Overview: A couple of hours before the US announced a postponement in the reciprocal tariffs on everyone but China, President Trump sent social media message encouraging people to buy stocks. And the postponement sent US equities soaring, but it does not set right with many observers. In fact, the US hiked the tariff on China further, and the net result is that the average effective tariff in the US is now 24% rather than 27% as it would have been with the reciprocal tariffs. It is still a threat to growth and price stability. The dollar is sharply lower today. The euro, Swiss franc and Japanese yen are up over 1%. The euro is probing the $1.1050 area, around a cent above yesterday's settlement. Sterling is trading above yesterday's high near $1.2865. The PBOC set the dollar's reference rate higher for the sixth consecutive session, but the onshore yuan is a little firmer today.
While Asia Pacific and European stocks rallied strongly today, US index futures are lower. The S&P 500 and Nasdaq futures are around 2% lower, to pare yesterday's heady gains. European bond benchmark 10-year yields are broadly mixed. The yield on the 10-year Gilt is off 12 bp (to 4.65%), while the 10-year Bund yield is up 4 bp (to 2.63%). The peripheral premiums are narrower. The 10-year US Treasury yield is almost six basis points lower ~4.27%). Gold is extending yesterday's nearly $100 an ounce rally. It is up another $30 today, trading near $3113 late in the European morning. May WTI took out yesterday's highs to reach about $63.35 but is now back below $61.
USD: President Trump's 90-day postponement of the reciprocal tariffs on countries but China saw stocks rally and the bonds pare losses. The 10-year yield dropped from 4.51% to new session lows slightly below 4.30%. The Dollar Index reached a three-day high on Monday near 103.55 and was sold through 102.00 yesterday as the trade war (with China escalated). It recovered to near session highs on Trump's announcement and reached almost 103.35. It has been unable to sustain the upticks today as the US equity rally meets sellers and US yields soften. In this period, when some Americans blame foreigners for nearly everything wrong, many are looking at China as the driver of higher rates. Data reported comes with a lag and even then, given the different financial centers and ability to obfuscate, it is not always clear. Still, a competing hypothesis is that the jump in long-term yields reflects the unwinding of basis trades. In most other circumstances, today's US CPI would be the focus. However, given the trade war, the data is less important for the trajectory of policy. The median forecast in Bloomberg's survey is for the headline pace to slow to 2.5% from 2.8% and for the core to slip to 3.0% from 3.1%. US headline CPI rose at an annualized rate of 4% in Q1 24 and a 0.1% rise in March would put the Q1 25 annualized pace at around 3.2%. Still, the tariffs are widely expected to boost prices and some of the 20-percentage point increase in tariffs on China and the steel and aluminum tariffs may be picked up in today’s CPI and tomorrow's PPI. Just as the risk on employment is biased lower, the risk on prices is biased higher. Still, the odds of a May cut by the Fed fell sharply after the tariff postponement. The intraday move saw the odds fall from slightly above 50% compared to about 20%.
EURO: The euro reached a three-day high yesterday near $1.1095. Last week's high was near $1.1145. The US backing from the reciprocal tariffs saw the euro fall to session lows near $1.0915 yesterday. Support was established earlier this week near $1.0880. The euro is bid near $1.1070 in the European morning, and the intraday momentum indicators are getting stretched. The US two-year premium over Germany soared more than 30 bp yesterday to a little more than 230 bp before closing below 220 bp. It settled below 174 bp a week ago. It is now near 200 bp.
CNY: Between last Friday's low (~CNH7.24) to Tuesday's high (~CNH7.43), the dollar rallied about 2.6%. Since March 20, we have been tracking what appeared to greater flexibility in the PBOC's setting of the dollar's reference rate. We suspected something was up even before the US reciprocal tariffs were announced. Many argue that China is engineering a large devaluation of the yuan to offset or at least blunt US tariffs. Those that tie the PBOC moves to the US tariffs see that as the trigger. But our observation of the fix suggests that a large devaluation may not be in the works. After all, with US tariffs now above 100%, how much devaluation is needed? The 5%-10% some speak of will do little in this respect. Given the volatility in the capital markets, it seems prudent for Beijing to accept a bit more flexibility in the exchange rate. If Beijing has been pursuing a strategy of a broadly stable yuan against the dollar, to change now would seem to be a victory for the US of sorts. Chinese officials appear to be moving to provide more monetary and fiscal support for the economy. The PBOC set the dollar's fix higher today for the sixth consecutive session (CNY7.2092 vs. CNY7.2066 yesterday). Still, the dollar is a little lower against the onshore yuan, threatening to snap a four-day advance. Yesterday, the dollar held slightly below Tuesday's high against the offshore yuan (~CNH7.4290), reaching a high since 2007. It settled near CNH7.3460 and is trading in a range of about CNH7.3425-CNH7-3715 today. China reported a slightly softer than expected CPI today, falling 0.1% year-over-year in March after a 0.7% decline in February. It fell 0.4% month-over-month. However, the core measure, excluding food and energy rose by 0.5% after slipping 0.1% in February. Producer price deflation stands at -2.5% from -2.2%. Chinese producer prices have fallen on a year-over-year basis for 30 months. On a month-over-month basis, they fell by 0.4%.
JPY: We have often argued that the yen's exchange rate is particularly sensitive to changes in the 10-year yield, but of course, it is not perfect or one-for-one necessarily. The US 10-year yield has soared from about 3.85% last Friday to above 4.50% yesterday. However, as the 10-year yield fell back toward 4.35%, the dollar rallied against the yen to reach a little above JPY148.25, a four-day high. Although country breakdown of portfolio flows are reported with a lag, many US narratives find it easy to blame foreigners for everything that goes wrong in America, including the division of the social product between capital and labor (i.e., the disparity of wealth and income). The unwinding of basis trades (cash-futures arbitrage-like strategies) seems a more likely culprit. In February, Japanese investors bought JPY1.4 trillion of US bonds. That said, the weekly MOF portfolio flow report shows Japanese investors have sold foreign bonds in the five weeks of data since the end of February. Still, in the week through April 4, today's data showed Japanese investors sold JPY2.57 trillion of foreign bonds, the most since June 2024. Yet, in the week through April 4, the 10-year US yield fell nearly 25 bp.
GBP: The UK will report February GDP tomorrow. It is expected to rise by 0.1% after a decline of a similar magnitude in January. The trade-war threatens UK growth and will impact BOE policy. Sterling rose for the second consecutive session yesterday and gained almost 0.75% over the two sessions and is up another 0.5% today. It has nearly fully retraced the 1.25% it shed on Monday. It peaked above $1.32 last Thursday and made a low on Monday a little above $1.2700. The (38.2%) retracement of the pullback is near $1.2900. Today's high has been slightly above $1.2880. The 20-day moving average is near $1.2925 and the (50%) retracement is closer to $1.2960.
CAD: For the fifth session, the US dollar is consolidating within last Thursday's trading range (~CAD1.4030-CAD1.4320). The momentum indicators are mixed. The rolling 30-day correlation of the changes between the US dollar against the Canadian dollar and the Dollar Index is around 0.66, the highest for the year. Meanwhile, the Bank of Canada meets next week (April 16). The odds of a cut in the swaps market are now a little below 50% now in the swaps. It settled yesterday around 25% and was near 35% at the end of March.
AUD: The Australian dollar was sold to $0.5915 yesterday, a new five-year low. The trade war, and the slower global growth that implies is a weight on the Aussie. However, the postponement of US reciprocal tariffs saw the Australian dollar scream higher, to reach $0.6175. Around $0.6150, the Aussie recouped half of its losses since the April 3 high a little shy of $0.6400. Follow-through buying today initially lift the Aussie to almost $0.6205 to approach the next retracement (61.8%) near $0.6210. It pulled back to around $0.6135 in the European morning before finding new bids. The intraday momentum indicators suggest another run at the highs is likely. The 20-day moving average is around $0.6250.
MXN: The dollar posted a big key downside reversal yesterday. It initially reached a two-month high slightly above MXN21.08 yesterday, before it reversed and fell to a three-day low a little below MXN20.21. It held yesterday's lows so far today and recovered to nearly MXN20.4450. Banxico releases the minutes of its recent meeting that saw the second consecutive 50 bp cut. The central bank kept the door open to another cut of the same magnitude when it meets next month. The greenback also posted a key downside reversal against the Brazilian real. The US dollar had appreciated nearly 9% against the Brazilian real since last Friday's six-month low near BRL5.5930. It reversed lower after reaching BRL6.0960 yesterday and settled below Tuesday's low (BRL5.8615). It retraced a little more than half of its gains. The next retracement (6.18%) is near BRL5.7855. The 20- and 200-day moving averages converge in the BRL5.7360-BRL5.7475 area. Tomorrow, Brazil reports the IPCA measure of inflation, and it is expected to tick up. The central bank meets on May 7. It has hiked rates by 100 bp in each of the last three meetings. The next move maybe 50 bp. The Selic rate is at 14.25% and the peak may be a little over 15%.
Reviewed by Marc Chandler
on
April 10, 2025
Rating:
