Liberation Day from the Multilateral World Our Parents, Grandparents, and Great Grandparents Created

Overview:   The trepidation over today's US tariff announcement has been underscored by reports that even as late as yesterday, a final decision had not been made. Given the complexity of different tariff schedule formulations, and the desire to implement the new regime immediately seem to favor a simply across the board levy or maybe two categories, a high one and low one. In terms of allocation of power, Treasury Secretary Bessent and his suggestion that only a small number of countries would be targeted looks wide of the mark. In recent days, he looks sidelined. The tariffs are widely understood push prices higher and slow the economy. We suspect the latter, through a deterioration of the labor market will prod the Fed into resuming its easing cycle, not inflation falling back to target. 

The US dollar is mostly softer against the G10 currencies, with the Antipodean the strongest, followed by the Scandis. Against the euro, yen and sterling, the greenback is consolidating within the ranges seen Monday. Most emerging market currencies are firmer today. The yuan, rupee, and South African rand are among the notable exceptions. Equities were mixed in the Asia Pacific region, with many of the smaller bourses doing better than the large ones. Europe's Stoxx 600 is giving back most of yesterday's nearly 1.1% gain and US index futures are trading heavier. The 10-year JGB yield, around 1.45%, is the lowest in nearly a month. European benchmark yields are slightly firmer. The 10-year yield is up two basis points to about 4.66%. It recorded a three-month high last week a little above 4.80%. The 10-year US Treasury yield is steady around 4.17%. Gold is trading inside yesterday's range with a firmer bias near $3130. After peaking above $72 a barrel yesterday and pulling back, May WTI is little changed now a little above $71.00, having found support near $70.70 earlier today. 

USD:  Investors, businesses, and policymakers await the reciprocal tariff announcement at around 4 pm ET today. The Dollar Index is trading remains within Monday's range (~103.75-104.40). It is holding above 104.00. It needs to take out last week's high near 104.70, and maybe even the 200-day moving average near 104.90, or 103.75 to be significant. Today's high-frequency data points--ADP private sector job estimate and February factory orders--pose headline risk but the trade-war, tomorrow's ISM services, and Friday's nonfarm payroll report and Powell's speech on the economic outlook, are more important. There seems to a contradiction in the administration's embrace of tariffs. One hand, it they are to raise revenue, then the higher priced imported goods should not deter demand. On the other hand, if the tariffs are to encourage import substitution, then they will not raise a much revenue, and what revenue it does raise will fall over time. 

EURO: The euro slipped below $1.0780 in early North American trading yesterday and was unable to recover above $1.08 before around 820 mln euros in options expired there. Even then, it could not resurface above $1.0815. It has held below $1.0810. today. Another 1.33 bln euro $1.08 options expire today and another 5.6 bln euros in options struck at $1.08 expire combined between tomorrow and Friday. The eurozone sees the final March services and composite PMI and February PPI tomorrow. Investors now accept that a recovery is gaining hold, albeit unevenly in Europe. The final PMI readings will not change that assessment. Meanwhile, the base effect warns that producer prices will likely trend higher. Recall that on a monthly basis, EMU producer prices fell from November 2023 through May 2024. As those low numbers drop out of the 12-month comparison, the PPI will rise. It finished last year 0.10% year-over-year and jumped to 1.8% in January, and 0.3% increase, which is the median forecast in Bloomberg's survey would see the year-over-year rate rise to 2.5%.

CNY: The dollar rose to its best level against the offshore yuan yesterday since early March, near CNH7.2840, and is holding slightly below it today. Last month's high was a little over CNH7.30. Caixin reported its March services (51.5 vs. 51.4) and composite PMI (51.6 vs. 51.5). The dollar gapped higher against the onshore yuan yesterday and settled slightly above CNY7.27. Last month, it reached CNY7.2935. The PBOC set the dollar's reference rate at CNY7.1793 (CNY7.177 yesterday). It the highest the dollar's reference rate has been set since Trump's second inauguration on January 20. The PBOC's fixings have been alternating between a higher and lower dollar since the middle of last week. The yuan is not driven so much by the high-frequency data. China's response to US direct tariffs have been mild until now, and the US has unveiled so-called secondary tariffs. The US has previously announced tariffs on countries that buy Venezuelan oil, which the US did through the end of last year, and China, alongside India, are obviously at risk. Apparently, disappointed that Putin has been playing him, Trump has threatened to slap tariffs on imports from buyers of Russian oil (e.g., China and India). Nor can US officials abide by Beijing's possible blockage of the C.K. Hutchison's port deal with Blackrock.

JPY: The movement of the US 10-year yield continues to offer a robust guide to the direction of the yen's exchange rate. The dollar posted a bearish key reversal last Thursday. After reaching its highest level in a few weeks near JPY151.20, the greenback reversed low and settled below the previous day's low. It fell to JPY148.70 on Monday and consolidated with a weaker bias yesterday. Today's range is a 2/3 of a yen below JPY150. The US 10-year yield has plunged 25 bp since last Thursday's high print near 4.40%. Yesterday, it traded at its lowest level since the five-month low was recorded in early March near 4.10%. In early March, the swaps market was discounting almost a 75% chance of two quarter point hikes by the BOJ over the next nine months. The market has downgraded to less than a 10% chance of a second one. It might be a function of the uncertainty over US trade policy, which Governor Ueda has noted. The swaps market sees a hike likely in Q3. The swaps have about a 75% chance of it at the end of July and more than a 90% chance it happens by the next meeting on September 19. However, the changes in the exchange rate are more correlated over the past 30- and 60-day with changes in the US 10-year yield (~0.57 and 0.63, respectively) than changes in Japan's two-year yield, a proxy for monetary policy expectations (~-0.25 and -0.10).

GBP: Sterling continues to trade within last Thursday's range (~$1.2870-$1.2990). We have favored a downside breakout, but sterling is proving resilient. Still, with the momentum indicators falling and the five-day moving average below the 20-day moving average for the first time in a little more than two months, it remains vulnerable. It is trading quietly in about a half-a-cent range so far today (~$1.2900-$1.2950). A break convincing break of $1.2860 could get the ball rolling. The initial leg down, could target the $1.2750-$1.2800 area. It is a light news day for the UK. Besides innuendos, platitudes, and suggestions, the UK's special relationship with the US has not spared it the tariffs. It will not do the Labour government any favors if it is going to avoid in six months what it felt compelled to do last week, cut spending in the face of a sufficiently weak economy that the central bank has begun a rate-cutting cycle.

CAD:  The US dollar frayed the CAD1.4400 level and reached CAD1.4415, its best level since mid-March. It subsequently fell to CAD1.4300 and slipped a bit further today, seeing CAD1.4290, a three-day low. With a cold wind blowing from the south, Canada's high-frequency data do not capture the coming storm, which could sap even the modest growth Canada seemed poised to enjoy. The uncertainty alone is paralyzing, and surveys show a loss of consumer and business confidence. While the Trump-Carney call seemed more respectful, the damage has been done, and there is no going back to status quo ante. Who lost Yalta is still debated in some rarified foreign policy circles. There will be no debate who lost Canada, the goodwill of its consumers people, its commodity resources, and access to the Arctic. Note that yesterday, Canada banned Tesla from its EV subsidy program. Tesla sought a $43 mln rebate on sales of a 8753 vehicles over the weekend from four dealers, which is nearly two a minute and Canadian Auto Dealers Association called it manipulation and a government investigation has been launched.

AUD: The Australian dollar approached the lower end of its two-cent range ($0.6200-$0.6400) on Monday. It is extending yesterday's recovery to a little above the middle of the range and is testing the 20-day moving average (~0.6310). We assume the range will remain intact, until proven wrong. Playing for a breakout as the range's extremes are approached has not been a profitable strategy this year. It will eventually prove right but only after a number of false breaks. Patience will be rewarded. With the RBA meeting over, the February data, including today's building approvals and Thursday's trade and Friday's household spending are unlikely to have much impact. In addition to the US tariffs, the focus is on the election on May 3 and the likelihood of a rate cut on May 20.

MXN:  The dollar's five day advance stalled yesterday after it entered the MXN20.50-55 resistance area. It took out Monday's low (~MXN20.3320) but settled above it. It fell to almost MXN20.3175 today. A break of MXN20.30 could see MXN20.25, and possibly MXN20.18, perhaps if Mexico is spared reciprocal tariffs given the USMCA. Still, a move above MXN20.57 could see MXN20.74 on its way back to last month's spike high near MXN21.00. Mexico reports its domestic March auto sales today. To be sure, the data are not market-movers. Nevertheless, what is remarkable is that Mexico exported a little more than 80% of its production in February (259k vs 317k) but dare anyone call this surplus capacity. Mexico's domestic sales in February was about 117.6k. That suggests that Mexicans bought about 59k other cars. The data suggests these were mostly inexpensive Chinese EVs for which the US does not have an alternative. 

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