Overview: There appear to be two-forces at work that has helped the US dollar recover. First, as the market continues to debate whether the reciprocal tariffs are a negotiating ploy and in this tug-of-war of sorts, President Trump's declaration that he is open to "phenomenal offers" plays into that view. Still, the fact that Israel got rid of all of its tariffs on the US and still was hit with a 17% levy is notable. Second, there may be some position-adjustment ahead of the US jobs report. So far, the weakness in the US labor market appears in the soft, survey data, not the hard data, like weekly initial jobless claims. The rise in continuing claims is consistent with slowing in employment. A few hours after the jobs report, Fed Chair Powell will speak about the economy. This could be another source of volatility. However, we suspect he will be reluctant to signal much concern about the volatility of the stock market, i.e., no resurrection of the simplistic--stock market falls sharply, and Fed will cut" so-called Fed put.
The US dollar is firmer against all the G10 currencies but the Swiss franc. German factory orders disappointed and BOJ Governor Ueda recognized the unsettled global environments. Emerging market currencies are mixed with Asia-Pacific outperforming central Europe. The PBOC set the dollar's reference rate at its highest for the year. Few equity markets have escaped the selling pressure and US index futures are off 0.5%-1.0%, which warns of the gap lower opening. Bonds are still the safe haven. European 10-year yields are off 6-10 bp, and the peripheral premiums are widening. The 10-year US Treasury yield is off eight basis points to about 3.95%. Gold, ironically, is trading more like a risk asset and is off 0.75% today, but above yesterday's low (~$3054). May WTI has extended yesterday's dramatic sell-off, spurred by OPEC+ decision to boost sales around three-times more than expected and broader growth concerns. The contract reached about $64.25, its lowest since last September.
USD: The dollar fell sharply and broadly yesterday. The Dollar Index dropped by almost 1.7%, its largest drop since November 2022. It fell from a high Wednesday near 104.30 to a low a near 101.25 but managed to settle above slightly102.00. The sell-off was so sharp that the Dollar Index spent most of the European and North American session below three standard deviations from the 20-day moving average (~112.20). The Bollinger Bands are set two standard deviations away from the 20-day moving average. Three is an extreme event, if the returns are not normally distributed. After sliding back to nearly101.50, DXY recovered to the first area of technical resistance may be in the 102.40-50 area, near where the lower Bollinger Band is found. Above there, the 102.80-103.00 may offer stronger resistance. It is hard to reconcile claims that America has been taken advantage of when its outperformance, whether since the Global Financial Crisis or Covid fanned discussions framed around "US exceptionalism." The US GDP has never been higher and US household net worth has never been greater. Rather than a bold new initiative for growth, the US is pursuing a more intensive extractive strategy, similar to when ancient Rome wanted to fill up its coffers and sent out "tax farmers" to the provinces. While investors continue to digest the US latest salvo of tariffs, attention turns to the US jobs data. While surveys, like the ISM manufacturing and service surveys, find a deterioration in the labor market, the weekly jobs claims, including for federal government employees show little evidence. The ADP private sector jobs estimate was stronger than expected at 155kThere is little reason to expect it to show up in today's nonfarm payrolls. In the six months through February, nonfarm payrolls rose by 191k. In the six months through February 2024, nonfarm payrolls rose by 183k. The median forecast in Bloomberg's survey is for a 140k increase in March (151k in February), of which 135k (140k in February) came from the private sector. The household survey generates the unemployment rate, and a tick up (from 4.0%) should not be surprising. There is a deep conviction that the labor market will deteriorate this year, and we suspect it will be showing up in the data by the end of the quarter. Ahead of today's employment report and Fed Chair Powell's speech about four hours later, the futures market is discounting about slightly more than a 90% chance of a Fed cut in June, up from around 2/3 change at the start of last week.
EURO: The euro spiked to nearly $1.1145 in early North American trading yesterday but settled near North American session lows below $1.1030. It poked above $1.1100 briefly but met sellers. A combination of disappointing German factory orders and position adjustments ahead of the US jobs report saw the euro push below $1.10, triggering stop-loss selling that extended initially toward $1.0965. The US two-year premium over Germany narrowed by eight basis points over the past two days to its narrowed in around four weeks. EMU's aggregate calendar is quiet but the largest four members reported real sector data today. Germany's February factory orders were flat but had been expected to rise after the 7.0% drop in January that was revised to -5.5%. To be sure. it is a volatile series, like US durable goods orders. They averaged -0.4% in 2024 but in a range of -10.9% to +6.2%. France reported a 0.7% increase in February industrial output, its first gain since last September, led by a 1.4% increase in manufacturing production. Spain reported a 0.7% gain in February industrial production, better than expected, but in the previous three months, it fell by a nearly a cumulative 2.0%. Italy, which may be hit among the hardest by US tariffs, reported a 0.1% increase in February retail sales, leaving them down by about 0.25% in the first two months of the year. Meanwhile, money fleeing US equities does not appear to be going into European equities. The Stoxx 600 index is off around 9.5% from the record high seen in early March.
CNY: The dollar reached a two-month high against the offshore yuan yesterday near CNH7.35 in Asia before being pushed back to CNH7.2750 by late in the European session, as the greenback came under broad and sharp pressure. It fell slightly below CNH7.24 today, a new low for the week. On the other hand, the PBOC fixed the dollar higher (CNY7.1889 vs. CNH7.1793 yesterday), and matches the highest reference rate of the year. China may report its March reserve figures over the weekend. Lending figures are also due next week, but the data highlight is the March CPI and PPI next Thursday. While deflation in producer prices continues (-2.3% expected vs. -2.2%), the deflation in consumer prices (-0.7%) appears to have bene a statistical quirk. It was the first negative reading since January 2024. It is seen flat in February, year-over-year, compared with 0.7% in February 2024. Yesterday, Fitch cut China's sovereign rating to A from A+, the lowest of the top 3 rating agencies, but matches DBRS assessment. Fitch cited concerns about weaker public finances (debt fueled spending) and the impact of US tariffs. The rating agency said the decision was made before yesterday's reciprocal tariffs were announced.
JPY: The US 10-year yield briefly traded below 4% for the first time since the middle of last October, facilitated by plunging stock market. The dollar was crushed from a high near JPY149.30 to JPY145.20. It settled nearly three standard deviations below its 20-day moving average, which was near JPY145.40. It held above JPY145.30 today and recovered to JPY146.55 to enter its Bollinger Band. The volatility is such that a move into the JPY147.00-20 on a favorable reaction to the US jobs data cannot be ruled out. The yen and Swiss franc both appreciated by more than 2% yesterday. What they both have in common is low interest rates and the traditional appeal as funding currencies, when they are borrowed and sold for a higher yielding instrument or another asset, from emerging market bonds to equities. As those assets fall, which invariably they will, the asset is sold and the funding currency bought back. Also, among some participants there is a belief that their net international investment position is the first line of defense and when risk is off, some of those assets can be repatriated. Both give a sense of "safe haven." Japan reported household spending fell by 0.8% year-over-year in February. In February 2024, it fell 0.5% year-over-year. In GDP terms, consumption 0.1% in Q4 and appears to have remained subdued this quarter. This is an inflation adjusted report. Low unemployment, rising nominal wages, and government subsidies for energy have proven insufficient to boost consumption.
GBP: Sterling raced up to almost $1.3210 yesterday. It stalled and some profit-taking appeared to kick-in. Sterling eased slightly through $1.3080 in late turnover. It reached almost $1.3115 today before being sold to around $1.2960. Despite sterling being slapped with a 10% tariff and the EU 20%, the euro has surged against sterling and approached the year's high today near GBP0.8470 (from ~GBP0.8320 yesterday). After spending most the last 10 months of 2024 above the 50 boom/bust level, UK's construction PMI has spent Q1 25 contracting. It stood at 46.3 in March (44.6 in February).
CAD: The US dollar fell by a little more than 1% against the Canadian dollar to approach CAD1.4025, its lowest since early last December. The 200-day moving average is near CAD1.40. The push through CAD1.41 met the (50%) retracement objective of the greenback's rally since last September's low (~CAD1.3420). The next retracement (61.8%) is near CAD1.3945, but the greenback is better bid ahead of the North American open. It held CAD1.4055 today and reached nearly CAD1.4170 in European turnover. While the initial hurdle may be near CAD1.4175, given the volatility, a break could see CAD1.4220. Canada's March employment report is a bit dated given the US tariff assault. Many economists fear that the tariff shock and supply-chain disruption could push the Canadian economy into a recession. The risk is on the downside, and any strength will likely be seen as an anomaly. The unemployment rate was at 6.10% in March 2024. Last year's high was in November at 6.9%. It was at 6.6% in January and February and may have ticked up to 6.7%. Canada created 15.5k full-time jobs in the first two months of the year and 49k in the first two months of 2024. Ahead of the swaps mark is discounting about a 55% chance of a cut at the April 16 meeting, up from about 33% last Friday (March 28) and the previous Friday (March 21).
AUD: In yesterday's dramatic session, the Australian dollar covered the two-cent range that has largely confined the price action for at least the past two months: $0.6200-$0.6400. It posted its highest settlement since March 19 but within Wednesday's range. It has totally unwound yesterday's gains, and more. It has frayed the $0.6200 area and have not closed below it since mid-January. Australia reported a 0.2% increase in household spending in February and a 3.3% year-over-year rate. The January series was revised to show a 0.5% gain rather than 0.4%. In February 2024, it rose by 4.6% year-over-year. The central bank would likely be more comfortable cutting rates if consumption were weaker. Household spending rose by an average of 0.6% a month in Q4 24, is strongest quarterly performance since Q3 23. The cumulative 0.7% increase in Jan-Feb this year matches the first two month of 2024. Still, the futures market is confident of a cut at the May 20 RBA meeting. AT the end of last week, the market was discounting about a 70% of a quarter-point cut, and now there is about a 20% chance of a 50 bp move. Lastly, note that the White House corrected itself and the reciprocal tariff on New Zealand is 10%, the same as Australia, rather than 20% initially signaled.
MXN: The dollar fell to new nearly five-month lows yesterday as the greenback was broadly beaten up. It had been turned back from the MXN20.50 area that it probed in the previous three sessions and fell to about MXN19.84, holding the lower Bollinger Band, set two standard-deviations from the 20-day moving average. The greenback is bid and is probing the 20-day moving in Europe (~MXN20.1565). Above there, resistance may be near MXN20.20. Mexico's economic calendar is light ahead of the weekend. Next week's highlight is the March CPI and barring a significant surprise the central bank is likely to proceed with another 50 bp cut at the next meeting in the middle of May.
Reviewed by Marc Chandler
on
April 04, 2025
Rating:
