Overview: The dollar's down trend, which began at least a week before President Trump's second inauguration stalled this week, and preliminary technical signs suggest a bottom may be in the process of forming. The uncertainty over US reciprocal and sector tariff announcement on April 2 is boosting uncertainty among policymakers, investors, and businesses. The greenback is mostly firmer today and near the week's best levels against most of the major currencies. Emerging market currencies are mixed. The Turkish lira remains under pressure. It is off around 0.5% today and about 3.75% this week after President Erdogan had his main political challenger arrested. Despite large scale intervention and an emergency rate hike, the crisis does not appear over.
Equities are under pressure ahead the weekend, though several large Asia Pacific bourses were higher, Hong Kong and Chinese markets fell by over 2% to wipe out this week's gains. Europe's Stoxx 600 is off for the second consecutive session, and its 0.75% pullback today, erases about 2/3 of the week's gains. US index futures are trading lower. European 10-year rates are mostly a couple of basis points lower. UK Gilts are moving the other way, and the 10-year yield is up about three basis points, which puts it higher on the week. The US 10-year Treasury yield is near 4.22%. At its low point yesterday, it was near 4.17%. Gold is consolidating after setting the record yesterday near $3057.50. It is around $3029 now and fraying this week's average, slightly above $3031. May WTI reached a new high for the month today near $68.65 but has reversed lower and is now below yesterday's settlement, which was slightly above $68.
USD: The greenback's downtrend since around a week before President Trump's inauguration on January 20 remains intact, but the move is long in the tooth. It set the low since mid-October in the middle of the week near 103.20. The recovery yesterday frayed the 104.00 level, but it could not settle above it. It is testing it again today in Europe. A convincing close above 104.00 targets e 104.90-105.00 area which houses the (38.2%) retracement of this month's decline and the 200-day moving average. Meanwhile, the US threat of reciprocal and sectoral tariffs on April 2 hangs over the market and weighs on psychology. Next week's economic calendar features the PCE deflator for which economists have a good handle on after the CPI and PPI. Both the headline and core rate are expected to rise by 0.3%. That would keep the headline at 2.5%, but the core could tick up to 2.7% from 2.6%. Recall that in January real personal consumption fell by a dramatic 0.5%. That seems to overstate the weakness. Nominal consumption fell by 0.2%. It was partly a fluke related to winter storms. Nominal consumption is seen rising by around 0.6%, which would see the real rate rise by around 0.3%.
EURO: The euro was sold to an eight-day low yesterday near $1.0815. It has not traded below $1.08 in two weeks, but a pullback is underway. The first target is in the $1.0700-$1.0725. The 20- and 200-day moving averages converge with the (38.2%) retracement of this month's rally and is the measuring objective of a possible double top near $1.0950. It has been an important week for the eurozone. Germany has approved a 500 bln euro 10-year infrastructure program after very weak public investment for years. It also excluded defense spending from its debt break. Attention turns to the EC, which is moving to relax fiscal restraints on members. Germany and the Netherlands reportedly have blocked efforts to have another round of joint bonds. Next week's highlight is the preliminary PMI and the EU summit.
CNY: Its broader gains saw the dollar fray its 20-day moving average against the offshore yuan, but the real hurdle may be last week's high near CNH7.27. It is trading at its best levels for the week near CNY7.2565. The fix was at CNY7.1760(CNY7.1754 yesterday). It is the smallest adjustment this week. Beijing's policy announcements seem to be moving in the right direction, but the real meaning is yet to be determined. Since the re-opening from the pandemic, the domestic economy has struggled to gain much traction. The economy reportedly grew by 5.4% in 2023, 5.0% last year, and many forecasts, including the World Bank, project 4.5% growth this year. China may have a bit more time to see if and how it can block the port sales by the Hong Kong company CK Hutchinson. Separately, reports suggest that Beijing may block BYD's efforts to build a factory in Mexico. The idea that a Chinese company would build cars in Mexico antagonized the US and Canada, however, Chinese officials have expressed concern that the proximity to the US could risk letting its proprietary technology get out of its control.
