After falling steadily since from the end of Q3 24 through the first part of January, the dollar stabilized last week, despite the dovish market takeaway from the Federal Reserve. The median projection for growth was shaved while the inflation project was raised. Still, despite the Atlanta Fed's GDP Now tracking a contraction here in Q1, few are that pessimistic. None of the 58 economists in Bloomberg's survey see a contraction, and only one estimate has growth below 2%. While many are talking about "stagflation," it seems exaggerated. The median Fed projection sees growth slowing but only toward trend (1.8%), which is the estimate of the pace of non-inflationary growth. The tariffs are seen as a potential one-off (transitory) impact on prices. Even though inflation proving sticky, the Fed's median dot projection of the PCE deflator of 2.7% this year (up from 2.5% in 2024) and 2.2% is not the kind of price pressures associated with stagflation. The median forecast in Bloomberg's survey is lower than the Fed's seeing the deflator at 2.4% this year and 2.3% next year,
Prices will be very much on investors' minds next week. The US reports the February PCE deflator, which is not so much new news given the ability of economists to forecast it fairly accurately after having the CPI and PPI in hand. The UK and Australia report February CPI. Tokyo reports March CPI which gives strong insight into national developments. Mexico reports inflation for the first half of March, but the highlight of the week will be the central bank's meeting on Thursday, and a 50 bp rate cut looks likely. There is bound to be last minute jockeying ahead of the April 2 US tariff announcement. Canada's Prime Minister Carney is expected to call for snap election on Sunday that could be set for either late April or early May.
US
Drivers: US reciprocal tariffs and sectoral tariffs are threatened for April 2. Tariffs are understood to boost prices and weaken demand. Not only did the Chair Powell seem to play down the latter, but so are businesses and investors. Growth forecasts are being reduced. While surveys show elevated inflation expectations, market-based measures, such as the two- and10-year break-evens (the difference between the conventional yield and the yield of the inflation-protected security) are lower than where they finished last month and the 2-10-year yield curve is well with last month's range. After rallying from late last September through mid-January, the dollar has been trending broadly lower. Momentum indicators are getting stretched and the greenback's downside momentum has stalled.
Data: February personal consumption data, durable goods orders (and shipments) and March survey data (several regional Fed reports, Conference Board, and the preliminary PMI) are due and they will help Q1 GDP forecasts. The Atlanta Fed's GDP tracker is still looking at a contraction, but it has been pared to -1.8%, but the lowest forecast in Bloomberg's survey (with 58 respondents) is for a 1.2% expansion. The CPI and PPI take most of the guesswork away from forecasting the PCE deflator, which the Fed targets. The headline will be little changed at 2.5%, while the core rate ticks up to 2.7% from 2.6%.
Prices: The Dollar Index has been confined to roughly a 103.20-104.15 range since March 7. It frayed the upper end of the range ahead of the weekend and settled above 104.00 for the first time since March 6. A key question is whether this sideways movement is the formation of a bottom or a nesting phase before the next leg down. With momentum indicators stretched, month- and quarter-end approaching, and the April 2 tariff announcements looming, we are more inclined to see it as a near-term bottoming pattern after about a 6.25% drop since January 13, a week before the inauguration. There may be near-term potential toward 104.90-105.00.
EMU
Drivers: The prospects for a cease fire in Russia's war on Ukraine and the political deal in Germany on military and infrastructure support have reduced near-term downside risks in the eurozone. These developments look to have been discounted. After rising by nearly 50 bp in the first two weeks of March, the 10-year German Bund yield slipped 12 bp last week, its largest weekly declines this year. The US two-year premium over Germany ended 2024 near 220 bp and at the end of February was about 180 bp. It bottomed earlier this month near 138 bp and rose for the second consecutive week and approached 150 bp.
Data: The flash March PMI is the data highlight. Recall that the composite rose to 50.2 in January and stayed there in February, its highest level since last August. It was at 49.6 in December and 50.3 in March 2024. The ECB reports the results of its inflation survey. In February, the median forecast was at 2.6% and 2.4% for the one- and three-year outlooks.
Prices: The euro made a marginal new high for the year last week near $1.0955, but the upside momentum stalled. It fell through $1.08 ahead of the weekend for the first time in a couple of weeks. With the momentum indicators turning lower and the firming of the US two-year premium over German, the risks seem to favor the euro's downside into month-end and ahead of the April 2 US tariff announcement. We suspect there is potential toward the $1.0700-25 area, where several technical levels converge.
PRC
Drivers: Beijing wants neither a strong nor weak yuan. It wants a broadly stable one against the US dollar. One set of reasons why the PBOC has been reluctant to cut rates may be related to the exchange rate. Many international investors are under-weight Chinese stocks. The outperformance is giving international fund managers a new challenge. US efforts to curb Chinese technological advances seems to have largely failed. It is not only DeepSeek, but several other technological breakthroughs, including BDY's rapid EV charge, which reportedly is nearly as fast as refueling ICE. Two flashpoints are emerging. The first is whether Beijing formally blocks CK Hutchinson sales of ports to Blackrock, among which include the ports on both sides of the Panama Canal. The second is if Beijing prevents BYD from building a plant in Mexico for fear of losing its proprietary technology to the US.
Data: It is a light week for Chinese data and the main event is the setting of the one-year Medium-Term Lending Facility rate. It is expected to remain unchanged at 2.0%, but the lending amount may increase from CNY300 bln last month.
Prices: The dollar rose for the first time in three weeks against the offshore yuan, which is consistent with its broadly firmer tone. It finished the week above the 20-day moving average (~CNH7.2530) and traded above CNH7.26 ahead of the weekend. The next hurdle is seen near CNH7.2700-25. The month's high is closer to CNH7.3075 and could be challenged if the greenback extends its recovery against the other major currencies, which, from a technical vantage point, looks like a reasonable scenario.
Japan
Drivers: The exchange rate often seems most sensitive to changing US and Japanese interest rates. The US 10-year premium over Japan peaked a few days after dollar did against the yen in early January near 360 bp. It is now near 270 bp after setting a two-and-a-half year low earlier this month a little below 265 bp. However, the correlation has weakened recently.
Data: There are two highlights. The first is the preliminary March PMI that will begin the week. The market tends not to be particularly sensitive to the PMI, though the composite has risen for four consecutive months through February at 52.0, matched its best level since last August. The market is more sensitive to the other highlight, Tokyo's March CPI at the end of the week. While fresh food prices may have peaked, they still may be filtering through to processed foods and the costs of dining out. Still price pressures look little changed in March from February.
Prices: The dollar rose against the yen in five of the past six sessions, but the 10-year US Treasury yield slipped every day last week. The US 10-year premium over Japan also narrowed in each session last week. The dollar pushed above JPY150 in the middle of last week but has not settled above it so far this month. Still, the momentum indicators are constructive and after falling by around 7.75% from January 10 through March 11, consolidative/corrective forces appear to have moved into ascendency. Provided support in the in the JPY147.75-JPY148.00 area holds, the upside may attract into month- and quarter-end and ahead of the April 2 US tariff announcement.
UK
Drivers: Sterling has been beneficiary of the broad dollar pullback. It appreciated 7.35% from the January 13 low near $1.21 to stall recently slightly above $1.30, and five of the past seven weeks. The UK won praise for Prime Minister Starmer projecting UK leadership as the US strains the Atlantic alliance, his domestic policies are causing strain within the Labour government. Last week's move found GBP6 bln of savings by making it more difficult to claim benefits for physical and mental disabilities (Personal Independence Payments). It follows decisions to strip most pensioners of winter fuel payments and cuts overseas aid to boost defense spending.
Data: This is a busy week for UK economic data. The highlights include the February CPI on Wednesday and Chancellor Reeves Spring budget statement on Thursday. In the three months through January, the UK CPI rose at an annualized rate of 1.2%. The base effect warns that the year-over-year rate is likely to recede in February and March from January's 3.0% pace. The UK's CPI rose by 0.6% last February and March. Reeves is under pressure from within the Labour Party to moderate her fiscal austerity. The Office of Budget Responsibility is expected to revise its economic projections lower before Reeve's statement. The UK will also report February retail sales. Some moderation is expected after the 1.7% surge in headline sales in January. The delayed January trade figures are due. The overall trade deficit is expected to have widened. There is some interest in its precious metals trade amid report of substantial gold shipments to the US. According to the Bloomberg survey, the trade deficit excluding precious metals may have narrowed to GBP2.0 bln from GBP2.275 bln in December.
Prices: Sterling has trended higher over the past two months; the two-year Gilt yield has fallen by over 40 bp. The two-year yield rose every day last week, while sterling slipped for the first time in three weeks. Ahead of the weekend, sterling slipped below $1.29 for the first time March 11. The momentum indicators are rolling over. The break of $1.29, which may set the stage for a test on the $1.2840 area, which is where the 20-day moving average and (38.2%) retracement of this month's rally is found. Below there, the $1.2785-$1.2800 band that houses the 200-day moving average and the next retracement (50%)
CANADA
Drivers: The threat and actual US tariffs imposed are a negative shock to Canada's economy. The shock is serving to extend the Bank of Canada's easing cycle. The swaps market has a little less than a 50% chance of another cut next month, but which time, the reciprocal and sectoral tariffs expected to be announced. The market has the next cut fully discounted by the end of July. Meanwhile, Prime Minister Carney heads up a minority government and seeks a popular mandate. It has been expected that he would call for an election before the prorogued parliament returns on Monday. Indeed, reported have emerged that Carney will make the announcement on Sunday, March 23. The likely election date appears to be late April, but early May is also possible.
Data: Canada reports January's GDP in the only notable release in the last full week of March. The economy is expected to slow markedly this quarter from the 2.6% annualized pace seen in Q4 24. The median forecast in Bloomberg's survey is for 1.6%, which would be the slowest since the end of 2023. All the key components are seen slowing (consumption, investment, government spending, and net exports).
Prices: Although last week's loss was minor (~0.10%), it was the third consecutive weekly decline of the greenback. That is its longest losing streak since last August. Nevertheless, as it continues to trace out a broad consolidation. Last week's low was near CAD1.4270, which is not even a new low for the month (That was set March 6 near CAD1.4240). The exchange rate appears to be tracing out a consolidative triangle pattern. Depending on precisely how it is drawn, the lower end may be found around CAD1.4285 at the end of the month. The upper end of the pattern is trickier. If drawn off the highs from this month, it comes in around CAD1.4475 at the end of March. A caveat is that the pattern is often subject to false breaks.
Australia
Drivers: Australia's Prime Minister Albanese has ruled out reciprocal tariffs on the US for the steel and aluminum levies. He argues that they ultimately inflict self-harm. Australia exported about 10% of its steel and aluminum to the US last year. or about $1.1 bln of its total exports of about $600 bln. The Reserve Bank of Australia has begun a slow easing cycle. There is little chance of a cut at the next meeting on April 1, even after the poor employment report. Still, the futures market has slightly more than a 70% chance of a cut in May. Overall, the market two cuts discounted for the remainder of the year and about 2/3-chance of a third.
Data: Australia sees its preliminary March PMI and the February monthly CPI print. After spending a couple of months in Q3 24 below the 50 boom/bust level, Australia's composite PMI remained above 50 in Q4 24. It reached 51.1 in January, its highest level since last August, before pulling back to 50.6 in February. Australia's monthly CPI peaked last year in May at 4.0%. It bottomed at 2.1% last September and October. It rose to 2.5% at the end of the year and remained there in January. It may have done so again in February. The trimmed mean measure peaked at 4.4% last May and fell to a three-year low of 2.7% at the end of 2024. It edged up to 2.8% in January. It was at 3.9% in February 2024. The central bank puts more emphasis on the quarterly CPI print, and the Q1 print is due at the end of next month.
Prices: The Australian dollar stalled at the start of last week near $0.6400, slightly shy of last month's high for Q1 near $0.6410 and the (38.2%) retracement of the Q4 slide that carried into the first part of January. The Aussie takes a four-day losing streak into next week. It settled at new lows for the week ahead of the weekend, a little below $0.6260, its lowest level since March 5. The trendline drawn off January and March lows comes in near $0.6245 at the start of the week and is closer to $0.6265 at the end of the month. A convincing break could signal a return to the $0.6170-$0.6200 area.
Mexico
Drivers: Canada and Mexico have adopted different tactics to deal with the disruptions emanating from the US. The Trump administration has shown more respect for Mexico than Canada, but it does not have territorial ambitions for its southern neighbor. Mexico's Sheinbaum has pushed back against some of Trump's claims, ridiculed the "Gulf of America" nomenclature, and seeks legal action against US gun manufacturers. She cites US customs data regarding fentanyl confiscations and non-documented migrants. The peso has been unexpectedly resilient in the face of US actions and the slowing of its domestic economy.
Data: Mexico reports CPI for the first half of March, January IGAE survey, which is similar to a monthly GDP report, January retail sales and February trade figures. The highlight is Thursday's central bank meeting. Banxico cut its overnight lending rate five times in 2024, beginning in March. With inflation back into its target rate, it delivered a 50 bp cut last month to bring it to 9.50%. The resilience of the peso may embolden the central bank to deliver another half-point cut now. We suspect it may signal scope for further cuts but likely at a slower pace. The swaps market has about 175 bp of cuts discounted over the next 12 months.
Prices: The dollar rose by about 1.25% against the peso last week, its best showing since the end of January. The high for the week was set ahead of the weekend near MXN20.2755. At the end of the previous week, the greenback was at its lowest level since the US election last November (~MXN19.8475). The US dollar gains stalled near the 20-day moving average and the (38.2%) retracement this month's decline, near MXN20.2870. A move above there may spur gains toward MXN20.42-MXN20.50.
Reviewed by Marc Chandler
on
March 22, 2025
Rating:
