German Political Consensus is Emerging, Helping to Extend the Euro's Gains, While Japanese Data Disappointed

Overview: After stabilizing yesterday, and into today, news of political developments in Germany suggest movement toward an agreement on defense spending and sent the dollar lower. The euro unwound its losses since the election. The US interest rate premium over the eurozone continues to trend lower. Japan disappointed with weak real household spending and Q4 GDP was revised lower. While most G10 currencies are firmer against the dollar, the yen (and Swiss franc) are struggling. Japan's economic data disappointed. The euro's strength has helped lift the central European currencies. The Chinese yuan is up about a third of a 1%, while the Mexican peso is steady/slightly firmer. 

The sharp sell-off in US equities has spurred at least 10 corporations to delay their investment grade bond sales. US index futures are firmer today, with the Nasdaq up about 0.6% and the S&P 500 up about 0.3%. Europe's Stoxx 600 is lower for the fourth consecutive session, which if sustained would be the longest losing streak this year. All the large bourses in the Asia Pacific region were off, with Japan, Taiwan, South Korea, and Singapore down more than1%. Only Chinese equities were higher, both on the mainland and in Hong Kong. Japanese and Australian 10-year yields fell six basis points today, while the German political developments have seen European yields climb 2-5 bp today. Gilts are flat, while the US 10-year yield is soft near 4.20%. Gold is recovering and is back near $2910 after testing the $2880 area. April WTI tested last week's low near $65.20 before rebounding and its near session highs (~$66.50) in late European morning turnover. 

USD: There has been a sea-change with respect to the dollar. The combination of growth fears in the US and the reduced tail risks in Europe has seen the Dollar Index decline by 6% since peaking a week before President Trump's second inauguration. It has exceeded the (61.8%) retracement of the "Trump rally" that arguably began at the end of last September. It recovered in the North American session yesterday, set marginal new session highs, above 104.00 afternoon dealings, despite the dramatic slide in US stocks and drop in US yields. Today, is the first day since the November 5 election that the Dollar Index has not traded above 104.00. It has made a new marginal new low today, near 103.40. It is the lowest since the election when it reached almost 103.35. A break leaves little on the charts ahead of 102.00. Today's high-frequency data includes the deterioration of small business optimism, which is unwinding the surge, ostensibly on tax cuts and de-regulation promises of the new administration, and the January JOLTS report on the labor market. Greater interest lies with tomorrow's CPI and the threat of US steel and aluminum tariffs. Meanwhile, averting a government shutdown at the end of the week, will require several Democrat Senators’ support. 

EURO: After a slow start, news that the German Greens were ready to negotiate with the CDU and SPD on defense spending sent the euro above $1.09 in early European activity. It had reached slightly above $1.0935 last November 5-6. The fiscal moves in Europe and the growth concerns in the US means that a euro push to parity, which had seemed likely, is off the table. This is evident in the options and futures market. As of March 4, the latest Commitment of Traders report showed the third consecutive week that the net speculative short position was reduced and near 10.1k contract, it was the smallest net short position since last November. The US two-year premium over Germany is near 165 bp, off 60 bp in the past month, and to levels seen last October. Greenland holds legislative elections today. It is not a market-mover but still will draw attention given the US interest. Still, the bottom line is that that Greenland seeks its independence and has little interest in replacing Denmark with the United States.

CNY: The dollar is fraying the lower end of last week's range near CNH7.2280. Last month's low was about CNH7.2260. The 200-day moving average is around CNH7.2220, and the dollar has not traded below it since last November 11. Officials seems content with its broad stability against the dollar. While reports suggest the Trump administration may ax Biden's Chip program, China recently announced a CNY1 trillion (~$138 bln) program to fund AI and quantum computing, public-private initiative. Beijing can be expected to probe in places where the US may be pulling back or wavering. There is some talk of a possible Trump-Xi summit around mid-year. Since returning the Lunar New Year holiday, the PBOC has set the dollar's reference rate between CNY7.1691 and CNY7.1745. The reference rate edged higher for the third consecutive session at the upper end of its recent range at CNY7.1741. to CNY7.1725 (from CNY7.1733 yesterday). In the three days, the fix has risen by about 0.07%. While this is small beer, it is the most in three days in almost four months. 

JPY: The dollar fell to new five-month lows against the yen earlier today near JPY146.55. There does not appear to be much support until closer to JPY145. Last week's high was near JPY151.30. The US 10-year yield fell nine basis points yesterday to briefly slip below 4.20%. Today, it fell to 4.15% before recovering. Last Monday's four-month low was near 4.10%. Disappointing economic news and the drop in US yields, saw the 10-year JGB unwind yesterday's 5.5 bp rise in full. Meanwhile, the US 10-year premium over Japan has fallen to around 265 bp, the smallest since August 2022. This year's peak was in mid-January near 357 bp. Japan reported household spending rose 0.8 year-over-year in January. The median forecast was for a 3.7% increase after 2.7% in December. Adding insult to injury, Japan also saw Q4 24 GDP growth revised to 2.2% annualized from 2.8%. In the swap market, the odds of a June rate hike, which had been tipped by a former BOJ official, was trimmed to about 50%. A hike had been fully discounted in September, and now it has been pushed back a month. 

GBP: Sterling jumped 2.55% in the first three sessions last week to poke above $1.29. It extends the gains to about $1.2945 before the weekend and made a marginal new high yesterday before reversing lower. It took out Friday's low but settled a few hundredths of a cent above it. It held yesterday's low (~$1.2860) and is knocking on yesterday's highs. The economic calendar is light with RICS house prices tomorrow and January GDP and details at the end of the week. The sharp rise in German rates relative to UK rates appears to have spurred a sharp rally in the euro against sterling. The euro was setting a marginal new low since December in late February-early March near GBP0.8240. The euro rallied 1.6% against sterling last week, its biggest weekly advance in two years. It approached GBP0.8445 today. The high so far this year was set near GBP0.8475.

CAD:  While President Trump has been candid in his assessment that US allies have taken advantage of the US more than America's traditional adversaries, he seems to hold a special dislike for Canada. Nearly all the threatened tariffs apply to Canada, plus reports suggest he is considering forcing Canada out for of the shared intelligence group "Five-Eyes". Trump's territorial ambitions include Canada, but it is unrealistic on numerous grounds (to say the least). The Canadian dollar is the worst performer among G10 currencies so far this year, off nearly 0.25%. The Australian dollar is the second worst, and it is up about 1.6% against the greenback. The US dollar extended its recovery off last week's low, set Thursday around CAD1.4240. It rose to nearly CAD1.4475 yesterday before stalling today. It is in a narrow range today between CAD!.4410 and CAD1.4450. The trendline drawn off the early February and early March high comes in near CAD1.4500 today. The Bank of Canada meets tomorrow, and the swaps market is confident (95%) of a cut. The market has two more cuts fully discounted this year.

AUD: The Australian dollar rallied a little more than 2.5% in the Tuesday-Thursday last week before it pulled back ahead of the weekend and fell further yesterday. The Aussie recorded a high near $0.6365 last week and yesterday's low was a cent lower. It saw a marginal extension of its losses today to about $0.6260 before recovering to session highs, slightly below $0.6300. A break of the $0.6255 would weaken the technical tone. The economic calendar is light until the February jobs report on March 20. The dollar bloc is under-performing here in March, but the Scandis which often are growth sensitive as the dollar bloc are doing best in the G10. Norway's firmer than expected CPI yesterday saw the odds of a Norges Bank rate cut later this month fell from 90% at the end of last week to a less than 50% today. Meanwhile despite poor real sector data, the swaps market thinks Sweden's Riksbank is done cutting rates (before Norway even begins). 

MXN: Mexico's President Sheinbaum is being credited with the delay of the US tariffs. While the Trump has threatened Canada with reciprocal tariffs on the longstanding disputed sectors of lumber and diary, Sheinbaum argues that the US does not have this leverage on Mexico. Mexico does not have tariffs on US goods. Rather than announce retaliatory actions, as Canada has done, Sheinbaum has been reserved. Separately, Deputy Finance Minister Amador will succeed de la O who resigned last week but will stay on as an international economic adviser to the government. There is a keen sense of continuity. The dollar posted a potential key reversal yesterday against the peso. For only the second time so far this year, the dollar traded below MXN20.20 yesterday. It then recovered to trade and settle above the pre-weekend high (~MXN20.3355). The outside, up day is understood to be a bullish pattern. The dollar is trading quietly in a MXN20.30-MXN20.40 range so far today. Still, the peso's relative resilience has encouraged ideas that the central bank can address the weakening economy with another 50 bp rate cut when it meets again on March 27. 

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