Overview: Investors are finding some comfort in a signal from some senior US official that toned down the double-barrel threat of reciprocal and sectoral tariffs on April 2. The focus is said to be on the former, with some exemptions. Although the administration is two-months old, there have been many conflicting signals and there still is much uncertainty. After last week's gains, the greenback has begun the new week mostly softer against the G10 currencies, with the Japanese yen. Japan reported a sharp drop in the composite PMI, and it may be a rare occasion that the market reacted to it. At the same time US rates are firmer. Near 4.28%, the 10-year US Treasury yield is near its best level in a week. Emerging market currencies are mixed, bookended by the Indian rupee's 0.45% gain and the Turkish lira's 0.5% loss.
Equities are mostly firmer. Japan, Taiwan, and South Korea fell in the Asia Pacific region, but the index of mainland companies that trade in Hong Kong and India's indices are up over 1%. Europe's Stoxx 600 is firmer for the first time in three sessions and US index futures are up a little more than 1%. Most European 10-year benchmarks are 1-2 bp firmer, but the UK 10-year Gilt yield is almost two basis points lower despite the stronger-than-expected flash PMI. Gold is consolidating and is nearly flat on the day near $3023. It had briefly dipped below $3000 before the weekend. May WTI is firm in the upper end of last week's range but trading quietly in a roughly $67.95-$68.55 range and is little changed.
USD: The Dollar Index posted its highest close in two-and-a-half weeks, above 104.00 ahead of the weekend. We have suspected that is has been forging a bottom for the last couple of weeks. Yet, follow-through buying is needed to confirm. It is consolidating today in less than a 20-tick range on either side of 104.00. A push above the 104.30-40 area could target the 104.90-105.00 area. The preliminary March PMI is due today. It has softened for the past two months and February's composite, at 51.6 was the lowest since the end of 2023. We know the business and consumer confidence has eroded. The two Fed surveys out for March, the Empire State and Philadelphia weakened from February. Fed Chair Powell seemed to play down the soft survey data and noted that real sector reports have fared better. While it is customary to expect real sector data to follow the sentiment and survey data, Powell pointed to exceptions. This is part of the uncertainty that surrounds the outlook. More immediately, quarter-end approaches and the April 2 reciprocal, while some reports have played down the likelihood of sectoral tariffs the same day as President Trump had previously threatened.
EURO: The euro briefly dipped below $1.08 ahead of the weekend. Although it was the first time in two weeks, given the limited penetration, it does not appear that much in the way of stop-losses were triggered. Moreover, it quickly snapped back toward $1.0830. It is holding above $1.08 today and approached resistance $1.0860 in early European turnover. An economic recovery appeared to be finding traction before the new fiscal efforts. The composite PMI has not fallen since November, and in January and February, it stood at 50.2, the best since last August. It rose to 50.4 in March, according to the preliminary estimate. Still, the manufacturing sector remains weak and the PMI in March was at 48.7, the slowest contraction since August 2022. Germany's composite has been above 50 through the first quarter. France has moved in the opposite direction. The composite popped above 50 twice last year (April and August). It finished last year at 47.5 and was at 45.1 in February, its lowest level since the end of 2023, before ticking up to 47.0 in March.
CNY: The dollar appears to have carved out floor around CNH7.2200. It settled above the 20-day moving average (~CNH7.2530) ahead of the weekend. The dollar reached about CNH7.2650 today to surpass the (50%) retracement of this month's losses (~CNH7.2615). A move above there could see the CNH7.2700-30 next. On a weekly basis, the PBOC has been alternating between higher and lower dollar fixings for the past five weeks. And over the run, the dollar's reference rate has been flat for all practical purposes. It began the saw-tooth phase at CNY7.1738 and finished last week at CNY7.1760. Today's' fix was at CNY7.1780, the highest since January 20. The PBOC made it biggest drain of liquidity in a more than a month today (CNY346 bln), using open market operation. A US Senator who is an ally of Trump's, who met with senior PRC officials over the weekend, indicated that trade talks with China will proceed but only after the flow of fentanyl precursors stops.
JPY: The dollar rose against the yen last week. It was the first back-to-back weekly gain this year. It peaked in the middle of last week near JPY150.15 but has not settled above JPY150 this month. The five-day moving average crossed above the 20-day moving average last Thursday, for the first time since mid-January. The momentum indicators are constructive. It is hold slightly below JPY150 today, though US rates are firm. Above JPY150, could see JPY150.65 in short order, but we suspect there is potential toward JPY151.65-80 over the slightly longer-term. Japanese markets do not seem to pay much attention to the PMI. Yet, while real sector data, like industrial production, services (tertiary activity index) and household spending have been weak, and the March composite PMI slumped 48.5. It is the first decline in five months and the lowest since February 2022.
GBP: Sterling was sold below $1.29 ahead of the weekend for the first time since March 11. It briefly traded below the pre-weekend low, slightly below $1.2890 before snapping back to almost $1.2960 today. The loss before the weekend was sufficient to snap sterling's two-week rally. It was only the second weekly loss since the end of January. The UK's flash March composite PMI rose to 52.0 from 50.5. It is the highest since the end of Q3 24. February CPI on Wednesday, and retail sales (and January trade figures) at the end of the week, may elicit a stronger response. That said, the with the Office for Budget Responsibility and the Spring Statement, fiscal policy is also in focus.
CAD: The US dollar begins this week with a three-week decline in tow, its longest losing streak against the Canadian dollar since last August. Yet, over the three weeks, it has fallen by less than 0.85%. It does not seem to be going anywhere quickly. The greenback has averaged about CAD1.4375 this month and settled before the weekend around CAD1.4350. It has been confined to a narrow range so far today between around CAD1.4325 and CAD1.4360. As tipped by the local media last week, Prime Minister Carney dissolved parliament and called for a snap election for April 28. Recent polls have put the Liberal Party ahead of the Conservatives. Meanwhile, with the April 2 US tariff announcement on the horizon and the light Canadian economic data this week, it is difficult to see strong Canadian dollar gains. The only economic report of note this week is Friday's estimate of January GDP. A 0.1% expansion seems likely.
AUD: The Australian dollar fell for the past four sessions and fell to slightly below $0.6260 before the weekend, its lowest level since March 5. It is better bid today but holding below last Friday's high, slightly above $0.6300. Australia's preliminary composite PMI rose to 51.3 from 50.6 in February. Despite the March cyclone, the manufacturing and services PMI showed no adverse impact. To be sure, the weakness in the February employment data (loss of nearly 36k full-time positions, the most since the end of 2023) was before the cyclone hit. One implication is that central bank may have to ease sooner and by more than had been expected. The futures market has nearly a 75% chance of the next cut being delivered in May, up from about 62% in the middle of last week. The year end rate projection has been cut from 3.65% around a month ago to 3.40% now.
MXN: The dollar fell around 5.5% since the peak on March 4 near MXN21.00 but the downside momentum has been broken. The greenback rose around 1.5% last week to MXN20.2755 ahead of the weekend, a seven-day high. The momentum indicators have turned up and a move above MXN20.29 targets the MXN20.42 area. This is an important week for Mexico. It begins today with the CPI for the first half of March (expected to see headline and core rates ease slightly) and the IGEA economic activity index, which is like a monthly GDP estimate (look for Q4 weakness to carry into the start of this year). However, the highlight of the week comes on Thursday when the central bank is likely to deliver its second consecutive 50 bp rate cut and the softer inflation and economic activity supports the call. Banxico has little to lose by cutting rates, which may help cushion the blow coming from the slowing of the US economy and the tariff threats.
Reviewed by Marc Chandler
on
March 24, 2025
Rating:
