(traveling; no commentary tomorrow)
Overview: The dramatic price action in throughout the capital markets after last week's US tariff announcements, China's retaliation, and yesterday's US threat of another 50% tariff on China has calmed today, in a nervous way. Indeed, the calm could be shattered by one comment or social media post by the US President. Japan pushed back against some of "facts" the US cited, like the tariff Japan puts on US autos, and unlike the several countries that either eliminated tariffs on US goods or offered to do so, Japan reportedly has moved to the front of the line in trade talks. This encourages the view that the US tariffs are indeed a negotiating tactic, and the administration is willing to see its other goals pared (revenue and onshoring) to secure a "beautiful deal." This has eased market anxiety, but the impulsive nature of the administration means that market participants may still lack much conviction.
The US dollar is consolidating but with a soft bias against the G10 currencies, with the beaten up Australian and New Zealand dollars leading the way. Emerging market currencies are mixed. Of note, the PBOC set the dollar's fix above CNY7.20 for the first time since September 2023 amid speculation that Beijing will seek a weaker yuan to blunt the impact of the tariffs. The large Asia Pacific equities rallied. The Topix jumped 6.25% and the index of mainland shares that trade in HK and Australia's composite rose more than 2%. Europe's Stoxx 600 is snapping a four-day, roughly 13% drop, with a modest gain of nearly 1.5%. US index futures are 1.2%-2.0% better. The recovery in US Treasury yields and local equities saw Japan, Australia, and New Zealand's 10-year yields jump 14-17 bp earlier today. European bonds are mixed with peripheral premiums have edged in a little. The 10-year US Treasury yield is little softer near 4.17%. Gold is firm. After reaching almost $2957 yesterday, it has recovered to almost $3016 today and is near $3004 late in the European morning. May WTI traded a little below $59 yesterday but recovered today to around $61.75 but could not sustain the momentum and is trading around a dollar off its highs. US-Iranian negotiations are to start shortly, and the US has bolstered its military presence in the region.
USD: In a choppy and volatile session, the Dollar Index re-entered last Wednesday's range, rising to around 103.50 yesterday and settled near its highs. It also met the (61.8%) retracement of the leg down from the March 26 high (~104.70). It is trading with a softer bias but inside yesterday's range. News that bilateral talks between the US and Japan on trade, with Treasury Secretary Bessent and Trade Representative Greer may be the strongest indication to date that the tariffs are a negotiating tactic, and the love of the deal may ultimately important than other professed goals of boosting revenue and onshoring production. Also, reports of export tax credit, if it materializes, may also be a substitute for tariffs. While the performance of the equity market and tariff developments overwhelm high-frequency data, The main data point this week is Thursday's CPI. Today's highlights feature a small business confidence survey, and tomorrow, see MBS mortgage applications, wholesale inventors and minutes from last month's FOMC meeting. None have much market-moving heft and Fed Chair Powell's comments at the end of last week means bar to a cut at the next month's FOMC meeting is still high. Still, the sell-off of equities yesterday showed many participants still seem believe or hope that the Fed will capitulate in the face of the tightening of financial conditions from the sharp equity drop to ease policy at next month's meeting. The futures market was pricing in about a 40% chance of a May cut and slightly more than a 25% chance of a 50 bp cut in June. Today's tentative stability has seen the odds of a May cut slip back to 33% and the odds of a 50 bp cut in June ease to less than 20%.
EURO: The euro frayed its (61.8%) retracement objective of its rally since the March 27 yesterday as it fell to almost $1.0880. The retracement objective was found near $1.0890. The 20-day moving average is closer to $1.0865. It is consolidating today above $1.09 and held below $1.0990. With yesterday's reported 1% drop in Germany's February industrial production and the a nearly 18% sell-off in Europe's Stoxx 600 in a little more than a month, coupled with the negative shock from US tariffs, the swaps market is confident that the ECB will cut rates again next week (~85%). The US two-year premium over Germany had been trending lower. It was above 220 bp at the end of last year and fell 7-8 bp in January, and 12-13 bp in both February and March when it settled at 184 bp. It jumped nine basis points on Friday and another 18 bp yesterday to push above 200 bp, the most since the end of February. In calmer markets today, it has eased 7-8 bp and is hovering a little above 190 bp.
CNY: As the greenback traded higher against most G10 currencies in North America, it also climbed against the Chinese yuan. The dollar settled near session highs slightly shy of CNH7.35. The PBOC set the dollar's reference rate at CNY7.2038 (CNY7.1980 yesterday). The highest fix in more than six months encouraged the selling of the offshore yuan, the dollar reached CNH7.3650. The PBOC has been accepting a bit more volatility in the exchange rate and has been moving the fix by more than it was until around mid-March. It remains a highly managed currency. The US threatened to boost tariffs on China by another 50% if it follows through with its threat to retaliate. Yet, it seems once Chinese goods are well priced out of US markets, the additional tariff increase is meaningless. China is wrestling with deflation or at least disinflationary forces in its measure of consumer prices. Ironically, the US tariffs and Beijing's retaliatory tariffs may help address it. Separately, China will see to find advantage in the US trade-war. Mostly uncommented upon, at the end of last week, the PBOC announced that the digital yuan cross-border settlement system will be fully connected with the 10 ASEAN countries and six Middle East Countries, which account for more than a third of the world's trade and could take activity away from SWIFT. China's digital payment system can clear trades in seconds as opposed to a few days. Even though many see this as a challenge to the dollar's role in the world economy, we are less persuaded, and locate the key to the dollar is not its use a transactional vehicle or "means of exchange" but its store of value, i.e., the liquidity and depth of the US Treasury market.
JPY: Helped by the recovery in the US 10-year yield (from ~3.87% to 4.22%), the greenback climbed from near JPY144.80 to JPY148.15 and settled near its highs. The greenback recovered a little more than half of what it lost since the March 28 high around JPY151.20 and last Friday's low near JPY144.55. Stabilization of equities have taken pressure off US Treasury yields, and the softer yields initially helped the greenback consolidate in a mostly JPY147-JPY148 range today. Yet, if the recovery in the 10-year yield continues, the dollar may push toward JPY148.50. Japan's trade and current account balance have strong seasonal patterns and always (for 30 years without fail) improve in February sequentially from January, which also deteriorates from December. The powerful pattern remained intact. The goods and services trade swung back into surplus (~JPY713 bln) from a JPY2.94 trillion deficit in January. It is the largest trade surplus under the balance-of-payments accounting since March 2021, and likely was flattered by efforts to beat the US tariffs. The broader current account surplus stood at JPY4.06 trillion after a deficit in January of a little less than JPY260 bln. In February 2024, Japan recorded a JPY310 bln trade deficit and a JPY2.8 trillion current account surplus.
GBP: Sterling was socked for almost 1.3% yesterday after being cut by around 1.65% before the weekend. It fell to about $1.2710, its lowest level in a month. It is consolidating in the lower part of yesterday's range. It held the $1.2720 area but was unable to resurface above $1.2800. The 200-day moving average is closer to $1.2815. It settled above its upper Bollinger Band last Thursday and closed below it yesterday (~$1.2805). The lower Bollinger Band is near $1.2765 today and sterling is below it in late morning turnover in Europe. The UK economic diary is light until the February monthly GDP is reported at the end of the week. The swaps market is confident that the BOE will resume its rate cutting cycle next month with a quarter point cut. It has nearly three cuts fully discounted before the end of the year. As recently as late March, the swaps market was pricing in one cut completely and almost a 60% chance of a second move.
CAD: The greenback extended its gains to almost CAD1.4300 yesterday and stopped shy of the 20-day moving average (~CAD1.4310). It settled slightly below the pre-weekend high (~ CAD1.4260). Last Thursday's range (~. -CAD1.4320) still dominates. The US dollar is in a CAD1.4150-CAD1.4250 range today and is hovering around the middle of the range late in the European morning. The US trade war threatens to push the Canadian economy into a recession, according to many economists. Yesterday's Bank of Canada business survey and last week's disappointing jobs report bolstered market speculation of a rate cut next week. The market may be more likely to respond to a soft IVEY survey today than a strong report, which would likely be dismissed as out of date, given the US tariff announcement. The swaps market has little less than a 60% chance of a cut at next week's meeting discounted, almost double the odds of the end of March.
AUD: It is hard to be confidence that order has returned to the Antipodean currencies after has returned after the mini-flash crashes at the end of last week, which saw the Australian and New Zealand dollars drop over 5%. Yesterday, the Aussie fell by about 0.85% and the Kiwi dropped a little more than 1%. Both are trading firmer and are leading the G10 currencies today with gains of 0.8%-0.9%. Prior to the pre-weekend collapse, the Aussie's low for the year was seen in early February slightly below $0.6090. The January low was near $0.6130, and it stopped slightly short of that yesterday. It has recovered to about $0.6075 today. Unable to do so last week, the New Zealand dollar's set a new low for the year yesterday, slightly below $0.5510. The "Covid low" was around $0.5470. It recovered to about $0.5625 today. After cutting its cash target rate by 125 bp in Q4 24 and by 50 bp in February, the Reserve Bank of New Zealand may opt for a quarter-point cut in tomorrow but is discounted a small chance (less than 15%) of another 50 bp move. On a quarter point move the new target would be 3.50%. The swaps market sees the year-end rate near 2.75%.
MXN: The US dollar reached almost MXN20.81 yesterday, its best level in a month. The greenback settled slightly above the down trendline connecting the spikes in February and March. It comes in around MXN20.67 today. It settled above its upper Bollinger Band (~MXN20.5950). As it is more broadly, the dollar is consolidating today. So far, the range has been about MXN20.5450-MXN20.72. Last month's high was near MXN21.00 and that has been our near-term target. After Mexico's March vehicle production and export figures yesterday, attention turns to tomorrow's March CPI. Mexico exported a little more than 80% of its vehicle output last month, most of to the US. To be sure, this is not so much Mexican companies as foreign auto makers following the incentives of NAFTA, and now USMCA. The risk is that the improvement in Mexico's headline and core CPI stall, and this may have become more evident in the second half of last month. Still, with the inflation still within the target range, and the slump in industrial output seen in January (-0.4%, the fourth consecutive monthly decline and the fifth contraction in six months) and little improvement expected in February (due at the end of the week), the central bank still has the latitude to deliver another 50 bp cut when it meets in the middle of next month.
Reviewed by Marc Chandler
on
April 08, 2025
Rating:
