Overview: The run on the dollar has been extended today but it has stalled in the European morning. As North American traders return to their posts, the Australian and Canadian dollars, along with sterling are lower on the day. Higher than expected Swedish inflation has helped put the krona on the top of the G10 with more than a 1% gain. It is at its best level against the euro in a couple of years. Most emerging market currencies are lower, led by around a 0.5% loss of the Polish zloty and Hungarian forint.
Today's highlight is the ECB meeting, which is expected to result in another quarter-point cut to 2.50%. The market expects some guidance to suggest a pause near month before another rate cut in June. Meanwhile, the European bond market rout continues, with eurozone benchmark 10-year yields up 6-8 bp. They are up around 45 bp over the past five sessions compared with a four-basis point rise in the US 10-year Treasury yield (now near 4.3%). The EU leaders summit today is expected to confirm the relaxed fiscal stance for defense and security spending. Meanwhile, Asia Pacific equities, with a few exceptions (e.g., Taiwan and Australia) advanced, Europe's Stoxx 600 is off about 0.6% after rallying 0.9% yesterday. US index futures are down sharply, with the Nasdaq off more than 1% and the S&P 500 off 0.80%. Gold is trading softer near $2900. It settled near $2019 yesterday. After plunging to six-month lows yesterday around $65.20, April WTI is firmer today and has held above $66 a barrel.
USD: The Dollar Index snapped a three-day, 1.2% advance on Monday and is falling for the fourth session today. It has pulled back by around 3.4%. It settled below the 200-day moving average (~105.00) for the first time since last November's election. Today, it has tested the (61.8%) retracement of its run-up since the end of last September, near 104.00. The next support area may be near 103.35. Sandwiched between the tariffs and Friday's employment report, there are several data points to consider today. We may dismiss the Q4 productivity and unit labor costs as old news, and more for economists than market participants, in any event. Weekly jobless claims are overshadowed by tomorrow's national report. It is still too early to look for much impact from DOGE, though the ADP estimate of private sector job growth (77k), was half of what was expected and the weakest since last July. That leaves the January trade balance as the day's highlight. We already know that the goods deficit blew out by 25% to a record 153.3 bln. Since the US runs a chronic even if modest services surplus, the overall deficit may have widened to almost $129 bln from nearly $98.5 bln in December. Some of the imported goods were likely to beat the tariff threats, so the drag on GDP from the trade balance may be partly offset by the rise in wholesale inventories. The preliminary estimate of a 0.7% increase in wholesale inventories was the largest since August 2022, but it is worth about $1 bln, which does little to blunt trade shock.
EURO: The combination of increased (defense) spending in Europe and the consequent jump in long-term interest rates coupled with the growth concerns in the US have triggered a jump this week in the euro. It finished last week below $1.04 and pushed slightly to nearly $1.08 yesterday. It rose slightly through $1.0820 today before steadying. The $1.08 area is the (61.8%) retracement of the euro's pullback from last September's high near $1.1215. Above there is the US election-day high near $1.0935. There is little doubt that the ECB will deliver another quarter point rate cut today. Counting today's cut, the swaps market has about 68 of cuts discounted this year. The central bank has two communication channels. The first is President Lagarde. She will want to secure maximum flexibility while minimizing commitments. She will likely recognize the challenges and uncertainties, of course, but she is also likely to recognize the progress and may be questioned about the impact of the new fiscal initiatives. The second channel of communication are the staff forecasts. In December, the GDP forecasts were 1.1%, 1.4% and 1.3% for 2025, 2026, and 2027, respectively. Then the CPI forecasts were at 2.1%, 1.9%, and 2.1% for this year and the next two. The euro has appreciated by about three cents since the December meeting forecasts. The price of Brent oil is about 5.5% lower. The tariff threat from the US has increased. The prognosis for a near-term ceasefire in Ukraine seems remain uncertain.
CNY: The dollar approached CNH7.30 at the start of the week, but the dollar's broad pullback has seen it eased slightly through CNH7.2335 yesterday. Last month's low near CNH7.2290, was lowest level since late last November. The greenback is a trading firmer today and has resurfaced above CNH7.25. The US has raised the tariff on Chinese goods by 20% in the past two months. And it is not finished. Yet, Beijing's response has been restrained. It retaliates but in a mild way. It still seems like a dance of sorts. Trump and Xi have not spoken since the inauguration on January 20, according to press reports. The US has not provided an off-ramp. Some interpret Beijing's reaction is an effort to preserve a chance of a diplomatic solution. At the same time, there is no reason to escalate the exercise in self-harm. The PBOC set the dollar's reference rate at CNY7.1692. It was the third day the fix was set lower, and it was the lowest in monthly.
JPY: The drop in US 10-year yields following the disappointing ADP private sector jobs estimate sent the greenback lower against the Japanese yen. It was trading near JPY149.70 before the data and was sold to new session lows near JPY148.40 on the news. Although the 10-year Treasury yield recovered to new session highs (~4.28%), the dollar struggled to get much above JPY149. The dollar is trading at its lowest level since last October, near JPY147.70. The JPY147 area corresponds to the (61.8%) retracement of the rally from last September's low through January 10. Meanwhile, Japan's Ministry of Finance weekly portfolio flow report covered the last week in February. In the first two months of 2025, Japanese investors are buying foreign bonds at around the same pace as last year's pace and their foreign equity purchases a little less than last year's pace. For their part, foreign investors have been bought more than four times the amount of Japanese government bonds than in the first two months of 2024, but have switched to selling Japanese equities after being buyers a year ago.
GBP: Sterling settled Tuesday above the 200-day moving average (~$1.2785) for the first time since November 12. Follow-through buying lifted sterling to $1.2900 yesterday and $1.2925 today. At its high, it met the (61.8%) retracement of sterling's slide since last September. Above there, and $1.3000-$1.3030 beckons. Still, it has stalled in Europe and set the session low near $1.2870. Nearby support is seen near $1.2850. The UK's construction PMI fell back below 50 in January for the first time since February 2024 and continued to fall last month (44.6) remained below it last month. It is at its lowest level since late 2023. There is a dearth of economic reports until next Friday's January monthly GDP and details. The UK economy practically stagnated in H2 24, and growth impulses have not improved much.
CAD: Hopes of some kind of tariff reprieve, suggested by the US Commerce Secretary, helped the Canadian dollar recover yesterday. The greenback eased to almost CAD1.4330, retracing a little more than half of the gains since bottoming in the middle of February near CAD1.4150. It approached CAD1.4300 today before recovering to near CAD1.4360. Resistance is seen in the CAD1.4400-20 area. Canada reports its January goods balance today. It recorded a seasonally adjusted deficit in all but three months last year for a C$7.2 bln deficit. It was less than 1/10 the size in 2023. It runs a small (< 0.4% four-year average) current account deficit. Canada also sees the IVEY PMI. It fell sharply in January to pandemic levels (47.10 vs. 54.70) and likely fell further last month with the US disruption hang over it like the Sword of Damocles.
AUD: The Australian dollar posted a bullish outside up day on Tuesday and follow-through buying yesterday lifted it slightly above $0.6340 yesterday. It approached $0.6360 today. The Aussie has stalled and is near session lows near $0.6325. Support is seen closer to $0.6300. Australia reported its January goods balance earlier today. It was a surplus of A$5.6 bln, down from $9.23 bln in January 2024. In all of 2024, Australia reported a goods surplus of A$68.7 bln, down from A$124.6 bln in 2023. Exports fell by about 2.5% last year and imports rose by almost 10%. In January, exports rose 1.3% and imports slipped by 0.3%. Australia's current account deficit last year looks to be around 2% of GDP, which would be the largest since 2018. Note that Australia trades with more with China than it does with Japan, the US, and South Korea, the next three largest, put together.
MXN: The possibility of some reprieve from US tariffs strengthened the peso in North American dealings yesterday. The dollar, which approached MXN21.00 on Tuesday, fell slightly below MXN20.35 area yesterday. It is trading inside yesterday's range in quiet turnover today. A break could signal a move toward MXN20.20, though the low so far this year was set late January near MXN20.1350. Mexico reports February CPI on Friday, and given the peso's performance, barring a new shock, the central bank looks poised to deliver another 50 bp cut when it meets on March 27. Turning to Brazil, the dollar rallied about 4.2% from February 18 through Tuesday this week. It closed firmly on Tuesday near BRL5.8845. Amid its larger pullback yesterday, the greenback fell to almost BRL5.75. Last month's low was near BRL6750, around where the 200-day moving average is found. The greenback has not settled below its 200-day moving average against the real since February 2024. Brazil's composite PMI jumped to 51.2 in February to snap a three-month decline that brought it to 48.2, a new low since the pandemic. Brazil reports Q4 GDP and trade data ahead of the weekend.
Reviewed by Marc Chandler
on
March 06, 2025
Rating:
