Overview: Uncertainty over next week's US tariff announcement continues weigh on markets and undermines near-term conviction. The dollar is mostly consolidating against the G10 currencies. Sterling is the heaviest, off about 0.3% after a soft CPI report and ahead of the Spring Budget Statement. The dollar bloc and Norwegian krone are the strongest. Among emerging market currencies, the Mexican peso roughly 0.25% loss puts it at the bottom of the performers today. The beaten-up Turkish lira is practically flat, but it appears to have little to do with President Trump's endorsement of Erdogan and more to do with Finance Minister Simsek delivering a "whatever it takes" speech to stabilize the markets.
Nearly all the large bourses in the Asia Pacific region rose today, though mainland China, Taiwan, and India bucked the move. Still, with the help modest gains in Tokyo, and nearly a 1.1% rise in South Korea, a firmer tone in HK, and a 3.8% surge in Indonesia, the MSCI Asia Pacific Index looks to have snapped a three-day drop. The Stoxx 600 in Europe is giving back most of yesterday's gains. US index futures are also softer. Benchmark 10-year yields in Europe are slightly softer, though the soft CPI, which weighs on sterling is helping push the 10-year Gilt yield down about three basis points to around 4.73%. The US 10-year yield is firmer near 4.33% but seemed to shrug off Moody's warning about the US fiscal outlook. It has a negative outlook on its Aaa rating. Gold is little changed, straddling the $3020 settlement area. May WTI is firm but below yesterday's high near $69.70, its best level since March 3.
USD: The Dollar Index stalled after recovering about 1.25% from last week's lows. It recorded higher highs for five consecutive sessions through yesterday and is consolidating today. It is holding below yesterday's high (~104.45) but above about 104.20. The US economy is slowing, although up until now it was primarily seen in the soft data (surveys), it will likely begin being seen in the real sector data. Today's February durable goods orders may have fallen after jumped 3.2% in January. Looking further afield, March nonfarm payroll growth, due on April 4, is seen near 120k, which would be least since last October. With the help of fiscal and monetary policy, the US economy grew well above trend post-2020. The median forecast in the Fed's Summary of Economic Projections has the economy slowing to trend this year ~1.7%), which is regards as the non-inflationary pace. Some observers are confusing this with stagnation. That said, we are concerned that the economy slows more under the weight of government cuts and layoffs, high-level of uncertainty over tariffs and other taxes, and the immigration policy (not limited to illegal residents).
EURO: The euro bounced up after slipping marginally through $1.0780 yesterday. Still, it closed lower for the fifth consecutive session. It is trading quietly in about a quarter of a cent range above $1.0780. It is sandwiched between the 20-day moving average (~$1.0775) and the five-day moving average (~$1.0810). Options for nearly 2 bln euros tomorrow and 2.2 bln euros struck at $1.08 expire tomorrow and Friday. The eurozone has a light economic schedule in today and the coming days.
CNY: Given the losing streak of the offshore yuan and the pattern of the PBOC dollar fixes, we are on alert for a change in China's foreign exchange stance. The reference rate was set lower for the first time in five sessions (CNY7.1754 vs. CNY7.1788 yesterday). The dollar is rising against the offshore yuan for the seventh consecutive session and reached CNH7.2750 today, the highest level since March 5. Separately, reports indicate that CK Hutchinson will proceed with the $19 bln port sale that includes ports on both sides of the Panama Canal, over some pushback from Beijing. The deal is expected to be signed on April 2.
JPY: The dollar extended its gains yesterday to almost JPY151, its best level since March 3 where it was greeted by sellers despite the firm US 10-year yield. The greenback slipped through JPY150 in North America yesterday. It is consolidating today mostly in a JPY149.85-JPY150.60 range. Since the five-month low was set on March 11 (~JPY146.55), the dollar rallied 3% through yesterday's high. A break of JPY149.50-60 would disappoint the bulls. Japan's services producer prices slipped to 3.0% in February from a revised 3.2% (3.1% initially) in January. It remains in the upper end of the range that has persisted since the end of H1 24. The swaps market, which was leaning toward 50 bp of hikes in the remainder of the year earlier this month, has scaled back to about 38 bp, which is a quarter-point hike in fully and about a 50% chance of another.
GBP: Sterling recovered from nearly two-week low on Monday (~$1.2885) to reach $1.2960 yesterday. It returned to Monday's low today encouraged by a soft CPI report. There are about GBP360 mln options at $1.2945 that expire today. Today's high so far is almost $1.2950. The UK reported a 0.4% increase in February's CPI and a 2.8% year-over-year rate (3.0% in January). The core inflation slipped to 3.5% (from 3.7%), but services inflation was flat at 5.0%. Attention shifts to fiscal policy, where around 8:30 AM EST, Chancellor Reeves will make the Spring Budget Statement. The UK's Labour government will choose more austerity over accepting a larger budget deficit or raising taxes. Looking for a concrete example of what it means? Consider that in 1985 the height of the average five-year old (boys and girls) in the UK was 69th of 200 countries and political entities. By 2019, it was in 102nd place for boys and 96th place for girls at an average height of 112.5 centimeters and 111.7 centimeters, respectively. In 2024, estimates suggest the average height of five-year old boys had fallen to 110.3 cm and 109.3 cm for girls. The Guardian noted in 2023, that experts attribute the decline to a "poor national diet and cuts to National Health Service" but also noted that height is a "strong indicator of general living conditions, including illness and infection, stress, poverty and sleep quality."
CAD: The US dollar softer against the Canadian dollar for the third consecutive session and is near the month's low set March 6 near CAD1.4240, where options for about $635 mln expire today. A break of it could target CAD1.4200 next. The economic calendar is light, and this week's highlight is January's GDP on Friday. The median forecast in Bloomberg's survey is for 0.3% growth, which would be the fastest since last October. The Bank of Canada projects 1.8% growth this year after 1.5% for the past two years. The IMF is a bit more optimistic with a 2% forecast.
AUD: The Australian dollar reached a three-day high yesterday near $0.6325, retracing half of last week's losses and it is probing that area in the European morning. The next retracement (61.8%) is about $0.6240. Australia's February CPI slipped to 2.4% from 2.5% and the trimmed mean measure ticked down to 2.7% from 2.8%. Australia moved in the opposite direction than the UK. Yesterday, the government unexpectedly announced an income tax cut, an extension of energy rebates, and a higher threshold for a state-run health care system tax. It is willing to accept a larger budget deficit (A$42.1 bln in 12-months through June 2026, up from a previous projection of a A$27.6 shortfall). Australia's budget deficit was slightly less than 2% of GDP last year. The shift in fiscal policy ahead of the May election has not impacted expectations for the central bank to cut rates at least two more times this year. The futures market implies almost a 50% chance of a third cut, unchanged from the middle of last week.
MXN: The dollar slipped slightly below MXN19.96 yesterday. The low was recorded before Mexico reported stronger than expected January retail sales (0.6% vs. median forecast in Bloomberg's survey of flat sales). It was the largest rise since last July. Despite the rise, it most likely will not deter the central bank from delivering another 50 bp rate cut on Thursday. After the low was seen, the greenback recovered to new session higher near MXN20.07650 before consolidating and settling near MXN20.05. After this week's cut that will bring the target rate to 9.0% the pace of cutting will slow considerably, with scope for a few quarter-point cuts this year. Brazil is moving in the other direction. The minutes from last week's week meeting that saw the central bank hike the Selic rate by 100 bp for the third consecutive meeting indicated additional hikes will be delivered, albeit at a slower pace. Consumer prices rose by about 1.3% last month, the largest monthly rise in three months. The hawkish minutes lifted the Brazilian real by about 1.5% yesterday to lead the emerging market currency complex. After reaching BRL5.7725 on Monday, a six-day high, the US dollar fell to about BRL5.6780 yesterday. The low since mid-October 2024 was set last week near BRL5.6320.
Reviewed by Marc Chandler
on
March 26, 2025
Rating:
