Overview: The US dollar is trading heavily as the pullback from tariff-threat extreme continues. It is weakest against all the G10 currencies and most emerging market currencies. Stronger than expected wage growth and softer US 10-year yields has driven the yen to new highs for the year, to lead the major currencies with more than a 1% gain. The weakest among the G10 currencies is the Canadian dollar, which is up about 0.35% and is approaching the year's high. Among emerging market currencies, only the Chinese yuan and Indian rupee are lower.
China's mainland market re-opened from the extended Lunar New Year holiday. Chinese equities, including those that trade in Hong Kong, fell, though most of the other large bourses in the region rose. India was the other notable exception. Europe's Stoxx 600 is treading water and is little changed after rising about 0.20% yesterday. Disappointing corporate earnings yesterday are weighing on US equity indices today, pointing to a lower opening. Bonds are rallying. European benchmark 10-year yields are 3-6 bp lower. The 10-year US yield, which has been holding above 4.50% on a closing basis is off almost four basis point to 4.47%. The US Treasury's quarterly refunding announcement will be made today. Gold is trading a record high above $2870. It settled last week below $2800. March WTI is trading in the upper half of yesterday's range (~$70.65-$74.35). It traded almost $73 earlier today but is now near $72.
USD: After settling poorly yesterday, the Dollar Index settled poorly yesterday, it is taking another leg lower today. It has pushed below initial support around 107.50 and initial potential may extend toward last month's low near 107.00. Meanwhile, attention turns back to economic data and the US has a heavy slate. It features the ADP estimate of private sector employment (expected to improve from 122k in December), December trade deficit (expect to have widened sharply) and final services and composite PMI, along with the services ISM. The economy appears to be off to a solid start, and even the disappointing January auto sales (15.6 mln SAAR) produces a two-month moving average (as the tariff threat may have pushed some purchases into December) that is the third highest since April-May 2021. The data are unlikely to shake the market's confidence that the Fed is on hold for the next couple of meetings at least. The quarterly refunding announcement will likely draw attention. Treasury Secretary Bessent, among others, were critical of former Secretary Yellen for relying on bills rather than issuing more coupons. This may be the first opportunity to redress it, but it may be too early. For its part, the Federal Reserve's balance sheet roll-off of $25 bln a month continues and ending it does not seem imminent. Separately, President Trump authorized the launch of a sovereign wealth fund. The US Treasury has full discretion over the roughly $125 bln Exchange Stabilization Fund, which despite its name has been used for other purposes than intervention. A piece of this can be carved out for a sovereign wealth fund that could be invested in wider range of assets than reserves typically are.
EURO: The euro is pushing above $1.04 for the first time this week as its recovery from Monday's spike low to $1.0140 is extended. It has approach the resistance area seen around $1.0440-65. The final services and composite PMI were in line with the initial estimate and had little impact. France's budget remains in the center of a local maelstrom. Prime Minister Bayrou used a constitutional provision to bypass parliament to adopt this year's budget. Two no-confidence votes are likely today, but the Socialists have indicated they will abstain, allowing the government to survive. Without its support the motion will fail regardless of how Le Pen's National Rally will vote. The previous government, led by Barnier fell under similar circumstances but then the left was united and joined forces with the National Rally. The political intrigue may not end there. The Socialists threat a no-confidence vote over migration reform after the budget is resolved. Separately, Germany goes to the polls on February 23.
CNY: When mainland markets closed on January 27, the greenback was trading near CNH7.24. In Monday's tariff drama, the dollar briefly traded above CNH7.36 before falling back to CNH7.2750 yesterday. The pullback has been extended to slightly below CNH7.27 today. The PBOC set the dollar's reference rate at CNY7.1693, little changed from the last fix before the Lunar New Year holiday of CNY7.1698. Caixin PMI was softer than expected, with January's services falling to 51.0 (vs. 52.2) and composite 51.1(vs 51.4) PMI but appeared to have negligible impact.
JPY: The dollar recorded an inside day against the Japanese yen. and has lurched lower today. Stronger Japanese wage data and softer US yields has seen the dollar drop to JPY152.55. its lowest level since mid-December. It met the (61.8%) retracement of the from the December low near JPY148.65. The next technical target may be near JPY151.50. The shelf formed over the past week and a half in the JPY153.70-80 area may now serve as resistance. The wage growth bolsters speculation of a rate hike perhaps in early Q3. Labor cash earnings in December were 4.8% above year ago levels, the most since 1997. When adjusted for inflation, real cash earnings were rose by 0.6% and the November serries was revised to 0.5% from -0.3%. A cautionary signal comes from the more robust measure that uses a constant sample base and full-time pay. It peaked last July at 3.0% and stood at 2.8% in December. The key was a 6.8% rise in bonuses. Note that in December Japan's headline CPI was at 3.6% and the core rate, which excludes fresh food and energy, was up 3% year-over year. Japan's final service and composite PMI readings did not provide new information. Japan's economy grew 1.2% at an annualized rate in Q3 and appears to have grown around a similar pace in Q4. Growth in Q1 25 and Q2 25 is expected to be around 1%.
GBP: The Bank of England meets tomorrow. A quarter-point cut is largely discounted, and the next cut is nearly priced in for the May 8 meeting (pause in March). It approached $1.25 yesterday and is up another half-cent today. The next target may be near $1.2600. Sterling's strength seems to reflect the broad US dollar move rather than constructive domestic developments. Today's final composite PMI pared the first increase since August to 50.6 from 50.4 in December and 51.2 preliminary reading. Last January, the composite was at 52.9. The UK-US rate differentials have moved. Note that the US two-year premium reached eight basis points on Monday, the most since last August, and is near five basis points now. As recently as mid-January, the UK offered a 20 bp premium. The US 10-year premium also reached seven basis points on Monday, which is also the most in five months. Now the US offers about a two-basis point premium. In early January, it was the UK that offered a 10 bp premium.
CAD: The US dollar fell to nine-day lows against the Canadian dollar yesterday, near CAD1.4300. Follow-through selling pushed it to almost CAD1.4270 so far today. Last month's low was set closer to CAD1.4260. The next area of support is around CAD1.4200. Unlike yesterday, today's move is taking place as Canada's two-year discount narrows a little. Yesterday, it reached a new 28-year extreme over 160 bp. The 10-year differential has also narrowed from yesterday's record high above 150 bp. It appears that the economic disruption from the tariff threat and some assessment of the odds that some tariff will be implement has prompted the swaps market to the risk of lower terminal rate by the Bank of Canada. A week ago, the swaps, market was pricing about 45 bp of cuts in the remainder of the year, and now it is discounting almost 65 bp.
AUD: The Australian dollar overcome resistance near $0.6240 yesterday, the (61.8%) retracement of the leg down from the January 24 high ($0.6330) to Monday's low (~$0.6090). It rose to about $0.6290. A move above $0.6300 targets last month's high near $0.6330. Australia saw the final services and composite PMI. The first increase in the composite since last October was confirmed and the final estimate stands at 51.1, up from 50.3 initially. It had stood at 50.2 for the last three months of 2024. Australia reports its December goods trade balance tomorrow. It is expected to narrow to about A$6.5 bln. In the first 11 months of 2024, Australia's goods trade surplus narrowed to about A$66.2 bln from A$111.9 bln in the Jan-Nov 2023 period.
MXN: The demand for the peso appears to have been exhausted by its nearly 5% recovery on Monday. Despite posting a key reversal by making a new high and then closing below the previous session's low, there was no follow-through dollar selling yesterday. The US dollar found support near MXN20.3150 in the Asia Pacific session on Tuesday, and it held through the North American session before it recovered to test resistance near MXN20.60. It reached MXN20.64 today, but is better offered in late in the European morning. The postponement of US tariffs and the subsequent recovery of peso makes it more likely that the central bank would deliver a half-point rate cut tomorrow. Economists surveyed by Bloomberg had mostly forecast the larger move after the unexpectedly large contraction in Q4 GDP (-0.6% vs. median forecast in Bloomberg's survey of a 0.2% decline in output), but the swaps market was less sanguine.
Reviewed by Marc Chandler
on
February 05, 2025
Rating:
