degree of uncertainty. And at the same time, he will want to avoid being tempted to move out of his lane.
EURO: The threat of reciprocal tariffs on unspecified countries took the euro to session lows ahead of the weekend near $1.03. Its losses were extended to $1.0280 in Asia Pacific turnover, but it has recovered to almost $1.0335 in the European morning. The US two-year premium over Germany widened by 15 bp to about 224 bp, a new high for the year. It peaked last November near 238 bp. It is recovering after dipping below 200 bp in late January.
CNY: The dollar's gains scored in the wake of the "reciprocal tariff' threat saw the greenback rise to a nine-day high against the offshore yuan of slightly above than CNH7.31. The 15% tariff announced last week on US energy and vehicles came into effect today, but even still, it appears that US tariffs, which former President Biden added to, means that the average US tariff on China appears to be larger than China's average tariff on US imports. Still, we need to be cognizant that there are other "market-distorting" practices besides tariffs. Meanwhile, China reported that January CPI rose 0.5% year-over-year, the most since last August and slightly higher than expected. The extended Lunar New Year holiday appears to have flattered the rise. Service prices rose 0.9%, while goods prices rose 0.1%. Excluding food and energy, China's CPI rose by 0.6%, the most since last May. At the same time, producer prices remain entrenched in deflation. Producer prices were 2.3% lower than a year ago, the 28th month of negative readings. The greenback rose to about CNH7.3175 to approach a band of resistance seen in the CNH7.32-CNH7.33 area, though pushed higher seems likely. Last week's high was near CNH7.3735 and that could be retested in the coming weeks, provided the greenback remains broadly firm and US rates continue to recover. The PBOC set the dollar's reference rate slightly firmer at CNY7.1707 (up from CNY7.1699 at the end of last week).
JPY: The yen was the strongest currency in the world last week, rising by about 2.5% against the US dollar. It is the fourth consecutive weekly appreciation of the yen, which is the longest advance since last July-August during the dramatic unwinding of the carry-trade. Despite the rise in US 10-year yields ahead of the weekend by a net of around five basis points, the dollar failed to derive much traction against the yen. In fact, ahead of the weekend, the greenback barely was able to settle within the previous day's range. Still, we suspect that firmer US rates will give the dollar better traction. Also, the threat of reciprocal tariffs could impact Japan. Although it has no tariff on auto imports its average tariff on US imports is about 4.3% compared with average US tariff on Japanese goods of almost 1.6%. The US levies about a 2.5% tariff on Japanese auto imports. Despite the glowing reports of how Japan's Prime Minister Ishiba dealt with Trump last week, Japan appears to be subject to the steel and aluminum tariffs. The dollar initially fell to about JPY151.15, holding slightly above the pre-weekend low (~JPY150.95) before recovering to about JPY152.55, slightly above last Friday's high. It is closer to JPY152 in late European morning activity. The 200-day moving average comes in a little above JPY152.75 today. Earlier today, Japan reported a smaller December current account surplus, which is true to the seasonal pattern, though it, was smaller than expected. The trade balance remains in surplus was also smaller than expected. There seemed to be little market impact.
GBP: The UK's economic calendar is light until Thursday's GDP figures, and the Bank of England warned last week of a contraction after a stagnant Q3. The average UK tariff on US goods is about 4.2%, while the average US tariff on the UK is around 2.7%. Sterling found support near $1.2360 last Thursday and remained above it ahead of the weekend. It held above it today and has resurfaced above $1.2400. It reached about $1.2420 in early European turnover but looks set to consolidate.
CAD: The US threat of reciprocal tariffs left the Canadian dollar nonplussed. It is protected by the USMCA, one would imagine. The Canadian dollar eked out a small gain before the weekend, making it the strongest among the G10 currencies. In fact, the roughly 1.7% gain was its best weekly performance since October 2022. Still, the greenback found support last week near CAD1.4260. Canada is the single biggest source of US steel and aluminum imports, and the US dollar has come back bid on the new tariff threat. It reached about CAD1.4380 today. Since the high was recorded, it has seen a low around CAD1.4315 but is firming ahead of the North American open and is near CAD!.4340. Following the recovery of the Canadian dollar and the unexpected decline in the unemployment rate last month prompted the swap market to downgrade the chances of Bank of Canada rate cut next month to about 60% from 100% at start of the week and 75% at the end of January. It is now back near 75%.
AUD: For the last three sessions, the Australian dollar has chopped in a roughly $0.6240-$0.6300 range. The Aussie was briefly pushed to $0.6230 on the US newest tariff threat but has since recovered back above $0.6280. A move above $0.6330 is needed to lift the technical tone. The market remains highly confident that the Reserve Bank of Australia will begin its easing cycle next week. The second cut is fully discounted for at the May 20 meeting. Australia has a light schedule of market moving data this week.
MXN: US dollar recorded an inside trading session before the weekend but the close was in the upper end of the range. Softer than expected January CPI on the heels of the 50 bp rate cut the previous day and forward guidance that suggested the bar is low for another 50 bp cut, kept the peso on defensive ahead of the weekend. Risk-off sentiment, reflected in the sharp sell-off of US equities, also was a drag after the US threatened reciprocal tariffs. The USMCA offers some protection in this aspect of the tariff threat. However, Mexico is more exposed to the steel and aluminum tariffs. It is the second largest source of US steel imports and third largest source of US aluminum imports. The greenback rose to MXN20.64, a marginally new three-day high and is little changed on the day now in late European morning turnover around MXN20.56. Mexico report January auto production and auto exports today. Look for a bounce back after the seasonally weak December figures. The average increase in vehicle output in January over the past five years has been about 28%. On the other hand, auto exports often slow in January. The average monthly decline has been a little more than 7%.
Reviewed by Marc Chandler
on
February 10, 2025
Rating:
