(Business travel will interrupt the regular commentary this week. It will return on April 26 with the May monthly. We apologize for the disruption. Thank you for your patience. Good luck.)
Overview: In thin markets, the dollar has been stomach-punched. It is off by more than 1% against six of the G10 currencies today. The Canadian dollar is the worst performing, and it is up nearly 0.50% and is at new eight-month highs. As we observed, the dollar was vulnerable. The attack on the independence of the Federal Reserve is the latest trigger. And preliminary April South Korean export data showed exports to the US collapsed more than 14%. Many centers, including Hong Kong and Australia in the Asia Pacific region and many in Europe are closed for the extended Easter holiday. The thinner markets may be exacerbating the moves, but the direction is clear. The only emerging market currency unable to find traction against the greenback today has been the beleaguered Turkish lira.
Equities were mixed in the Asia Pacific region, but US index futures point to a gap lower opening today. The S&P 500 and Nasdaq futures are off by more than 1%. Like we saw earlier this month, the rise in US rates is not lending the dollar support. Our working hypothesis continues to be that given the risks associated with the Trump administration, investors and other market participants are demanding a higher US interest rate premium to compensate them. Due to the UK holiday, US Treasuries are not trading in Europe. The futures point to little change in US rates, though we anticipate that the prospect of Fed easing in the face of the tightening of financial conditions will support the short end of the curve and further curve steepening. Gold is setting a fresh record high near $3400. June WTI is off around 2.75% to unwind most of the gains from last Thursday to trade near $62.25.
USD: The US bond and equity markets stabilized last week, and the Dollar Index was pinned in its trough near 99.00. It has taken another leg down following threats to the Federal Reserve's independence and indication from South Korea's exports about the wide impact of US tariffs. The Dollar Index has probed the 98.00 area, a new three-year low. There is little chart support ahead of the 95.00-95.25. The high-frequency data is often important because of the potential policy implications. However, this is less true this week. The data is most unlikely to impact expectations for the FOMC meeting that concludes May 7. That seems very clear from Fed Chair Powell's recent comments. Still, the idea that the dramatic weakness in the soft data (surveys) has not filtered into much real sector data to steady the Fed's hand seems to be playing on borrowed time. The odds of a rate cut in June/July seem high. The Fed's Beige Book is due in the middle of the week. It and the dot plot have become more important under Powell's watch.
EURO: In the past six sessions coming into today, the euro has traded above $1.14 on an intraday basis though failed to close above it once. Still the consolidative price action was constructive, and it broke out of it to almost $1.1575. It opened on its lows (~$1.1390) and has not looked back. The next chart area of note is near $1.1685. Some European centers are still closed for the extended Easter holiday. The preliminary April PMI on Wednesday poses headline risk but is unlikely to alter views about the strong chance of another ECB cut in June.
CNY: Here in April, the yuan has fallen by about 0.4% against the dollar, and year-to-date it is nearly flat (~ -0.15%). Many observers seem too dollar-centric to recognize that the yuan is trading near record lows against the euro and three-year lows against the yen. The yuan has also fallen against other emerging market currencies. The JP Morgan Emerging Market Currency Index is up almost 5.4% this year and MSCI Emerging Market Currency Index is up about 2.50%. The one- and five-year loan prime rates were left unchanged at 3.10% and 3.60%, respectively. We expect Beijing to provide more monetary and fiscal stimulus to help blunt the impact of the US tariffs, which jeopardize a $400 bln market. However, it is possible that it is not announced until around the Politburo meeting in July. The PBOC set the dollar's reference rate at CNY7.2055 (CNY7.2069 Friday). It was the third consecutive data the reference rate was lower. On average, the fix was changed by about 0.50% this month compared with 0.33% in March and 0.02% in February. The dollar is trading near five-day lows against the offshore yuan, having reached about CNH7.2835.
JPY: The dollar fell to a new low for the year last week, near JPY141.60. It has fallen another yen today to JPY140.50. The next target is last year's low near JPY139.60 and the 200-day moving average is near JPY138.00. BOJ Governor Ueda warned last week that the Japanese economy is in a difficult place. And between the proverbial rock and hard place will be driven home in the coming days. The preliminary April PMI is likely to show the first back-to-back sub-50 reading for the first time since the end of 2022. The economy is soft. And at the end of the week, the Tokyo April CPI, which is a reasonably good lead into the national figures, are likely to jump. The base effect may contribute to it, but processed food prices are rising, too. Many observers used stagflation to describe the US, which we think is a bit of an exaggeration. Japan looks closer: weak growth impulses, and higher inflation. The headline rate is seen rising to 3.3% (from 2.9%). Recall that the US CPI was 2.4% in March, while Japan's national figure, reported last week, was 3.7%.
GBP: UK markets are closed today. Sterling is extending its streak into the tenth consecutive session today. Sterling's recent strength is more a reflection of the broadly weaker dollar than positive economic news from the UK. It has approached last year's high (~$1.3435). A move above there may target the $1.3650-$1.3750 area. UK data this week includes the monthly government budget data, which tends not to move the market's needle in the short-term, but is a factor in the medium-term, and, in the current context that means that Fall when Chancellor Reeves may again confront a deficit that threatens her own targets. Meanwhile, the March composite PMI jumped to 51.5, a five-month high, but the risk is on the downside in the preliminary April iteration. The swaps market remains confident of a quarter-point rate cut in early May.
CAD: The US dollar recorded new marginal five-months lows against the Canadian dollar last week near CAD1.3830. It found bids there in three of the past five sessions but has punched through there today to CAD1.3780. The next interesting chart area is around CAD1.3730, the (38.2%) retracement of its post-Covid rally that began near CAD1.20 in June 2021. Canada's economic diary turns quiet this week after last week's CPI and central bank meeting. In fact, February retail sales (which likely were dragged down by auto sales) are only pieces of potentially market-moving data ahead of the April 28 election. There is another story playing out: China has cut its US crude imports by 90% while boosting its demand for Canadian oil, which do to a new pipeline in Western Canada more efficiently bring crude from Alberta oilsands to the Vancouver terminal. It is not enough to fully replace the US supply but is now an alternative to more than a quarter.
AUD: The Australian dollar's impressive rally off the five-year low and key reversal seen on April 9 (from $.5915) stalled last week in front of $0.6400, which has stymied it in February and March. In the broad greenback sell-off today, the Aussie reached $0.6435. The 200-day moving average is around $0.6470, and above there, the $0.6500-$0.6550 beckons. The more the US talks about making countries chose between it and China, the more challenging it looks for Canberra, which has navigated between being embedded in US security efforts and its extensive trade with China. We continue to suspect that the AUKUS submarine deal is at risk. The preliminary PMI in the middle of the week is the only high-frequency data-point ahead of the quarterly CPI reading on April 30. Two other events are on investors' radar screens. First is the May 3 election, in which Prime Minister Albanese and the Labor Party looks likely to retain power. Second, is the May 20 central bank meeting. There has been some speculation of a 50 bp cut, but that would seem to signal that the Reserve Bank of Australia made a policy mistake by not cutting earlier this month. A quarter-point cut seems more likely.
MXN: Since the spike to MXN21.08 on April 9, the greenback has fallen by a little more than 6.5% to set a new low six-month low last week near MXN19.6550. It was recorded while local markets were closed, and they will not re-open until tomorrow. The dollar has held barely above last week's low. The dollar bottomed in April 2024 near MXN16.26 and the (38.2%) retracement would bring it to around MXN19.37. Mexico reports February retail sales in the middle of the week and they look soft after the 0.6% gain in January, the most since last July. They may have fallen around 0.5%. The CPI for the first half of April is due the following day. Both the headline and core rates are holding slightly inside the 3% +/- 1.0% range. Nevertheless, the swaps market is pricing in an aggressive easing path: 60 bp over the next three months and 130 bp in the next six months.
Reviewed by Marc Chandler
on
April 21, 2025
Rating:
