Overview: The dollar's gains scored in North America yesterday have been reversed today. It is softer against all the G10 currencies, led by the Japanese yen. The greenback was pushed below JPY150 for the first in a little over two months, ostensibly on the back of greater confidence that the BOJ will continue to hike rates, but if anything the swap market is slightly softer than yesterday. Still, the dollar does not look to have bottomed against the yen for the session. Most emerging market currencies are also enjoying a firmer tone today. The Mexican peso is firmer after falling for the first time in seven sessions yesterday.
Rising JGB yields and yen weighed on Japanese equities today and major indices were off more than 1%. Australia ASX 200 and the index of mainland companies that trade in HK were also fell more than 1%. Europe's Stoxx 600 is about 0.25% firmer after falling by 0.9% yesterday. US index futures are trading softer. European yields are 1-2 bp lower, though the 10-year Gilt yield is up one basis point to about 4.62%. The yield on the 10-year US Treasury note is a little lower at 4.52%. The US sells $165 bln in bills today and $9 bln 30-year TIPS nd more Fed speak--though the message of patience is clear. Gold set a new record near $2955. April WTI is holding in around a 30-cent range on either side of $72, where the 20-day moving average is found.
USD: The Dollar Index is softer after reaching a four-day high yesterday near 107.40. A convincing push beyond 107.50 would improve the technical tone and boost confidence that the decline from almost 110.20 a week before President Trump's second inauguration is over. That decline itself needs to be placed in the context of the 10% rally from the end of September. The daily momentum indicators are stretched but have not turned higher. Initial support is seen near 106.80, while Monday's low slightly above 106.60 is a two-month low. The economic calendar features the Philadelphia Fed survey, weekly jobless claims, and the Leading Economic Indicators. It may take a few weeks for the federal government layoffs lead to filing for unemployment benefits, but the risk of that the gradual slowing of the labor market accelerates. The LEI was flat in Q4 24, the first quarter it did not decline since the end of 2021. It may not be so lucky in Q1 25. Four Fed officials speak today, but it is clear that the Federal Reserve is likely on hold through the first half. The next cut is fully discounted for September, which seems about right, though we would think the odds of another before the end of the year is somewhat greater than the 40% discounted now.
EURO: The euro rose from $1.0280 on February 10 to almost $1.0515 on February 14. It was sold in North American to $1.04 yesterday to approach the (50%) of last week's rally. It is consolidating quietly in almost a quarter-cent range above $1.0420 today. There are options for 1.6 bln euros at $1.0450 that expire today. It is not just the US tariff threat, but its willingness to strike a bilateral deal with Russia, and President Trump's desire to cut deal with China, after the US lobbied hard to deter Brussels from doing so, marginalizes Europe in a profound way. A political risk premium for holding euros may emerge.
CNY: The dollar recorded the low for the month on Monday slightly above CNH7.2525 and rose to CNH7.2930 yesterday. The greenback is heavier today and returned to almost CNH7.2600 today. Beijing has been slow to provide more support via lower interest rates and the loan prime rates were left unchanged earlier today. The dollar's reference rate was set at CNY7.1712 today, the highest in a week. Contrary to ideas that officials would allow the yuan to fall in the face of US tariffs, the PBOC has succeeded in maintaining a stable exchange rate against the dollar. The onshore yuan is up about 0.50% this year and the offshore yuan has risen by about 1%. Rising equities and a narrower 10-year discount to the US may also help support the yuan.
JPY: That there was no discussion of interest rate policy when BOJ Governor Ueda met Prime Minister Ishiba earlier today was taken favorably for the yen on ideas that normalizing monetary policy is no longer controversial and did Tokyo is not resisting. The dollar briefly traded below JPY150 for the first time since December 9. Since the low was recorded, the dollar has been unable to resurface above JPY150.50. The JPY149.20 area is about the (50%) retracement of the dollar's rally from the mid-September low (~JPY139.60). The firmer US 10-year yield (~five basis points) this week has not helped the greenback, though the 10-year US premium (~307 bp) is the narrowest in four months. Japan's Prime Minister Ishiba asked Trump for exemptions from the metal and reciprocal tariffs. It is not clear that it will be granted. While Japan runs an overall trade deficit, it records a bilateral surplus with the US. It also has a 10% VAT, which the US administration views as a tariff even though the tax applies to domestic goods, as well.
GBP: Sterling posted an outside down day yesterday, trading on both sides of Tuesday's range but settling above Tuesday's low, albeit barely avoided more bearish implications of a potential reversal pattern. For the past fifth consecutive session, sterling is straddling the $1.26 area. Recall that $1.2610 is the (38.2%) retracement of sterling's downtrend from $1.3435 in late September 2024. Support is seen near $1.2550 and yesterday's high was $1.2640. The combination of stronger wage growth and the acceleration of CPI have prompted the market to shave the odds of a May cut, so that the next cut is now fully discounted for June. Still, the swaps market continues to 50 bp in cuts before the end of the year.
CAD: The US dollar edged higher against the Canadian dollar for three consecutive sessions coming into today, but the upticks have been minor. The greenback recorded a two-month low at the end of last week near CAD1.4150. The US dollar reached a four-day high yesterday slightly a little above CAD1.4245 to meet the (38.2%) retracement objective of last week's decline. It is finding support today a little above CAD1.4200. There are options for around $715 mln at CAD1.4175 that expire today. One supportive development for the Canadian dollar is that the US two-year premium has narrowed for the past seven sessions and around 145 bp, it is the smallest since late January. It reached its widest since 1997 earlier this month near 165 bp. The 10-year US premium widened to a record 150 bp on February 4 and is now around 135 bp.
AUD: The Australian dollar was turned back yesterday after approaching the two-month high set Monday near $0.6375. It has come back bid today after falling to a new low for the week (slightly below $0.6330) and is now above yesterday's high. It was helped by a solid jobs report, even though the unemployment rate ticked up to 4.1% in January, which is where it was in January 2023. Australia created 44k jobs, twice what the median in Bloomberg's survey projected. Australia reported 54k full-tie positions were filled (after losing ~24k in December). Part-time positions fell by 10k (after surging nearly 84k in December). The participation rate rose to 67.3% frum a revised 67.2% (initially 67.1%). The country's jobs grew by an average of 37k a month in 2024 and 31k a month in 2023. Of those positions, almost 25k a month on average were full time last year after almost 9k a month on average in 2023.
MXN: The peso's six-day rally, matching its longest advance since last March, was snapped yesterday. The US dollar jumped by around 1% against the peso to almost MXN20.48. Only the Polish zloty, among emerging market currencies, did worse than the peso. The peso has steadied and has recouped about 0.25% today. The greenback may find initial support near MXN20.34. The US formally designated several Mexican drug cartels as terrorist organizations, which serves to broaden the US efforts, including businesses and individual who transact with them. Mexico's president has threatened to extend the country's legal actions against US gun manufacturers. This exposes another front in the US-Mexico confrontation, which includes undocumented migration, fentanyl, steel, and auto, as well as Mexico's imports of Chinese autos (for domestic consumption for which there is not a competitive USMCA alternative, low-priced EV, for example). Mexico reports retail sales today, which likely fell for the third month in December. Citing the unexpected contraction in Q4 GDP and the uncertainty emanating from the US, the central bank downgraded this year's growth forecast in the quarterly inflation report to 0.6% from 1.2%. The dollar recorded marginal new session highs after the report. Minutes from the recent central bank meeting will be published today. That meeting resulted in a 50 bp cut and suggestion that another cut of a similar magnitude may be considered.
Reviewed by Marc Chandler
on
February 20, 2025
Rating:
