The global capital markets continue to reel from the profound changes being ushered in by the new US administration. It is arguably too soon to see the economic impact as efforts to get ahead of the US tariffs may be goosing some measures of economic activity. The government and private sector job cuts have yet to filter into weekly jobless claims or the March nonfarm payroll report. Despite Musk-led efforts to cut US spending, the March 2025 budget deficit was about $15 bln wider than expected and the Q1 25 deficit was about 7.5% higher than a year ago.
Senior US administration officials and market participants accepted that the dollar would appreciate in response to tariffs, but instead, the dollar dropped sharply. A trade-weighted measure of the US dollar appreciated 9% last year and is off nearly 4% since the end of January. US stocks and bonds have fallen as well, and this fans concern of a capital strike against the US. Capital flow data is reported with a lag. The US Treasury's capital flow report (TIC) will be reported in the middle of the week, but it covers the month of February. The trade-weighted dollar fell by about 0.35% in February, the S&P 500 gave back about half of January's 2.7% gain, and the 10-year yield fell 33 bp. The TIC data may be too old to reflect the recent drama. Investors and businesses trying to grasp the significance of what is happening and coping with the volatility and uncertainty are more important than the high-frequency data. The ECB meets and now is widely expected to deliver another quarter-point cut. The market is less convinced that the Bank of Canada cuts, as well, but with the newfound strength of the Canadian dollar, and the tariff headwinds still coming, there may be scope for a surprise.
US
Drivers: The impact of US tariffs and the reaction--retaliation and capitulation--reflected in the equity and bond markets saw the dollar fall sharply in the second half of last week. There is also much discussion of the possibility the negative net international investment position (foreign investors own ~$26 trillion more US assets than Americans own of foreign assets) makes it vulnerable to a capital strike. The postpone of the reciprocal tariffs still leaves the average effective tariff over 20%, which serves as a headwind for growth and a boost to prices. The Federal Reserve has maintained its ground. It has no sense of urgency to cut rates, and the Supreme Court's decision to allow the president to dismiss officials from independent agencies is understood to possible lay the groundwork for Trump to fire Powell. The check on the executive power must ultimately come from Congress, and a bill is beginning to get bipartisan support to reassert the legislature in trade and tariff issues.
Data: Federal Reserve Chair Powell has drawn attention to the divergence between the weak soft data, like surveys, and the still resilient hard data, from the real sector, like the nonfarm payrolls. Weakness in the April Empire manufacturing survey of the Philadelphia Fed's Business Outlook may be dismissed. Real sector data looks mixed. Strong auto sales, ostensibly to beat the tariffs, likely flattered retail sales, but industrial production likely slowed after rising 0.7% in February, helped by a 0.9% rise in manufacturing output.
Prices: The pressure on the dollar increased in the past two sessions. DXY fell by 2.5% in the last two session before recovering in late pre-weekend trading in what appears to be short-covering. It fell to almost 99.00 ahead of the weekend to nearly meet the (61.8%) retracement of its post-pandemic rally and settled at 100.10. And even with the recovery, it could not re-enter the lower Bollinger Band, set two standard deviations below the 20-day moving average, found near 101.05. The previous support around 102.00 may off resistance. On the downside, support is near 97.70, but the risk may extend toward the 95.00 area.
EMU
Drivers: The trade war is the new shock, following Russia's invasion of Ukraine and the de-risking from China. It comes as a recovery was seeming to take hold. The market's confidence of an ECB rate cut this week is near 85%. The deposit rate is at 2.5% and the swaps market puts it near 1.65% at year-end, down around 18 bp this month.
Data: The aggregate February industrial production estimate is due. It tends not to be a market mover, as the national reports ae mostly in hand. Still, it should be consistent with the gradual recovery, which has not yet been picked up in some of the survey data, like the PMI. Industrial output fell by about 0.3% over the first two months of 2024 and may have risen by 0.6% in the first two months of 2025. Germany's ZEW survey has seen the current assessment improve each month in Q1, but at -87.6, it remains weak by nearly any metric. The expectations component has surged and at 51.6 in March was the highest since Russia's invasion of Ukraine.
Prices: The euro spiked to nearly $1.1475 ahead of the weekend, which was nearly four standard deviations for the 20-day moving average and a three-year high. It pulled back in the North American session to around $1.1275, where buyers re-emerged and lifted it back to $1.1355 at the close. Above $1.1500, the next technical area of note is around $1.1685.
China
Drivers: The PBOC appears to have introduced a little more flexibility into the yuan and appears willing to accept a weaker yuan. The setting of the daily reference rate remains one of central bank's most powerful tools to manage the exchange rate. At the same time, the official trading platforms reject trades outside of the approved 2% band. Many observers warned China was going to have a large devaluation of the yuan and instead, it was the dollar that fell sharply.
Data: China will report the March trade figures. The median forecast in Bloomberg's survey is for a $75.7 bln surplus, which compared with a $58.6 bln surplus in March 2024. Some effort to get ahead of some US tariffs may have lifted exports, which are seen rising by 4.5% after falling by 3.0% in February. Imports are expected to have fallen by around 2.3% after a 1.5% rise in February. The highlight of the week estimates for Q1 GDP. The economy is expected to have grown by 1.4% on the quarter (1.6% in Q4 24) and 5.2% year-over-year (5.4% in Q4 24).
Prices: The greenback reached almost CNH7.43 on April 8. It appears to be a record high, which was only about 1.8% above where it settled last year. The dollar fell slightly below CNH7.2800 before the weekend and settled near CNH7.2875. The greenback fell for the past three sessions after rising for the previous three sessions. Moreover, it snapped a three-week advance. The dollar reached its best level against the onshore yuan since 2008 last week, a little above CNY7.35. It represents slightly less than a 0.7%% advance this year. It fell to about CNY7.2920 before the weekend. The greenback finished stronger against the onshore yuan than the more speculative offshore yuan, which if maintained may be another sign of less speculative pressure on the yuan. Beijing has maintained a stable yuan, albeit with little more flexibility, i.e., volatility. Three-month implied volatility rose to about 7.6% last week its highest since the end of 2022. To provide some perspective, the 100-and 200-day moving averages converge around 5.7%-5.8%. It finished last year near 6.5%.
Japan
Drivers: The movement of US rates remains the most important driver of the exchange rate. This helps give the yen the appearance of being a safe haven. Also, some market segments often use the yen to fund the purchases of other assets, and the liquidation of those other assets requires the buying back of the funding currency.
Data: There are two notable data points in the week ahead. The first is Japan's March trade figures. Japan's trade balance often improves (8 of the past 10 years) in March over February. However, with efforts to front-run US tariffs, Japan reported a trade surplus in February, the first time since 2021. It was also the largest trade surplus since then. Japan has not run an annual trade surplus since 2020. The second is the March CPI. The Tokyo estimate steals most of the thunder from the national report, and the national CPI runs a little hotter than Tokyo's. That said, the national headline rate may edge up from the 3.7% pace reported in February. The core, which excludes fresh food, may rise to 3.2% from 3.0%, while the measure that excludes fresh food and energy is seen rising to around 2.9% from 2.6%. Although there was some speculation to the contrary, the bar to a rate hike on May 1 seems high.
Prices: The dollar fell by about 2.30% against the yen last week. It was one of the largest weekly losses since the unwinding of the carry-trades last July-August. The dollar fell to nearly JPY142.00. It held slightly above the three-standard deviation (from the 20-day moving average) found near JPY141.85. The surge in the US 10-year yield by nearly 15 bp ahead of the weekend, helped the dollar recover to almost JPY144.00. But, the yield finished only five basis points higher and the dollar settled near JPY143.55. From the high in early January, the dollar has tumbled nearly 10.6% against the yen, and the move does not look exhausted. The next area of support may be in the JPY139.60-JPY140.00 area.
UK
Drivers: The rolling 30-day correlation of changes in the Dollar Index and sterling is strong at -0.82. It is higher than the correlation with changes in UK short- and long-term interest rates and US rates. This suggests the dollar's broad movement is more important than idiosyncratic factors. Yet, the correlation with the Dollar Index may be a reflection of the sterling's correlation with the euro, which over the past 30 sessions is slightly greater than with DXY.
Data: The UK issues its latest labor market report (February/March) and the March CPI. The labor market appears to be gradually slowing. However, average weekly earnings, at 5.8%-5.9% in January (three-months, year-over-year) and 6.1% in the private sector, may contribute to some MPC members being reluctant to ease policy faster. The wage growth is seen to be underpinning services CPI, which in February was 5.0% year-over-year. The base effect (0.6% increase in March 2024) makes for relatively easy comparison, and the jump in the year-over-year rate in January to 3.0% from 2.5% can be unwound further. It was 2.8% in February and may have slipped to 2.6% in March. Barring a significant surprise, the swaps market is confident of a rate cut next month, and probably three before the year's out.
Prices: Sterling will begin the new week with a four-day rally in tow, during which it rose about 3.3%. Ahead of the weekend it approached $1.3150. Sterling pulled back into the European close and US early afternoon turnover. New buying emerging new $1.3030 and it settled near $1.3085. On April 3, sterling popped slightly above $1.3200, its highest level since last October. Above there could target $1.3325 area, but last year's high was closer $1.3435.
Canada
Drivers: The Canadian dollar seems more sensitive to the US dollar's broad direction than short-term interest rates, risk-appetites as reflected by the performance of equities, or oil prices. The market is divided about the outlook for this week's Bank of Canada meeting. The swaps market has about a 55% chance of a cut. Meanwhile, the latest surveys show Canada's Liberal are ahead of the Conservatives, and anecdotal reports suggest a consumer and tourist boycott against the US continues.
Data: On April 15, the day before the Bank of Canada meeting, the March CPI is due. Recall that in February, Canada's headline CPI rose 1.1%, the most since mid-2022. The end of the sales tax holiday was an important factor. The central bank's underlying core measures accelerated to 2.9% from 2.7%. Canada's headline CPI fell slightly at an annualized rate in H2 24. The trade war with the US risk boosting prices and slowing growth. The overnight target rate is 2.75% and swaps market has the year-end at about 2.10%, down from a little over 2.20% at the end of March and near 2.65% at the end of last year.
Prices: The US dollar fell by around 3% against the Canadian dollar in the past three sessions to reach levels not seen since last November (~CAD1.3840). It settled the week well below the 200-day moving average (~CAD1.40) for the first time since last October. In fact, it settled below CAD1.3945, the (61.8%) retracement of the greenback's rally since last September's low (~CAD1.3420). The CAD1.3800-CAD1.3825 offers the next important support area.
Australia
Drivers: The Australian dollar's plunge of more than 5% and the New Zealand dollar's nearly 4.6% drop seemed to be a mini-flash crash in the week to April4. Quantitatively, the move pushed the Antipodean currencies more than 3-4 standard deviations from the 20-day moving average. It as excessive by nearly any metric and plays on fears that the fragmentation of the foreign exchange market may contribute to pockets of illiquidity.
Data: The minutes from the April central bank meeting will be looked at for confirmation of the market's conviction that the monetary easing cycle will accelerate beginning with next month's meeting. The futures market is discounting about a 40% chance of a 50 bp cut, and a total of almost 125 bp this year. Australia's March employment report is due April 17. The labor market is deteriorating. Australia lost about 22k jobs in the first two months of the year (gained about 125k in the Jan-Feb 2024 period). They were all part-time positions. Australia added about 1.3k full-time position in Jan-Feb (after 90k in the first two months of last year). The unemployment rate was 4.1% in Feb, up from 3.7% in Feb 2024.
Prices: In the middle of last week, the Australian dollar fell to a five-year low near $0.5915. It rebounded smartly on the back of the weaker greenback and approached $0.6300 before the weekend. Position squaring saw it ease back to the $0.6225 area, but it recovered to settle slightly below the high. The Aussie finished the week above its 20-day moving average (~$0.6245) and near the middle of the two-cent range ($0.6200-$0.6400) that has dominated most of the trading this year.
Mexico
Drivers: Our chief concern is that the US re-shoring drive cuts at the heart of Mexico's development and modernization efforts. Mexico has indicated it will see closer trade ties elsewhere. This will take time. This combination of this external shock, and a weak domestic economy and inflation within its target range, gives the central bank leeway to be more aggressive in its easing path. The currency looks vulnerable.
Data: Mexico does not report market-moving data in the coming days. Mexico's economy contracting by 0.6% in Q4 may have grown slightly in Q1 25, helped seasonal rebound in auto production and better consumption. However, capex looks to have fallen for the second consecutive quarter and cannot be counted given the uncertainty that continues to hang over the US tariff policy.
Prices: The dollar posted a large bearish key reversal in the middle of last week by setting a new high for the move (above MXN21.00) and then reversing lower to close below the previous day's low, which was near MXN20.47. However, there was no follow-through dollar selling. Instead, over the past two sessions, the greenback consolidated within Wednesday range in a roughly MXN20.21-MXN20.6250 range. It settled below the middle of that range. The interest rate differential makes it difficult to be short the peso if it is not weakening. The dollar looks poised to push lower and may approach MXN20.00, though the month's low is near MXN19.84.
Reviewed by Marc Chandler
on
April 12, 2025
Rating:
