Overview: The dollar rallied in the second half of last week even as interest rates fell amid a new growth scare. The 25% tariffs on Canada (10% on energy) and Mexico that were postponed a month ago, could be implemented as early as tomorrow. The only tariffs that have been imposed so far were 10% on Chinese imports, and another 10% threatened tomorrow, and apparently in April, too. The economic disruption that the tariffs and tariff threats seem to be creating has become a more central concern. The dollar is softer against all the G10 currencies. European currencies are leading the move, amid higher rates and stronger stocks. Emerging market currencies are mostly firmer, led by central European currencies.
Asia Pacific equities were mixed today. Japan, Hong Kong, and Australia rallied among the large markets. China, Taiwan, and India were lower, while South Korea's was on holiday. Europe's Stoxx 600 has rallied for the past ten weeks. It is up 10.25% year-to-date and is up about 0.5% today. US index futures are building on the strong pre-weekend recovery. Benchmark bond yield is jumping 4-7 bp in Europe and the 10-year US Treasury yield is up almost five basis points to 4.25%. Gold fell almost 2.7% last week, its first weekly decline this year. It is about 0.5% higher today near $2872. April WTI set a three-day high earlier near $70.60 but has reversed low to approach last Friday's low around $69.15.
USD: The Dollar Index is snapping a three-day 1.5% advance. The renewed focus on tariffs, which could be implemented this week on Canada and Mexico and another 10% hike on the levy on Chinese goods helped fuel the greenback's recovery in the face of falling yields in the second half of last week. The Dollar Index settled above the 20-day moving average for the first time in three weeks and tested the (38.2%) retracement of decline since the January 13 peak. The next retracement (50%) is near 108.15. It was marked down in early Asia Pacific activity and has not recovered. Support may be near 160.75. The US growth concerns are getting extreme. The Atlanta Fed GDP tracker slashed its Q1 25 GDP forecast to -1.5% from 2.4% in mid-February. Real personal spending collapsed by 0.5% in January, the largest drop since February 2021. However, it still does not have much data beyond January, which we know was hampered by exceptionally poor weather. The data in the today could begin pushing the pendulum back. The manufacturing PMI and ISM likely held above the 50 boom/bust level. Auto sales likely bounced back after a horrible January (-7.1%). The highlight of the week is the employment data on Friday, job growth looks on par with January. Deterioration is likely coming but so far, it still seems gradual.
EURO: The euro fell to $1.0360 before the weekend after being turned back from $1.0530 in the middle of last week. It surpassed the (38.2%) retracement of the rally from the February 3 low found near $1.0380. The next retracement target is around $1.0335. The momentum indicators have turned down, but it has come back bid today. The $1.0450-65 area may offer the nearby cap. The eurozone's preliminary February CPI rose by 0.5%, which given the base effect (0.6% increase in February 2024) means that the year-over-year rate eased (to 2.4% from 2.5%). That is the first decline in five months. Given the strength of price pressures last year through April, it means that there eurozone inflation is likely to soften in the coming months. This set the stage for the ECB's rate cut on Thursday and the updated staff forecasts. In December, it projected CPI would fall this year to 2.1% from 2.4%. That matches the median forecast in Bloomberg's survey. Separately, the final February manufacturing PMI was revised to 47.6 from 47.3 initially and 46.6 in January.
CNY: The dollar bottomed against the yuan last Monday slightly in front of the 200-day moving average (CNH7.2220) and recovered to fray CNH7.30 before the weekend. It has risen to CNH7.3060 today. The next technical target may be near CNH7.3170 and then CNH7.3250. The PBOC's dollar reference rate crept up last week, and this give the greenback slightly more scope to appreciate. Today's fix was set at CNY7.1745, the highest Trump's inauguration on January 20. Over the weekend, China reported a modest tick up in its February PMI. The manufacturing PMI rose to 50.2 from 49.1 and the non-manufacturing PMI firmed to 50.4 from 50.2. The composite PMI reached 51.1 (from 50.1). It was at 50.9 last February. Earlier today, it was reported that the Caixin manufacturing PMI improved to 50.8 from 50.1.
JPY: Despite falling US rates, the dollar rose to a six-day high against the yen and nearly reached JPY151.00 before the weekend. It is consolidating mostly on the JPY150-handle today. It appears to have forged a rounded bottom near JPY148.50. Nearby resistance is likely around JPY151.50 and then the JPY152.50 area, which holds the (38.2%) retracement of the decline that began on January 10 (~JPY158.85) and the 200-day moving average. Japan's manufacturing PMI inched up to 49.0 from the initial estimate confirmed of 48.9 (and 48.7 in January). It was last above 50 in June 2024. Tomorrow, Japan reports January employment data, and it looks steady month-over-month.
GBP: Sterling peaked last Wednesday near $1.2715, its best level in two months. Despite the rave reviews of Prime Minister Starmer's visit and hopes of exemptions for harshest US tariffs, and a dinner invite from King Charles, sterling was sold. Ahead of the weekend it fell to $1.2560, a two-week low and slightly above the 20-day moving average ($1.2550). The (38.2%) retracement objective of sterling's recovery from the January 13 low (~$1.21) is near $1.2480. But it has begun the week on up note. It is pushing above $1.2650 in the European morning. Nearby resistance may be encountered around $1.2560-75. The UK reported firm consumer credit and steady mortgage approvals. The final manufacturing PMI was 46.9, up from the initial estimate of 46.4. It was at 47.5 last February.
CAD: The US tariff threats have helped the greenback trend higher. It begins this week with a six-day advance, but it is at risk. Still, it is holding above CAD1.4200. The US dollar has risen in nine of the past 10 sessions. The recovery has carried it to CAD1.4470, the (50%) retracement of the sell-off from the February 3 high (~CAD1.48), the last time the tariffs looked imminent. The next retracement (61.8%) is near CAD1.4550. The momentum indicators are constructive, and the five-day moving average has crossed above the 20-day moving average. Canada sees the February manufacturing PMI today. In January, it snapped a five-month advance and fell to 51.6, a three-month low. US tariffs are the most important factor in the outlook for the Canadian economy and monetary policy. But the signaling effect is already having an impact, even before any tariffs are implement. Outside the tariffs, Canada's February employment report is released Friday, and the risk is that the unemployment rate ticked up to 6.7% after pulling back from 6.9% last November, the cyclical high.
AUD: The Australian dollar has fallen for the past six sessions and eight of the last 10. The losses have pushed it beyond the (61.8%) retracement of the rally since the February 3 low slightly below $0.6090. It was straddling the $0.6200 area in late pre-weekend trading and posted its lowest close since January 17 and has begun the week off steady. It is in almost a third-of-a-cent range above $0.6200. The momentum indicators have curled down, and the five-day moving average fell below the 20-day moving average. before the weekend. Until January, Australia's manufacturing PMI was below 50 since January 2024. Today, it was confirmed that it rose for the second consecutive month, but at 50.4 in February, not the 50.6 initially reported, which was highest since November 2022. The economic calendar is full this week, with trade, retail sales, minutes from February's central bank meeting, and the first look at Q4 GDP (0.5% quarter-over-quarter after 0.3% in Q3 24 is the median forecast in Bloomberg's survey).
MXN: The Mexican peso rose about 0.4% in February, slightly less than the Canadian dollar's 0.5% gain. Still, it feels like it has held up better. The peso has fallen in five sessions in the past two weeks. The dollar met the (38.2%) retracement objective of the losses from the February 3 high (~MXN21.2930) ahead of the weekend near MXN20.62 and posted its highest settlement since February 10. The next retracement (50%) is near MXN20.7475. Mexico's has made additional trade concessions, including boosting the tariff on Chinese autos and auto parts, in an effort to avoid the US tariffs has seen the peso recover from the pre-weekend sell-off. The dollar has returned to the MXN20.42-MXN20.43 area. The low last Friday was near MXN20.3750. Momentum indicators are gradually turning higher. Mexico sees the IMEF surveys today, and the manufacturing PMI. January remittances are also due, and they fall in January, with one exception (January 2003) in the past quarter-of-a-century.
Reviewed by Marc Chandler
on
March 03, 2025
Rating:
