Overview: The on-again off-again US tariffs have raised the level of uncertainty and lack of visibility that itself has become a market factor. The dollar has begun the new week, which could see US steel and aluminum tariffs announced Wednesday, softer, but mostly consolidating within the pre-weekend range. Most of the G10 currencies are firmer, though we note the potential downside reversal in sterling. Norway's higher than expected CPI has dampened rate cut hopes and lifted the krone by 1%. Emerging market currencies are mostly lower.
After rising 2.5% last week, the MSCI Asia Pacific Index traded heavier. Despite mainland investors buying a record amount of Hong Stocks today, the Hang Seng fell 1.8% and the index of mainland shares that trade in HK tumbled 2.1%. Among the large bourses, Australia, New Zealand, and South Korea managed to post small gains. Europe's Stoxx posted its first weekly loss of the year last week (~-0.70%) and is off around 0.3% in the European morning. US index futures are giving back their pre-weekend gains. Benchmark 10-year yields played catch-up in Asia, with the 10-year JGB yield rising five basis points and Australia's rising by almost four basis points. However, after surge, European yields are mostly 2-3 bp lower today, while the 10-year US Treasury yield is four basis points lower to slip below 4.26%. Last's week saw a five-month low near 4.10% and reached a high last Thursday near 4.34%. For the fifth session, gold is trading in narrow range, mostly within the range set last Tuesday (~$2882-$2928). Meanwhile, April WTI is consolidating in a roughly $66.50-$67.35 range. It approached a six-month low last week near $65.20 before stabilizing. It has not been above $68.25 since the low was set.
USD: The Dollar Index fell every day last week for the first time since the first week of March 2024. It is trading inside Friday's range today (~103.45-104.00). A move above 104.25 helps stabilize the technical tone. It is oversold but sentiment has turned, and interest rate differentials have moved against it. Following last week's employment data, attention turns to US prices with CPI and PPI out Wednesday and Thursday. Tomorrow sees the JOLTS report, which appears to have lost of some of market-moving ability. Meanwhile, US Commerce Secretary Lutnick said that the steel and aluminum tariffs are still on track for implementation Wednesday, and ahead of the weekend the US threatened to impose a higher lumber and dairy tariff on Canada shortly.
EURO: The US reached almost $1.0890 at the end of last week. It settled last week above its upper Bollinger Band for the third consecutive session. The next technical target is the high from the US election near $1.0935. The euro is trading inside the pre-weekend range and looks set to test its low near $1.0780. The US two-year premium over Germany, which the euro often tracks, narrowed to about 167 bp last week. It is now near 173 bp and been above 200 bp at recently as February 27. The ECB's quarter-point rate cut last week for the fifth consecutive time. The swaps market has scaled the odds of an April cut to slightly less than 50%, encouraged today by the stronger-than-expected 2% jump in Germany's January industrial output, boosted by autos, and December's slide was revised to -1.5% from -2.4%. On the other hand, exports unexpectedly fell 2.5% in January, offsetting the December gain, while imports rose 1.2%, a little more than double what expectations. The sharp rise in long-term European rates reflects the stepped-up spending in Germany and the EU more generally, which means an increase in supply, but also improved growth outlook. The downside tail risks have been reduced.
CNY: The dollar is moving up after testing the lower end of its range against the offshore yuan. Last month's low was near CNH7.2260 and last week's low set before the weekend was near CNH7.2280. It is bid today near CNH7.2670 to approach the 20-day moving average (~CNH7.2690). Despite the wide swings in the foreign exchange market, Chinese officials have managed to keep the yuan broadly steady. The PBOC set the dollar's reference rate at CNY7.1733 today. It is the second consecutive increase. Last week's was CNY7.1745. China reported its February CPI and PPI over the weekend. The CPI fell to -0.7%, its weakest print since last January's -0.8% year-over-year print. The National People's Congress targets around 5% growth this year and 2% CPI. Core prices fell by 0.1%, its first decline in four years. Weak consumption (measured as percentage of GDP, which we argue, reflects strong investment) is part of the standard broadside against China, but the main drag came from food prices, where is somewhat less elastic. Food prices fell by a dramatic 3.3% in February and are off 1.5% year-to-date, compared with a 0.1% decline in headline inflation this year. The PPI stands at -2.2%, the least deflation since last August. Producer prices have fallen on a year-over-year basis since the start of Q4 22. China has hit Canada with retaliatory tariffs for last year's 100% tariff on Chinese-made EV and a 25% tariff on Chinese steel and aluminum. China is targeting canola, pork, and some seafood.
JPY: The dollar frayed the JPY147 level ahead of the weekend and has held barely above it so far today. It is the (61.8%) retracement of the dollar's rise from below JPY140 last September to almost JPY158.90 on January 10. The 10-year US yield is trading in about a 10 bp range around 4.20%. The dollar has traded below its 200-day moving average against the yen since mid-February. A break of JPY146 targets JPY145. Labor cash earnings slowed to 2.8% year-over-year in January, down from 4.4% in December 2024. Most disappointing was the resumption of the decline in real earnings. They fell -1.8% year-over-year in January after rising by a revised 0.3% in December (initially 0.6%) and a 0.5% increase in November. Last January, real labor earnings were 1.8% lower than in January 2023, when they were off 4.1% year-over-year. Nevertheless, the wage data does not appear to be much of a hurdle for the BOJ, where the swaps market still has a hike fully discounted by the end of September. Separately, Japan reported its first monthly current account deficit (JPY170.5 bln) since January 2023. The main culprit was the trade balance. It swung from a JPY62.3 bln surplus in December to a JPY2.94 trillion deficit in January. Tomorrow, Japan reports household spending and the final look at Q4 GDP.
GBP: Sterling reached $1.2945 before the weekend, its best level since November 8. It made a marginal new high today (Bloomberg has it 1/100 of a cent higher) before reversing lower to fray the pre-weekend low (~$1.2875). Nearby support extends to $1.2865. The UK calendar is light until the end of the week's estimate of January GDP and details. Unlike the EU, the UK seems reluctant to boost spending. The increase in defense spending will be funded by cuts in international assistance. Over the past month, the 10-year Gilt yield has risen by about 16 bp, less than half the gain experienced by eurozone members. The UK's two-year yield is up about five basis points in the past month. Germany and French two-year yields are up 18-19 bp while the US two-year yield is off near 33 bp from a month ago.
CAD: Despite a partial postponement of US tariffs on Canada, the Canadian dollar could not sustain the upside momentum that saw the greenback fall to a seven-day low (~CAD1.4245) on Thursday. The US dollar reached CAD1.4425 after the weaker Canadian employment report. It is consolidating today in a roughly CAD1.4340-CAD1.4400 range. As widely expected, Carney has replaced Trudeau as Liberal Party leader and Prime Minister. A decision about an election is expected in the coming days. The key event this week is the Bank of Canada decision on Wednesday. The US two-year premium over Canada narrowed for the past four weeks, falling by almost 20 bp over the run. The US tariff threat impacted the Canadian economy before they went into effect. Canada reported its largest trade surplus in January since 2008, as exports to the US appeared to have front-run the tariffs. The economy appears to be slowing after growing by about 2.4% in H2 24. Given the lag of impact from monetary policy, the Bank of Canada may need to cut to prepare for further economic weakness. The swap market has wavered but is now discounting about an 80% chance of a cut this week. It has two cuts fully discounted between now and year-end and almost an 80% chance of a third. The underlying CPI measures are at 2.7%, while the headline rate was 1.9% in January. The overnight target rate is at 3.0%.
AUD: The Australian dollar settled poorly before the weekend. It put in last week's high on Thursday near $0.6365, fell to almost $0.6280 in North America on Friday, and closed near its lows. Until proven otherwise, it may be best to assume that the Aussie is rangebound between $0.6200 and $0.6400 and near the middle of the range, neither bull nor bear can happy. It is firm near $0.6325 but inside the range seen before the weekend (~$0.6280-$0.6340). It is a quiet week for market-moving Australian data. It is mostly about surveys this week. The Melbourne Institute Consumer Inflation survey on Wednesday may attract attention after it jumped to 4.6% in February from 4.0% in January. The central bank meets on April 1 but there is little chance of a move. The futures market has the next cut fully discounted for July and about an 85% chance of a May cut.
MXN: After everything was said and done, more was said than done, and the peso rose for the first time in three weeks and practically recouped everything it lost in the prior two weeks. The dollar fell to a two-and-half week low last Thursday near MXN20.2150. Ahead of the weekend, it consolidated in a narrow range below about MXN20.3355. The greenback is trading quietly in a MXN20.2370-MXN20.3015 range, inside last Friday's range. Perhaps, more than most foreign leaders, Sheinbaum has pushed back against the US aggressiveness, from threatening tariffs, and rejecting the "Gulf of America" to pushing harder against US gun manufacturers. At the same time, press reports suggest, her diplomacy was key in tariff delays. She has not been derided like Canada's Trudeau, and Trump talks fairly respectfully of her. Still, it is the early days, and Mexico is still in the US administration's crosshairs. The economic calendar is sparse this week. The highlight is January industrial output on Thursday. Another 50 bp cut by the central bank, which would bring the overnight target to 9%, when it meets on March 27 is still the most likely scenario.
Reviewed by Marc Chandler
on
March 10, 2025
Rating:
