Overview: At the end of last week, there was much talk about Black Monday and today it is here. Various circuit breakers kicked in as stocks plummeted. The Nikkei 225 fell 7.8%, and while China's CSI 300 fell 7.05%, the index of mainland shares that trading in Hong Kong dropped 13.75%. The Hang Seng itself was down 13.2%. Europe's Stoxx 600 fell 5.1% before the weekend and is off another 5.8% today. US index futures settled on their lows before the weekend and are poised to gap lower today. It would be third consecutive gap lower opening, which in some reckoning in technical analysis is often a sign of capitulation. The equity sell-off is giving a bid to the bond markets. The yield of the 10-year JGB fell 7-8 bp and now is about 50 bp off its recent high slightly below 1.09%. European benchmark yields are off mostly 2-8 bp but the 10-year German Bund yield is off 12 bp and the Dutch benchmark is off 10 bp. Peripheral premiums are widening at lower absolute yields. The 10-year US Treasury is off five basis points to a little through 3.95%.
The US dollar is mixed in choppy trading. The Swiss franc and Japanese yen are the best performers, rising more than 1% and 0.7%, respectively. The euro is little changed. However, the risk currencies, which among the G10 are the dollar-bloc and Scandi currencies, and they are under pressures. The Scandis are off more than 1%, while the Antipodeans are down 0.7-0.8%, and the Canadian dollar is nursing a 0.3% decline. After the Russian ruble's 1.75% loss, the Mexican peso is the second-weakest emerging market currency with a 1.7% decline. The peso trade 24-hours a day and is sometimes used as a proxy for emerging market currencies. The main exceptions in the emerging market space today are the Taiwanese dollar and Czech koruna, both posting minor upticks. There are some reports suggesting Taiwan's central bank may have intervened earlier today. Gold set a record last Thursday near $3168 and reached a low near $2971 today before rebounding to $3055. It is consolidating in a $3013-$3035 range in the European morning. OPEC+ plan to boost output next month by more than expected, and Saudi's sharp cut in next month's sales price, coupled with recession fears, have seen May WTI crater to about $59 a barrel. In the middle of last week, it reached nearly $73.30. It is back to levels last seen in late 2021.
USD: The Dollar Index finished strong relative to the day's range before the weekend, but it did lose around 1% on the week and returned to lows not seen since last October. Last week's low could prove to be the climactic low from a sell-off that began a week before the inauguration from 110.00 to reach almost 101.25. If there is some tariff relief granted, or no further escalation in US-China tariff war, the Dollar Index can consolidate. There may initial near-term potential toward 103.35 area (last Wednesday's low and Thursday's high). So far today it is in a roughly 102.20-103.20 range. Businesses, investors, and policymakers are still digesting the implications and consequences of the US tariff increase, which by several calculations surpasses Smooth-Hawley. The market seems more concerned about the direction of the economy than inflation. From mid-January high to last week's low, the 10-year yield fell about 95 bp. Why? It can be nearly explained by the 90 bp reassessment of the overnight rate. Also, unlike survey data, the five-year breakeven has fallen nearly 35 bp from its mid-February February consumer credit is due today, but it is a quiet calendar until Thursday's CPI, where a minor softening of the year-over-year rates are expected.
EURO: After surging to nearly $1.1145 in the aftermath of the US tariff announcement, the euro pushed lower ahead of the weekend and fell to $1.0925. The losses were extended to almost $1.0880 today, with support seen near $1.0850. Trading is choppy and the euro reached $1.1050 in late Asia/early European turnover. Fed Chair Powell seemed to confirm that the Federal Reserve is still likely to cut after the ECB. Aggregate eurozone retail sales, reported earlier today posted their first monthly increase since last September (0.3%, while the January series were revised to flat from -0.3%). This provides more evidence of a nascent recovery was taking hold. Separately, German industrial production fell by 1.3% in February, after a 2.0% gain in January. At the end of last week, France reported a 0.5% increase in February industrial output, the first increase in five months. Spain reported a 0.4% increase in its February industrial production, recouping almost half of January's decline. Italy reports at the end of the week, while the eurozone aggregate estimate is due on April 15, two days before the ECB meeting, where the US tariffs and euro appreciation has seen the odds of an April cut rise in the swaps market.
CNY: The risk is for the dollar to test the upper end this year's range found around CNH7.37. It held below CNH7.35 last week but the signals from the PBOC fix seems accept further yuan weakness. The dollar, which briefly traded below CNH7.25 before the weekend, rose a little through CNH7.33 today. The PBOC set the dollar's reference rate at CNY7.1980, the second consecutive increase of 0.13%. This matches the percent change from last Friday, which is unusually large for the PBOC. China could also be vulnerable to some sectoral tariffs. China retaliated, putting a 34% tariff on US goods, banning some products outright, and instituting more controls on some rare earths. Previously, it put 15% tariff om US coal and LNG, a range of food and fibers (including cotton, some grains, soybeans, pork and beef, and dairy) and a 10% tariff on crude oil and agricultural machinery.
JPY: The dollar recovered impressively ahead of the weekend against the Japanese yen even though the US 10-year yield remains below 4.0%. The greenback bounced from JPY144.55 to new session highs to around JPY147.10. It is trading choppily within the pre-weekend range today (~JPY144.80-JPY147.10). Japan's labor cash earnings edged up to 3.1% year-over-year in February (2.8% in January). It had reached 4.4% at the end of last year, the highest since the spike in 1997. One challenge is that when adjusted for inflation, it returned to below zero (-1.8% in January and -1.2% in February) after being positive in November and December 2024. The 24% tariff the US announced last week has squashed ideas that the BOJ could hike rates at its May 1 meeting. The odds fell from about 20% a week ago to about practically zero now. In fact, a rate hike this year has been removed from the swaps curve.
GBP: Sterling settled last week around $1.2865, its lowest close in a month. This is after peaking near $1.3200 the day before. Sterling's losses have been extended to about $1.2825 today. The price action looks poor, and the next test comes in the $1.2785-$1.2800 area. The UK's economic calendar is light under Friday's February GDP report and details. The strength of sterling and the US tariffs boosted the market's confidence of a rate cut at next month's BOE. meeting. The swap market is fully discounting. A 60% chance was discounted two weeks ago. The market had wavered about two rate cuts between now and the end of the year a couple of weeks ago and now has nearly three-and-a-half cuts discounted.
CAD: After falling to a new low since last December, near CAD1.4030, last Thursday, the greenback reached nearly CAD1.4260 ahead of the weekend. The CAD1.4265 area marks the (61.8%) retracement of last week's decline and the greenback has edged up to CAD1.4270 today. There may be potential toward CAD1.4300-20. The Bank of Canada publishes its Q1 business surveys today. Other surveys have found a deterioration of sentiment and confidence. The Bank of Canada meets in the middle of next week, and the swaps market has a little more than a 70% chance of a cut discounted, nearly twice the probability seen a week ago.
AUD: The Australian and New Zealand dollars plummeted ahead of the weekend losing about 4.7% and 3.60%, respectively. The Aussie was sold through $0.6000 for the first time since the early days of the pandemic. Although it stabilized after exceeding four-standard deviations from the 20-day moving average, it still settled beyond three. In fact, the third standard deviation from the 20-day moving average is found near $0.6000 today. It has traded slightly below $0.5935 today and subsequently reached a high near $0.6060. It is straddling the $0.6000 area in late morning turnover in Europe. Australia's economic data is in a bit of a hiatus this week. A couple of banks' confidence surveys and Melbourne Institutes consumer inflation survey are the main reports this week. The minutes from last week's central bank meeting and the March employment report are due next week. Even though New Zealand's central bank is expected to cut the cash target rate by 25 bp next week, the New Zealand dollar fared better than the Australian dollar. Still, the Kiwi 2.3% last week (vs, the Aussie's ~4% loss) and just inside three standard deviations from the 20-day moving average. The three-standard deviation mark is around $0.5535 today and the New Zealand dollar is in about a $0.5520-$0.5625 range so far today. The pre-weekend low was near $0.5550.
MXN: The dollar recovered from the hiccup around the tariff announcement and set a marginal new high for the week (~MXN20.56) ahead of the weekend. It had reached a new low since last October the day before. The greenback surged to almost MXN20.81 today and remains near the high before the North American open. Mexico's March CPI is the highlight of the week, but it will not be reported until Thursday. Barring a significant surprise, the central bank is likely to cut rates by 50 bp at its third consecutive meeting next month. Still before the Banxico meeting, it will see April CPI and Q1 GDP, and there will be a greater sense of the impact of US tariffs.
Reviewed by Marc Chandler
on
April 07, 2025
Rating:
