Overview: The postponed US tariffs on Canada and Mexico have gone forward and China faces its second 10% tariff increase in two months. The dollar is mixed. The Swiss franc and Japanese yen are the strongest of the G10 currencies, up around 0.45%-0.60% in late European morning turnover, but the Canadian dollar is no slouch and is up about 0.35%. Canada (and China) have announced what are seen as mild initial retaliatory measures, while Mexico is expected to make an announcement later day. The euro tested its recent highs near $1.0530. Japan's Prime Minister Ishiba denied US claims that it was seeking trade advantage in the currency market. Most emerging market currencies are firmer, including the Chinese yuan. The Mexican peso led the emerging market currencies lower yesterday and is the weakest today, off about 0.8%.
Stocks do not apparently like the tariffs. Nearly all the markets in the Asia Pacific region fell. Europe's Stoxx 600 is off more than 1%, which if sustained would be the largest drop so far this year. US index futures are trading softer. A poor reception to the 10-year bond auction in Japan saw the 10-year JGB yield edge up to almost 1.41%. European benchmark 10-year yields are off mostly 2-3 bp, with the 10-year Gilt yield off five basis points to 4.50%. The 10-year US Treasury yields is up one basis point to almost 4.17%. Gold's recovery is extending. It fell 2.65% last week, the first weekly loss of the year. It was up 1.2% yesterday and is up about 0.75% today near $2915. OPEC+ confirmed that the scheduled increase in output will begin next month. April WTI, which traded above $70 yesterday is below $68 now to new three-month lows.
USD: Yesterday's losses saw the Dollar Index surrender more than half of the gains scored in the second half of last week. It frayed chart support near 106.50 and convincingly broke it today to test the 106.00-10 area. Although the economic calendar is light, the focus is two-fold. The first is on the 25% tariffs on Canada and Mexico that were postponed last month, and 10% on China. Canada and China announced retaliation. Mexico may respond later today. The second focus is the President's State of the Union address late today, during Asia Pacific trade session Wednesday. Canada slapped a 25% levy on about C$30 bln (~$20.6 bln) of US goods and a second round is planned for three weeks on C$125 bln of goods, which includes steel, aluminum, cars, and trucks. China announced 15% tariffs on some US agriculture and banned a few defense companies.
EURO: The euro bounced off the two-and-a-half-week low set at the end of February (~$1.0360) to poke through $1.05 yesterday. It has not fallen through $1.0470 today but also held slightly above $1.0525. It peaked in January and February in the $1.0530-35 area. While the momentum indicators appear to be rolling over, the shifting views of the trajectory of Fed policy have seen the US two-year premium over Germany fall by more than 25 bp over the past few weeks to and slipped below 190 bp yesterday but is back above there today. Earlier today, Eurostat reported that EMU's January unemployment was steady at 6.2%, the record low seen since November.
CNY: The dollar traded firmly against the Chinese yuan yesterday. It rose to its best level since February 13 near CNH7.3065 and settled on its highs. Counter-intuitively, the dollar has come back offered today as it has broadly despite the tariff announcement. The dollar is trading near a three-day low against the offshore yuan. It reached nearly CNH7.2700. A break below could target CNH7.25. The PBOC's dollar reference rate set at CNY7.1739 (CNY7.1745 yesterday and CNY7.1726 last Tuesday). China's National People's Congress session formally begins tomorrow. On one hand, the new US administration must be causing some consternation among Chinese officials. Yet, on the other hand, the less than two-month-old second-Trump term is arguably doing more to sow mistrust and fissures between the US and its traditional allies than anything Beijing could have done.
JPY: The dollar recorded session highs yesterday in early North American turnover near JPY151.30, slightly ahead of the 20-day moving average, which the greenback has not settled above since mid-January and front of resistance we identified near JPY151.50. The dollar appears be forging a rounded bottoming, and the momentum indicators have turned higher., but the drop in US rates proved too much. The US 10-year yield pulled back a dozen basis points from session highs and took the dollar to the pre-weekend low slightly above JPY149. Follow-through selling today saw it retest last week's lows near JPY148.60. Prime Minister Ishiba felt compelled to personally respond to accusations by President Trump that the weakness of the yen was hurting the US. Today's January jobs report and job-to-application ratio. The unemployment was unchanged at 2.5%, after the December series was revised to 2.5% from 2.4%. The job-to-applicant ratio edged up to 1.26 from 1.25. Of note, at the end of last year, the swaps market was pricing in a year-end target rate of about 72 bp. Now it is near 85 bp.
GBP: Sterling recovered last Thursday and Friday's losses fully yesterday, as it rose little more than a cent-and-a-third to make a marginal new high since mid-December of almost $1.2725. Sterling is slightly firmer today and is approaching the (50%) retracement of the decline (~$1.3435) from last September to the mid-January low (~$1.2100) found near $1.2765. The 200-day moving average closer to $1.2785. The British economic calendar is light this week with the final PMI reading and new car registrations the highlight.
CAD: The US dollar's six-day rally was at risk, but with US tariffs pending, the greenback posted a bullish outside up day, trading on both sides last Friday's range and settling above its high. The greenback reached CAD1.4540, its highest level since the February 3 spike when the tariffs seemed imminent. However, it has held below about CAD!.4520 today. The US dollar found support in early European turnover ahead of CAD1.4400. US tariffs seem to be more important for the Bank of Canada's outlook than the high-frequency economic data, which this week includes the services and composite PMI, January trade figures, and the February employment report. Ahead of the US tariff announcement, the swaps market has about an 77% chance of a rate cut at next week's Bank of Canada meeting, up from about 50% at the end of last week. It has crept up a little more today. It has about 75 bp of cuts still here in 2025.
AUD: The Australian dollar snapped a six-day, 3.4% slide yesterday. It traded above the pre-weekend high, which was slightly below $0.6240. It has held below $0.6230 today, but has recovered from the initially push below $0.6190, its lowest level since February 4. The momentum indicators turned lower last week from over-bought levels and the five-day moving average crossed below the 20-day moving average at the end of last week. While Australia's Q4 current account deficit was a little larger than expected at A$12.5 bln, the Q3 24 shortfall was trimmed. Although the current account deficit has been deteriorating steadily on a quarterly basis for the past three years, it has not been much of a factor for the exchange rate. Retail sales rose 0.3% in January after falling by 0.1% in December. Minutes from the February central bank meeting were reported but did not seem to provide new insight. The futures market sees less than a 20% of a cut at the April 1 RBA meeting but has an 85% chance of a cut in May, and it is fully discounted in July. Remember a national election must be called for on or before May 17.
MXN: Mexico's economy contracted by 0.6% in Q4 24 and is off to weak start in 2025. The US tariff threats add to the headwinds. The peso had appreciated by about 1.3% in January-February and gave about half of its back yesterday. The dollar posted a bullish outside up day, trading on both sides of the previous day's range and closing above its high. The slightly more than 0.6% decline was the largest among emerging market currencies. Follow-through peso selling today has seen the greenback rise to MXN20.9335, its best level since February 3. Initial support is now seen in the MXN20.70-80 area. The central bank meets later this month (March 27) and with inflation back within its target 3% +/- 1%, it may be tempted to deliver another 50 bp rate cut. Outside of US tariff announcements, Mexico's February CPI due at the end of the week is the highlight. With the exception of February 3, when US tariffs looked imminent, the dollar has been trading between MXN20.00 and MXN21.00 since the middle of last November.
Reviewed by Marc Chandler
on
March 04, 2025
Rating:
