Overview: It seems the dramatic reaction in the capital markets and the collapse of consumer confidence (and erosion of public support for its policies) prompted the Trump administration to postpone the reciprocal tariffs. And after the markets closed Friday, it announced posted its website that smartphones, computers and other popular consumer electronics, and machines used to fabricate semiconductions were exempt from the so-called reciprocal tariffs and should have been part of the April 2 announcement. The administration was quick to say that coming tariffs on semiconductor, which it knows are coming even though the investigation is not completed, will cover the consumer electronic products. An announcement on semiconductor tariffs is expected soon. The repeated adjustments seem to reduce the credibility of claims of some "master plan" unfolding.
Comparisons of the US with emerging markets in recent days seems nearly as extreme as the epithets against the UK during the short-lived Truss affair in September 2022. While it helped us call sterling's low, the dollar's downtrend is intact but the firmer tone in US index futures and bonds has removed some of the last week's manic feel. Asia Pacific markets rallied today after a three-week, 8.5% slide. Europe's Stoxx 600 is up 2% today after falling 11.5% in its three-week drop. Benchmark 10-year yields in Europe mostly 3-7 bp lower and peripheral premiums are narrowing. UK Gilts are outperforming with a nearly nine basis point decline. The 10-year US Treasury reached almost 4.60% before the weekend and is slipping below 4.44%. Gold is consolidating near the record high set before the weekend slightly below $3246. May WTI is firm near $62 as prices continue to consolidate with last Thursday's range (~$58.75-$63.35).
USD: The Dollar Index recovered from the spike down to almost 99.00 in early European trading before the weekend, and in the volatile session, met sellers on the move to almost 100.40. The session high was near 100.75 in Asia Pacific turnover. US equities recovered and yields pulled back but only after the 10-year made new highs for the move near 4.59%. It has remained below Friday's settlement (~110.10) today but also above 99.20. With US bonds and stocks trading higher, the tone is less manic. After last week's inflation gauges, attention turns back to the real sector. Retail sales, industrial production, and housing starts are featured. The high frequency data, however, seems less significant now for at least two reasons. First, some will be flattered, like retail sales (helped by stronger than expected auto sales) and some data will not show the impact of the headwind coming to the US. Bloomberg estimated that despite the postponement of the reciprocal tariffs, because of the hike on China, the average effective tariff is down from 27% but at 24% it still poses a threat to growth and prices.
EURO: Before the weekend, the euro settled a little above the middle of the day's range and still finished almost 1.4% higher and rallying 2.3% the day before. The euro reached almost $1.1475, its highest level in three years in late Asia/early European activity following China's announcement of another (and it says last) increase in its tariff on the US. The euro was capped near $1.1410 in North America and spent most of the afternoon straddling the $1.13 area. The weekly gain of more than 3.5% was also the largest weekly advance since November 2022. Today, it saw the session low early near $1.11280 and reached $1.1425 as European markets were opening. It looks poised to challenge the pre-weekend high. The eurozone sees the aggregate February industrial production figures and Germany's ZEW survey tomorrow, but the highlight of the week ECB meeting on Thursday. There was some debate about an April cut, but the market has clearly become more confident of a quarter-point rate cut. The growth impact from the tariffs, and the price implications of the euro's strength and the drop in oil prices encourages such views. In early March, the swaps market was discounting a little more than 40 bp of cuts in the remainder of the year. Now a little more than 75 bp is priced into the swaps curve.
CNY: Rather than a sharp devaluation of the yuan by Beijing in response to the tariffs, it is the dollar that fell. In the past three sessions, the dollar fell by about 2% against the offshore yuan. Ahead of the weekend, the dollar fell to a six-day low against the offshore yuan. And in the face of the escalation of the tariff war, the offshore yuan rose for the first time in four weeks. Its greenback is snapping the three-day decline and is up almost 0.3% to CNH7.31 in the European morning have been up to almost CNH7.3175. The PBOC has not been taken off its course (relatively stable yuan against the dollar). Since Trump's inauguration, the onshore and offshore yuan have depreciated by about 0.40% and 0.60%, respectively. We suspect when push comes to shove, Beijing will choose more domestic stimulus over a large devaluation against the dollar to blunt the impact of the tariffs. The PBOC set the dollar's fix at CNY7.2100 (CNY7.2087 before the weekend, which was the first lower dollar fix in seven sessions). March trade surplus was larger than expected at $102.6 bln, up from $58.6 bln in March 2024. China's trade dominance has increased since Trump's initial tariffs in 2018, but today's figures were likely bolstered by attempts from exporters and importers to get ahead of the tariffs. Exports are up about 12.4% year-over-year, while imports are 4.3% lower. Aggregate financing jumped more than expected in March, reaching CNH15.18 trillion, year-to-date, compared with CNY12.8 trillion as of March 2024. However, while bank lending increased, the lion's share of the improvement came from the so-called shadow banking (e.g., non-bank financial institutions). Bank lending increased by around CNY222 bln of the increase from March 2024, while the shadow banking accounted for the remainder.
JPY: In the past three sessions, the dollar fell nearly 4.2% against the Japanese yen to approach JPY142.00. After retesting the low in early North American trade, short covering helped lift the greenback to almost JPY144.20, where sellers pushed it back toward JPY143.60. The dollar is trading within the pre-weekend range today. A break of JPY142 may require a further pullback in US yields, even though the volatility of US rates and the dollar appears to have loosened the relationship between the US 10-year yield and the exchange rate. Our working hypothesis is that it may take a bigger increase in the US premium to compensate investors. There is much talk that Japanese investors have been selling Treasuries. It is possible but where can it be documented? Capital flows are reported with a lag. It is a bit like US jobs. The media reports large layoffs not the hiring. Market scuttlebutt is about Japanese selling but they do that every day, but there are also Japanese buyers. One of the most authoritative sources of Japanese purchases of foreign bonds reported last week that they were net buyers in February of about $9.6 bln of US bonds, which hardly sheds light on recent activity.
GBP: Sterling is extended last week's gain to approach $1.3200 after it reached $1.3145 last Friday. It had spent most of the pre-weekend session and spent most of the European session and the entire North American session consolidating in choppy activity. It was unable to rise much above $1.3130 in North America and recorded a low about a cent lower shortly after Europe closed the books the for the week. Still, a higher close today allows sterling to extend its advance for the fifth consecutive session, the longest run since last November. The UK employment report is due tomorrow, and the March CPI is Wednesday. Barring a significant surprise, the market's confidence of a rate cut at the Bank of England's May 8 meeting. It is fully discounted. More telling of the shift in market sentiment is the extent of rate cuts now anticipated for this year. As recently as March 25, the swaps market has about 40 bp of cuts discounted, which is one quarter-point cut and a 60% of second. Now, there are nearly 90 bp of cuts priced into the swaps curve. That puts the year-end rate near 3.55% from over 4% in late March.
CAD: The US dollar last traded above CAD1.44 on April 1 and ahead of the weekend fell to CAD1.3840, its lowest level since last November. It has made a marginal new low today near CAD1.3830. For the third consecutive session, the greenback settled below its lower Bollinger Band, which is found around CAD1.3910 today. Chart support may be around CAD1.3800. Canada reports its March CPI tomorrow. The Bank of Canada meets Wednesday. Through last month, the central bank slashed its policy rate starting June 2024 from 5.0% to 2.75%. The market flirted with the idea of another cut this week. The odds a week ago were near 66% and have been halved, even though one might think the strength of the Canadian dollar (best level since last October) may encourage a pre-cautionary cut given the likely tariff headwind. Still, proximity of the April 28 election may be a consideration.
AUD: The Australian dollar posted a key upside reversal in the middle of last week by making a new (five-year) low and then recovered to settle above the previous day's high. Follow-through buying lifted the Aussie to $0.6300 ahead of the weekend; a 6.5% rally from Wednesday's low (~$0.5915). The rally has been extended to almost $0.6345 today. The risk-reward changes as the top of the four-month range is approached around $0.6400. The Reserve Bank of Australia's minutes from the meeting earlier this month may draw some passing interesting tomorrow but the importance will be in the clues to the bar for next month's meeting. The futures market is getting aggressive. It is discounting nearly a 40% chance of a 50 bp cut. It is now pricing almost 120 bp of cuts this year. That is nearly twice as much as was being discounted as recently as March 27.
MXN: The greenback snapped a three-week advance against the peso last week and fell about 0.60%. The dollar posted a bearish key reversal in the middle of last week but there was no follow-through selling. It ended up consolidating for the past two sessions. It is trading with a heavier bias today. A break of MXN20.17 is needed to open up the downside and spur a test to MXN20.00. The month's low was set April 3 near MXN19.84, which at the time was a little above the 200-day moving average, which comes in now slightly below MXN19.88.
Reviewed by Marc Chandler
on
April 14, 2025
Rating:
