Gold and the Mexican Peso Trade at New Highs, Sterling is Resilient in the Face of the Unexpected Contraction in January

Overview: The US dollar is mixed but the risk-appetites are finishing the week on an update. In the foreign exchange market, this is reflected in the dollar-bloc currencies leading the G10 higher, with the yen and Swiss franc the laggards. Japan's spring wage negotiation round is producing solid preliminary results, but a new funding scandal may weaken the minority government led by Prime Minister Ishida. Most emerging market currencies are also trading with a firmer bias, including the Mexican peso, which is at its best level since the US election. 

With a few notable exceptions, like South Korea, India, and Singapore, the large Asia Pacific equity markets rallied, with China's CSI 300, Hang Seng, and mainland shares that trade in HK advanced by more than 2% today. Europe's Stoxx 600 is up about 0.4%, trimming this week's loss. US index futures are trading higher. European benchmark 10-year yields are mostly 1-2 bp firmer on the day and 2-4 bp higher on the week. The 10-year US Treasury yield is about three basis points higher to push against 4.30%. It is up slightly more than eight basis points this week. Gold is at record levels near $3000. May WTI is firm but trading quietly in yesterday's range (~$66.10-$67.65). It settled near $65.70 last week. 

USD: The Dollar Index appears to be forging a base, maybe a rounded bottom, but continues to struggle to re-establish a foothold above 104.00. This reflects its continued vulnerability. Even then, it takes a move above the 104.25 area to be anything notable. It appears that the risk of a government shutdown has lessened but at least seven Democratic senate votes are needed. Meanwhile, with the CPI and PPI behind us, economists have a good idea of the PCE deflator. Attention turns to next week's FOMC meeting (standpat and updated forecasts) and real sector data (e.g., retail sales, industrial output, and housing starts), which will likely ease fears of a contraction this quarter. Today sees the preliminary University of Michigan March consumer survey. The policy uncertainty, flip-flops, and the drop in equities will likely weigh on confidence. In February, the one-year inflation forecast jumped to 4.3% from 3.3%. This was not replicated in the NY Fed's survey, but market-based measures and other surveys point to elevated concerns.

EURO:  The euro's upside momentum stalled on Tuesday just ahead of $1.0950 and fell to a three-day low yesterday slightly below $1.0825. A break of $1.08 could spur the next leg down toward $1.0725, which houses the 200-day moving average and the (38.2%) retracement of this month's gains. With several central bank meetings and a light economic schedule next week, the euro may be at the mercy of developments elsewhere. The US two-year premium over German has fallen from the year's high seen near 225 bp last month to almost 165 bp earlier this week, the least since last October. Still, it could snap a five-week decline if it settles above 176 bp today. It looks poised to recover, which could be one of the triggers for a further pullback in the euro. Negotiations in Germany over the new government and debt brake and defense spending continues. A deal on the latter is needed before the new Bundestag sits on March 26. 

CNY:  Amid the drama in the capital markets, the PBOC has succeeded in delivering a steady yuan. The dollar slipped marginally this week, and for the year, is off about 0.9% against the onshore yuan. Against the offshore yuan, the dollar fell to marginal new low for the year in the middle of the week near CNH7.2155. Nearby resistance is seen near CNH7.26. The PBOC set the dollar's reference at the upper end of the recent range at CNY7.1738 (CNY7.1705 last Friday). China reported February lending figures, and they were less than expected. Still, at CNY9.29 trillion, the aggregate lending year-to-date, is running ahead of last year's CNY7.97 trillion. Before the markets open on Monday, China reports January-February real sector data, including industrial production, retail sales, property investment, and house prices. The likely take away is the world's second-largest economy appears to be off to a slower start than last year. There are three entities that can bear the burden of 20% increase in US tariffs on Chinese goods. The US importer can accept narrower margins, or it can raise prices, forcing the consumer to pay (and possibly weakening demand). Walmart, which sources an estimated 60% of its products in China, tried to get the third entity to eat the tariff: It pressed the Chinese producer to lower their prices. Beijing, which is fighting deflation, pushed back against Walmart's efforts.

JPY:  Falling US stocks helped drag down US interest rates, which in turn, appeared to help give the yen a bid North America yesterday. It was the only G10 currency not to have fallen yesterday. The low set earlier this week was near JPY146.55. That was the lowest since last October. The dollar has come back bid today and is probing JPY149. The week's high was about JPY149.20 on Wednesday. The yen's weakness comes despite a strong preliminary result to this year's spring wage (5.46%, including a 3.84% rise in base pay). Two other considerations are helping support the dollar. First, US rates are firmer, and the dollar is also firm against the Swiss franc, the other low yielder. Also, a new scandal is unfolding in Japan after Prime Minister Ishida confirmed handing out gift vouchers to more than a dozen lawmakers. Next week, Japan reports February trade figures and the final look at January industrial production (initial estimate -1.1% month-over-month), the highlight is the Bank of Japan meeting. No one is expecting a changing in the 0.50% policy rate. Governor Ueda can be expected to repeat that provided the economy evolves as expected, the central bank will be able to raise rates. Some recent data have disappointed, and there is a heightened sense of uncertainty, given the impulses from the US. The swaps market has about a 50% chance of a hike in June, down a little from a week ago.

GBP: Sterling recorded an inside day yesterday and spent the second consecutive session entirely above $1.29. It recorded the high since last November on Wednesday slightly shy of $1.2990. The low for the week was set Monday near $1.2860. It is trading quietly above $1.29 today despite the disappointing news that the UK economy contracted by 0.1% in January, after growing by 0.4% in December. Industrial output fell by 0.9% and construction contracted by 0.2% while services slowed (0.1% from 0.4%). The January storm likely exaggerated the economic weakness. New government forecasts are expected on March 26. The BOE forecast 0.7% growth this year after 0.9% in 2024. Sterling settled near $1.2920 last week and slightly above $1.2575 at the end of February. 

CAD: The US dollar has chopped within last week's range (~CAD1.4240-CAD1.4545) this week. The trade tension is thick and there does not appear to be an off-ramp any time soon. The Canadian dollar looks vulnerable. The greenback reached CAD1.4520 earlier this week. Last week, it reached almost CAD1.4550, which met the (61.8%) retracement objective of the pullback from the high set early February (~CAD1.4795) when the tariffs initially seemed imminent. Canada's challenge of US steel and aluminum tariffs at the WTO is little more than a gesture. The US has blocked the appellate process for years. This week's Bank of Canada quarter-point rate cut was well anticipated and did not spur much of a market reaction. It did not give much forward guidance, but the swaps downgraded the chance of a cut next month from about 55% to almost 40%. Next week, highlight is the February CPI. Annualized pace over the past six months is -1.0% and the annualized pace of the past three month is -1.2%. It seems to overstate the case but suggests that the price pressures stemming from the trade war with the US has a low base.

AUD: The dollar-bloc currencies and Scandis underperformed yesterday during the risk-off session that saw US stocks tumble, and gold reach a new record and US yields unwound Wednesday's increase. The Aussie initially set new highs for the week near $0.6335 before reversing lower. It was pushed below Wednesday's low (slightly below $0.628 0) but is trading quietly inside yesterday's range so far today. A break of $0.6260 could spur a rest on last week's low, a little below $0.6190. 

MXN: The US slapped steel and aluminum tariffs on the world, including Canada and Mexico, for which the current free-trade agreement was negotiated in President Trump's first term. Mexico reported a 0.4% drop in January industrial output, frustrating economists, who, in Bloomberg's survey, anticipated a 0.1% gain. It was the fourth consecutive monthly decline. And the peso? It rose to new highs for the year and was the strongest emerging market currency yesterday after the exceptional Russian ruble. On the week, only the ruble among emerging market currencies outperformed it. The dollar extended its losses to almost MXN20.0165 today, its lowest level since last December. The greenback has not traded below MXN20.00 since November 7-8, which corresponded the FOMC's rate. A break could target the MXN19.70-MXN19.75 area. 

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