JPY: The dollar recorded the low for the week yesterday, slightly below JPY148.20. It overshot the (50%) retracement of its recovery off the March 11 low near JPY146.55. The 10-year US yield also recorded the low for the week yesterday near 4.17% before recovering, seemingly helping to stabilize the exchange rate. From Tuesday's high, the yield had fallen by 16-17 bp. The dollar's momentum indicators are constructive and another run at JPY150 seems likely. It has not closed above it this month. This week's range was set Wednesday-Thursday roughly JPY148.20-JPY150.15 and is currently hovering around the middle of the range. Japan reported its February CPI figures earlier today. They elicit little reaction--outside of media--because it is old news in the sense that the Tokyo CPI, which was out a few weeks ago, contained the important signal of the direction of movement. Tokyo's headline rate fell from 3.4% in January to 2.9% in February. the national figure, which eased to 3.7% from 4.0%. Tokyo's core rate (excluding fresh food) fell to 2.2% from 2.5%. The national core rate eased to 3.0% from 3.2%. The measure that excludes fresh food and energy was steady in Tokyo at 1.9%, while the national measure ticked up to 2.6% from 2.5%. The swaps market has about a 56% of a June cut discounted, up from almost 48% at the end of last week. The highlight next week is Tokyo's March CPI. It is seen little changed.
GBP: Sterling traded on both sides of Wednesday's range yesterday but the close within the range neutralizes the technical signal. It has not been able to push much above the $1.3010-15 area, but at the same time is has not traded below $1.29 this month. The week's low was set Monday near $1.2915. Today's low in Europe is about $1.2920. Our bias is for an eventual downside break out of this consolidation, with the momentum indicators poised to turn lower. The UK's public finance data today was of passing notice. The focus is on next week update by the Office for Budget Responsibility and Chancellor Reeves Spring Statement. Weak growth may sap her fiscal space. Moreover, while Starmer's foreign diplomacy is praised, the government's cut in foreign aid to fund more defense spending and GBP5 bln reduction in assistance to some 1.2 mln disabled people in the UK has been considerably more controversial. There is some speculation that Reeves may propose an income tax increase, which if true, could sap Labour's support ahead of May local elections. In terms of high-frequency data, the UK reports February CPI, retail sales, and the delayed January trade figures are due next week. The trade data draws more attention than usual, given the delay and reports of large-scale gold shipments to the US.
CAD: The US dollar set a new high for the week slightly above CAD1.4400 yesterday before falling to around CAD1.4315 as the greenback's earlier gains against the G10 currencies were pared. Yesterday's low is holding today. It appears to be consolidating in a large triangle pattern. The lower end is near CAD1.4275 today and the upper end near CAD1.4400. Canada's December retail sales were bolstered by the controversial tax holiday that led to Finance Minister Freeland's resignation and the downfall of Trudeau's government. After surging 2.5% December, retail sales are expected to have fallen back by around 0.4% (and 0.2% excluding autos). We suspect it may have limited impact partly because 1) other issues are more important, and 2) it is not likely to substantially impact Bank of Canada policy. The most crucial factor may be the impact from the reciprocal and sectoral tariffs the US has threatened for April 2. Next week, Canada reports January GDP, but politics may dominate the headlines. At least two polls show Canadian Liberals ahead of the Conservatives. We have been expected the call would take place before Parliament would return on Monday and media reports the announcement could be made Sunday.
AUD: After testing the $0.6400 area to start the week, the Australian dollar was sold to about $0.6270 yesterday in response to the broader greenback gains but also the poor employment report, which is still prior to the cyclone's disruption. Still, it managed to hold above last week's low, which was closer to $0.6260 and settle slightly above $0.6300, around where the 20-day moving average is found. It is consolidating at the lower end of yesterday's range. There have been a few intraday exceptions, but on a closing basis since Trump's inauguration, the Aussie has been confined to a $0.6200-$0.6400 trading range. The highlights next week include the preliminary March PMI and the February CPI. The futures market is pricing in about 2 1/2 cuts this year and backloaded into the second half. That means that the February CPI is of little consequence. Cyclone Alfred warns of downside risks to the PMI.
MXN: The dollar rose to a seven-day high near MXN20.27. Part of the peso's losses reflected the greenback's broader gains. Part of it may have been the weakness of emerging market currencies in general. Part of it may be related to position squaring ahead of next week's anticipated rate cut. All the active traded Latam currencies fell yesterday. Trading has been quiet today (~MXN20.1350-MXN20.2085). Mexico heads into the weekend with a quiet calendar. Next week is a different kettle of fish. The economy was weak in Q4 (-0.6% GDP) and appears to have begun the New Year off softly. Next week sees the January IGAE, which is likely a monthly GDP estimate, January retail sales, and the CPI for the first half of March. But the most important event is the central bank meeting. Given the peso's resilience, the weak economy (and more headwinds in the form of US tariffs possible), and that inflation is back within its target range, allows Banxico to deliver the second-in-a-row 50 bp cut.
Reviewed by Marc Chandler
on
March 21, 2025
Rating:
