Overview: There seems to be a nervous calm in the foreign exchange market as the dollar consolidates mostly inside yesterday's ranges, in largely uneventful turnover. In addition to the US steel and aluminum tariffs, and retaliatory moves by the EU, Canada, and China, the other big development this week is the effort to achieve a 30-day ceasefire in Ukraine. US-Russian officials meet today. Ahead of the talks, Russia reported captured a strategically important town in Kursk. Meanwhile, Republicans appear to have failed to secure the necessary Democratic Senator votes necessary to pass the reconciliation bill, leaving the government on course for a partial shutdown this weekend.
Bond markets are under modest pressure. Benchmark 10-year yields are up 2-3 bp mostly in Europe, which puts several countries' yields at new highs. The 10-year US Treasury yield is 1-2 bp firmer near 4.33%. Although Japan's equities indices were mixed, the large bourses in the region fell. Europe's Stoxx 600 a bit firmer to extend yesterday's gains, which snapped a four-day fall. The US index futures are heavier. Gold is edging close to the record set last month a little over $2956. It is making session highs in late European morning turnover above $2948. April WTI reached almost $68, a four-day high before sellers pushed it back toward $67.25.
USD: After extending its losses on Tuesday to almost 103.20, the Dollar Index recorded an inside day yesterday and today is trading inside yesterday's range. A move above the 104.25-40 area would help stabilize the technical tone after falling more than 4% to start the month. Following yesterday's tick down in US CPI, PPI is expected to do the same time. Yet, it is still not clear that due to the different weights and methodology, the PCE deflator will be as benign as the CPI. Still, there is practically no chance of a rate cut at next week's FOMC meeting, where the "Summary of Economic Projections" will be the focus after Fed Chair Powell's recent comments. The sharp loss of US equities, even if from stretched valuation, may take an economic toll, through the wealth-effect channel, and investors expect the Fed to respond accordingly. Lower airfares are consistent with the warnings from the airlines, like Delta, that demand is evaporating. Firmer core goods prices are what one would expect in a higher tariff environment. The target range for Fed funds is 4.25%-4.50%. The effective rate, which is the weighted average is about 4.33%. The Fed funds futures now anticipate a year-end effective rate of about 3.50%, which is the lowest since last October. The US reports weekly jobless claims. They were at 221k for the week ending March 1, which is around 10k higher than a year ago. We expect the labor market to deteriorate at a quicker pace in the coming months, as the cuts in government spending, lay-offs, and cooling of immigration takes their toll.
EURO: The euro's upside momentum stalled after reaching almost $1.0950 on Tuesday, which marginally surpassed the high from the US election day (~$1.0935). It continues to trade in Tuesday's range (~$1.0830-$1.0950). So far, today's low is about $1.0875. Given the dramatic run-up (~5.6%) since the end of February, momentum traders may be vulnerable to a shake-out. The week's low was set on Monday, a little above $1.08. January eurozone industrial production fell by 0.8%, but it is too old of data, given the coming fiscal support. Next week's March ZEW survey may begin picking up the shift in the risk assessment. Some observers had emphasized the political difficulty in securing an agreement in Germany for the shift in the "debt brake" and the defense spending, but it turns out that this under-appreciates the evolution of the German Greens.
CNY: The dollar recovered smartly yesterday against the yuan. After falling to a new four-month low (~CNH7.2160), it rebounded to CNH7.25 and has held a little below it today. The PBOC set the dollar's fix at CNY7.1728 (CNY7.1696 yesterday). If the US is pulling back from its previous global commitments, a realigning of US interests, the chief beneficiary will be its biggest rival, China. Consider that the US has raised its tariff on China by 20% and included Hong Kong for the first time. The Hang Seng is up around 18.5% so far this year and mainland shares that trade there are up about 20%. And to get ahead of the tariffs, China's figures showed its exports to the US soared to $76 bln, the most in Jan-Feb in three years. The unveiling of DeepSeek (and numerous other AIs) and other technological breakthroughs shows US efforts to curb it have largely failed. Meanwhile, the PBOC continues to deliver a fairly stable exchange rate. Recall that period of rapid growth in US and Europe after WWII through 1971 also took place with more-or-less fixed exchange rates.
JPY: The dollar fell from JPY151.30 on March 3 to about JPY146.55 on March 11. It has since recovered half of its losses (~JPY148.90). The next retracement target (61.8%) is near JPY149.50 and the 20-day moving average, which the greenback has not settled above since mid-January is around JPY149.50. It is consolidating somewhat softer today, in the lower end of yesterday's range. In fact, it has spent little time above JPY148.25 where it settled. The low is about JPY147.60, slightly below yesterday's low. Three real sector data points in recent days have disappointed. January wage growth reported on Monday was weaker than expected and the December series was revised lower. Tuesday, Japan reported considerable weaker household spending (0.8% year-over-year vs. median forecast of 3.7%) and revised lower Q4 GDP (to 2.2% from 2.8%, and economists did not expect any revision). The BOJ's target rate stands at 0.50%. The swaps market now sees it near 0.80% at the end of the year, down about 14 bp from the peak earlier this month.
GBP: Sterling reached almost $1.2990 yesterday, its best level since last November 8 around the US CPI report before reversing lower. It returned toward session lows near $1.2915. A quiet consolidative phase has confined it to about $1.2940-$1.2975 range today. Sterling has risen in four of the past five weeks. It settled near $1.2920 at the end of last week. For its part, the euro held support near GBP0.8400 and recovered to GBP0.8430. The dearth of important UK economic data this week ends tomorrow with the January GDP. The median forecast in Bloomberg's survey is for 0.1% growth after a 0.4% expansion in December. The details are expected to show a 0.1% fall in industrial output after a 0.5% increase in December. The index of services is seen slowing to 0.1% from 0.4% in December. Despite reports of gold shipments to the US, the UK trade balance excluding precious metals is projected to have narrowed to GBP2 bln in January from GBP2.27 bln in December.
CAD: The US dollar recorded the session low yesterday near CAD1.4355 after the widely expected Bank of Canada rate cut. It is trading mostly in a CAD1.4360-CAD1.4400 range today. The greenback has averaged about CAD1.4350 so far this year. The rate cut was the second quarter-point cut of the year after two half-point cuts in Q4 24 and a three quarter-point cuts in Q3 24. The swaps market sees scope for another cut near mid-year and probably another one in H2 25. The market anticipates a terminal rate between 2.00% and 2.25%. The Bank of Canada recognized risks to growth and prices mostly due to the uncertainty emanating from the US. This suggests a cautious stance going forward and the US tariff threat may trump next week's CPI shaping expectation for the outcome of the April 16 Bank of Canada meeting, for which the market has downgraded the chances of a cut.
AUD: At Tuesday's low (~$0.6260) the Australian dollar nearly met the (61.8%) retracement objective of last week's bounce. It recovered to test the $0.6320 area yesterday and reached nearly $0.6335 today. However, it has been sold to new session lows in European turnover an $0.6285. Yesterday's low was near $0.6275, and a close below it weakens the technical tone. Australia's light economic calendar this week features the Melbourne Institute's consumer inflation. It rose to 3.6% from 4.6% in February. It is the lowest since August 2021.
MXN: The US imposed steel and aluminum tariffs, and the Mexican peso approached it best level of the year. The dollar traded to about MXN20.1580. The low for the year was seen in on January 24 near MXN20.1345. The greenback is in a narrow range mostly below MXN20.17 and MXN20.20. The peso was among strongest emerging market currency yesterday and the Canadian dollar was the strongest G10 currency). The peso is up a about 3.2% this year. The Bolsa is up 5.1% this year and the yield of the 10-year dollar bond is off around 30 bp to about 6.30% (US 10-year Treasury yield is off 26 bp). The local-currency 10-year yield has tumbled about 85 bp (to ~9.55%). Mexico's economy contracted by 0.6% in Q4 24. It was dragged down by a roughly 2.5% contraction in industrial output. Still after a 1.4% drop in December, industrial production may have stabilized in January. It will be reported today. Still, the US tariff threats, and high real interest rates are economic headwinds.
Reviewed by Marc Chandler
on
March 13, 2025
Rating:
