Overview: The trade war continues to roil the capital markets. The US corrected itself and said that rather than 125%, tariffs on China have been raised by 145%. And China retaliated by hiking the tariff on US goods to 125%. Of course, the sensitivity of demand to price increases (elasticity) varies from product-to-product but now it would appear that most goods are uncompetitive, and further increases are practically meaningly. The equity markets were roiled first. Asia Pacific equity markets were mixed today HK, mainland China, Taiwan and India rose today. The index of mainland stocks that in HK are off 7.3% this week, while the Hang Seng, Taiwan's composite, and Singapore are off over 8% this week. Japan's Topix is off less than 1%. Europe's Stoxx 600 is of 1.2% today and nearly 3% for the week, after last week's 8.4% hit. US index futures are, ironically, little changed now. The S&P 500 is up about 3.5% on the week coming into today and the Nasdaq is up a little more than 5%.
Bond markets are broadly mixed today. The US 10-year yield is off two basis points to about 4.40%, up 22 bp on the week. The stronger-than-expected UK GDP may be weighing on Gilts, where the 10-year yield is up four basis points today and seven on the week. Eurozone benchmark 10-year yields are narrowly mixed. The 10-year JGB yield fell five basis points, paring this week's gains to nearly 20 bp. The stress is hitting the dollar in a dramatic way. Although the greenback is paring its loss ahead of the North American open, about half of the G10 currencies have gained more than 1% against the greenback today. The Swiss franc has led this week's moves with a 5% gain, while the New Zealand dollar is in second place with a 3.7% gain to edge ahead of the euro's 3.7% appreciation. Gold has raced to a record high near $3230, a roughly 6.3% gain this week. May WTI is quiet, straddling $60 a barrel. It is off around 2.75% this week after dropping 10.6% last week.
USD: First, the US equity market cracked. Then, it was the bond market. Now it is the dollar. It began in earnest yesterday, with a nearly 2% drop in the Dollar Index and a new low for the year (100.70) Follow-through selling today has knocked it back another 1.6% today and to around 99.20, its lowest level in three years. It has approached the (61.8%) of the post-Covid rally that ben in early 2021 near 89.20. It has recovered to only three standard-deviations below its 20-day moving average. That mark is found by 99.40. It is off nearly 3.8% this week. The US sees March PPI today. The headline and core rates are expected to tick-up to 3.3% (from 3.2%) for the headline and to 3.6% (from 3.4%) for the core. The tariffs do not help, but the recession fears and OPEC+ quicker restoration of production cuts (ostensibly to punish the cheaters) has seen the price of oil collapse. May WTI dropped almost 24% from the April 2 high (a little above $72) to the low Wednesday (~$55). If sustained, it may help blunt some inflation expectations. So far, though it has not made much of an impression on the average retail price of US gasoline, which is a little firmer since the end of last month. Meanwhile, the preliminary April University of Michigan's consumer survey is also on tap. Confidence is expected to have continued to weaken but the inflation expectations may have risen further. Market based measures, like the breakevens are better behaved. The two-year breakeven is elevated around 3.10%. It has down around 10 bp since the end of February. The 10-year breakeven is around 2.16%, down around two-dozen basis points since the end of February.
EURO: The euro rallied strongly in North America to take out not only this year's high set last week near $1.1145, but the 2024 high near $1.1215, as well. It reached $1.1240 yesterday and surged to nearly $1.1475 today, a three-year high before pulling back to around $1.1360. In the bigger picture, if PPP is the level currencies are thought to gravitate around in the long-term. The OECD PPP estimate puts "fair value" for the euro at $1.46. What other level do they gravitate around in the long run? A long run moving average by definition. The 10-year moving average (120 months) is near $1.1170 and the euro moved above it yesterday for the first time since 2021. The 20-year moving average (240 months) is near $1.2260.
CNY: After selling off more than 1% on Wednesday, the greenback slipped another 0.45% against the offshore yuan yesterday. It reached a three-day low slightly below CNH7.30 before stabilizing, meeting the (61.8%) retracement of the from April 4 low (~CNH7.2395) to this week’s high on Tuesday April 8 (~CNH7.4290). It slipped a further today to almost CNH7.29 before rebounding to CNH7.2265. Still, the offshore yuan is lower for the fourth consecutive week, but the 0.35% loss is a far cry from large devaluation that some had anticipated as Beijing sought to preserve is export competitiveness in the wake of the Us tariffs, which the White House clarified yesterday is now at 145%. China retaliated earlier today, and as of tomorrow, the tariff on US goods will be 125%. Against the onshore yuan, the greenback fell by about 0.4%, unwinding the past two days of gains in full and snapping a four-day advance. It is practically flat today. The PBOC seemed to follow the market a little and set the dollar's fix lower for the first time in seven sessions (CNY7.2087 vs. CNH7.2092 yesterday).
JPY: The dollar stalled this week around JPY148.00. It traded down to almost JPY144.00 to test Wednesday's low. Yesterday was the third consecutive session that the dollar moved more than 1% on a settlement basis. The close itself was below JPY145 for the first time in six months. It has taken another leg down today to almost JPY142.00, the lowest level since early last October. The next area of chart support is in the JPY139.50-JPY140 area. Implied three-month volatility is above 14.4% the highest close since the early days of the pandemic.
GBP: Sterling rose for the third consecutive session yesterday to post a new high for the week, 4/100 of a cent below $1.30. It met the (50%) retracement of last week's decline (from ~$1.3205) to this week's low ($1.2710). Today, it has risen to nearly $1.3135 to take out the (61.8%) is near $1.3015. In late European morning turnover, sterling has eased to around $1.3080. Recall last week's high was near $1.32. It is hard to say that the stronger than expected UK February GDP helped, as sterling's gains lag the euro (and Swiss franc and yen). The UK reported a 0.5% increase in February GDP. The median forecast in Bloomberg's survey anticipated a 0.1% gain to offset the January contraction. Industrial output jumped 1.5% (and 2.2% manufacturing). The services sector grew by 0.3%, and construction recovered (0.4% vs. -0.2%). The trade deficit widened (~GBP1.96 bln vs. a GBP301 mln surplus) as the gold exports slowed. Excluding precious metals, the UK reported a GBP783 mln deficit after a GBP537 mln surplus in January.
CAD: The US dollar was sold to a marginal new low for the year yesterday near CAD1.3950. It fell through the 200-day moving average (~CAD1.40) for the first time since last October and nearly met the (61.8%) retracement of the rally from last September's low (~CAD1.3420). It has fallen nearly CAD1.3880 today, its lowest level since last November. The three standard deviation mark from the 20-day moving average is near CAD1.3865. The next chart support is seen in the CAD1.3800-CAD1.3825 area.
AUD: After posting a bullish key reversal on Wednesday, follow-through buying yesterday lifted the Australian dollar to almost $0.6250 yesterday, a new high for the week. and tested the 20-day moving average. It pulled back in late turnover but still settled above $0.6200 for the first time in five sessions. The Australian dollar is laggard in the G10 today amid currency unable to find traction against the greenback today, unable to make much headway above yesterday's high. Still, on the week, it is up more than 3%. The New Zealand dollar's recovery was also impressive. It is up nearly 4% this week. It too surpassed the (61.8%) retracement of the last leg down and settled above its 20--day moving average (~$0.5715). It pushed against resistance near $0.5765 yesterday and overcame it today to rise to around $0.5815.
MXN: After posting a bearish outside down day against the peso on Wednesday, there was no follow-through dollar selling yesterday. Instead, the risk off mood saw the greenback recover from around MXN20.17 on Wednesday to MXN20.5750 yesterday. It reached the next technical target today above MXN20.62, but it has pulled back to below MXN20.47 in the European morning. Mexico's economy remains weak. Recall that it contracted by 0.6% in Q4 24. It has not improved much early this year. February industrial production figures are due today. The headline may rise by 0.1% after a 0.4% decline in January. but the year-over-year rate may have fallen further (-3.8% vs. -2.9%) and manufacturing output may have contracted by 2.4% year-over-year from -0.8% in January.
Reviewed by Marc Chandler
on
April 11, 2025
Rating:
