Overview: The reprieve from the angst of the trade war lasted a couple of days but it has returned following Beijing's actions against Boeing and the US requiring Nvidia to get export licenses to sell its H20 chip, designed to meet the previous restrictions on China. ASML's disappointing orders and results adds the concerns. The US celebrating the number of countries that seek tariff relief, but the EU was pessimistic on how the talks are going and BOJ's Ueda comments about the economic shock suggests the central bank may cut this year's growth forecast. The dollar is broadly lower. The Swiss franc continues to lead the charge, while no G10 currencies is up less than about 0.25% in late European morning turnover. Most emerging market currencies are also higher, even the Chinese yuan. China reported stronger than expected Q1 growth, which is taken with the proverbial grain of salt.
Asia Pacific market and Europe's Stoxx 600 are lower for the first time this week. US index futures are also lower led by the Nasdaq, which finished slightly lower yesterday. The futures are below where it finished last week. The 10-year Japanese Government Bond yield fell nearly 10 bp (to near 1.25%). Benchmark yield in Europe is mostly 1-2 bp lower. The softer than expected CPI may be helping Gilts outperform. The 10-year yield is off three basis points, and fueled by the franc's gains, the 10-year Swiss yield is almost four basis points lower near 0.38%. The 10-year US Treasury yield is flat near 4.34%. It peaked last Friday near 4.60%. Gold surged to a new record near $3318. June WTI is firm. It recovered from a brief dip below $60 for the first time this week and is near yesterday's high (~$61.60).
USD: The Dollar Index is giving back yesterday's gains today, but last Friday's range (~99.00-100.75) remains key. The upper end of that range coincides the (38.2%) retracement of the leg down from April 7 high (~103.55). Attention reverts back to real sector data today with March retail sales and industrial production, and Federal Reserve Chair Powell's speech. Retail sales will be flattered by the stronger auto sales as consumers moved ahead of the tariffs, where were to go into effect May 3, but now President Trump said he is considering a delay. Still, retail sales, excluding auto, gasoline, building materials and food services are expected to have risen by 0.6% after February 1.0% gain. Recall, retail sales typically account for around 40% of US personal consumption expenditures. Adjusted for inflation, PCE fell by 0.6% in January, the biggest decline since February 2021. It rose by 0.1% in February 2025, pointing to weakness ahead of the March effort to front-run the tariff threat. Turning to industrial output, after rising by slightly more than 2% in the three months through February, it is expected to have slipped by 0.2%. Still, manufacturing output is seen rising by 0.2% after a 0.9% increase in February and a 0.1% rise in January. Manufacturing output was flat in Q4 24. Manufacturing employment fell by 40k in Q4 24 and rose by 4k in Q1 25. Fed Chair Powell speaks at the Economic Club in Chicago (1:30 PM ET)) but his stance is unlikely to have changed since he said that the economy is in a "good place" and that central bank can be patient as the uncertainty is lifted. He can still maintain that most of the weakness has been in soft data (surveys) and that it has not shown up much in the real sector. Late in the session, the US Treasury reports February portfolio flows. Of course, it will not shed any light on the recent price action. February data from Japan showed Japanese investor were net buyers of US bonds. Federal Reserve data shows that its holdings of Treasury and Agency bonds for foreign central bank rose by around $20 bln in February.
EURO: The euro remains within last Friday's trading range (~$1.1190-$1.1475), recovering from yesterday's pullback (~$1.1265) and holding below $1.1400. The eurozone reported February's current surplus. It was 34.3 bln euros. In the first two months of 2025, its current account surplus is 75.7 bln euros compared with 80 bln euros in Jan-Feb 2024 and almost 18 bln euros in Jan-Feb 2023. The focus is on tomorrow's ECB meeting. The combination of the stronger euro, weaker oil prices, and the negative impact on growth from US tariffs, which even after the postponements, are at 10% compared with 2.5% at the end of last year, have spurred expectations of a rate cut. The swaps market is discounting three cuts in the remainder of the year and about a 40% chance of another. This week's cut will bring the deposit rate to 2.25%. The market is pricing in a terminal rate between 1.50% and 1.75%. Meanwhile, the EU says little progress in trade talks with the US and warns most US tariffs on the EU will not be removed soon.
CNY: As the greenback got traction more broadly yesterday, it recovered to toward the pre-weekend high against the offshore yuan (~CNH7.3260). The heavier dollar tone today has seen it return to CNH7.3120 today, holding slightly above yesterday's low (~CNH7.3075). There is a camp that says China will devalue to offset the US tariffs. Since US tariffs are so high, it implies a large depreciation. We have demurred. Closely watching the fix allows us to recognize that the PBOC began introducing greater flexibility in late March before the reciprocal tariffs were announced. Today's fix as at CNY7.2133, which was only 0.05% higher than yesterday. Small beer but five-times larger of a move than seen through most of the first two months of the year. We expect officials to maintain the broadly steady exchange rate against the dollar. As the dollar has weakened, the yuan unwound some of its gains against other trading partners. For example, the yuan is its lowest level against the euro since 2014. It is near two-year lows against the yen. China reported it economy expanded by 1.2% quarter-over-quarter and 5.4% year-over-year. March figures showed slightly stronger retail sales and industrial output. Property investment is still contracting and new and used house prices continued to fall though at a slower rate. They have not risen on a monthly basis since May 2023. The surveyed jobless eased to 5.2% from 5.4%, the first decline since last October. Although China has reduced its direct reliance on US markets, the hit from the trade war could be significant and many economists have cut their growth forecast. Still, the PBOC is expected to cut rates and reserve requirements, while Beijing may provide more fiscal support. The loss of US demand can be placed domestically (hence the case for easier monetary and fiscal policy), and in other markets, and some countries have already expressed concern about the US unilateralism deflecting Chinese goods towards them, or forcing them to protect their markets, like the US.
JPY: The greenback held its own against the yen yesterday, despite the five-basis point decline in the US 10-year yield. Less than a week ago, many, including a former US Treasury Secretary, was saying that US bonds were trading like emerging market bonds. We identified such talk as hyperbole and an extreme in sentiment. The 10-year US yield fallen by nearly 30 bp from high seen before last weekend. The dollar reached almost JPY142.00 ahead of the weekend and tested it again today. On the upside, the dollar may be capped in the JPY143.00-20 area. Cautionary comments by BOJ Governor Ueda may be a hint that the central bank will cut is growth forecasts because of the impact of US tariffs. Japan reports March trade figures first thing tomorrow. Japan's trade balance frequently improves sequentially in March from February (8 of 10 March's), but the median forecast in Bloomberg's survey expects a little deterioration from February's JPY590.5 bln surplus. Many observers continue to make references to Japan's trade prowess, yet it has not reported an annual trade surplus since 2020. That said, the 11.4% surge in February exports may have been boosted by exports to the US ahead of tariffs. Japanese companies reported boosted inventories in the US. Japan's trade surplus with the US was almost JPY920 bln in February (~$6 bln), up nearly 30% from a year ago. Auto shipments rose by about 14%.
GBP: Sterling has held up considerably better than the euro against the dollar in the last two sessions. Part of is outperformance is the development on the cross. From April 3 to April 11, the euro rallied by about 5% against the sterling. The euro gave back half of its gains (near GBP0.8530) and this has aided sterling against the greenback. However, after today's softer than expected CPI, sterling is a little heavier on the cross, while the dollar's broad weakness has seen sterling approach $1.33. It is extending its advance for the seventh consecutive day. After settling above the upper Bollinger Band for the second consecutive session, it could do so again today (~$1.3250). The UK reported a 0.3% rise in March CPI, which puts the Q1 increase at about 2.4% at an annualized pace, the same as in Q1 24. Still, given the base effect, the year-over-pace slowed to 2.6% from 2.8%. Core inflation and services inflation slowed (3.4% vs. 3.5%, and 4.7% vs. 5.0%, respectively). The swaps market remains confident of a quarter-point next month and at least two more cuts this year.
CAD: The US dollar snapped a four-day fall against the Canadian dollar yesterday. It bottomed Monday near CAD1.3830 and reached almost CAD1.3980 yesterday. It was turned back today from the approach to CAD1.40 (where options of $700 mln expire today) and returned to almost CAD1.39. Despite the Canadian election in less than a fortnight, the swaps market is still discounting around a 40% chance of a cut today. That still seems a bit rich. If it were not for the election we think the odds of a cut would be greater, given the strength of the Canadian dollar, the disappointing March jobs data (first back-to-back loss of full-time jobs since Aug-Sept 2022) and the softer headline CPI (2.3% from 2.6%), though the underlying core rates at 2.8%-2.9% are back at Q2 24 levels. The next Bank of Canada meeting is June 4, and the swaps market has about an 80% chance of a cut discounted. Yesterday Prime Minister Carney rescinded last week's 25% retaliatory tariff on US-made vehicles. He said that the tariffs will not apply if the car companies continue to make cars in Canada, employ Canadians, and invest in Canada, which is to say if they do not re-shore to the US.
AUD: The Australian dollar extended its recovery off the five-year low set last Wednesday near $0.5915. Since the low, the Aussie has shot up around 8% against the greenback. It approached the upper end of where it has traded since the middle of last December. The risk-reward changed as the $0.6400 area was approach and a little profit-taking was seen. Today there are options for A$2.3 5 bln at $0.6400 that expire. Australia reports March jobs figures tomorrow. The minutes from this month's central bank meeting signaled that the bar is low for a rate cut next month, and the employment data are unlikely to stand in its way. Australia lost almost 53k jobs in February, offsetting in full the 30.5k jobs gains in January. It was the biggest loss of jobs since the end of 2023. Economists warn that Australia's unemployment rate may tick up to 4.2% to match the cyclical high seen last July. Then the participation rate was 67.0% and in March may have been slightly lower.
MXN: The greenback posted a key downside reversal in the middle of last week after it poked above MXN21.00. There was no immediate follow-through selling, but it did emerge in the past two sessions and took the US dollar slightly through MXN19.93 yesterday. As it did earlier this month, the dollar held above the 200-day moving average (~MXN19.90). It recovered and settled near MXN20.10. The dollar was already recovering against the peso, but news that the Mexican tomatoes were slapped with a 21% tariff by the US, lifted it further (effective in 90 days). Mexico accounts for an estimated 90% of US tomato imports and about 60% of the US tomato consumption. The price action suggests yesterday's low may mark a near-term low. The dollar reached a little above MXN20.1350 today and amid the large retreat, found support ahead of MXN20.01. Near-term potential may extend toward MXN20.30. Meanwhile, the dollar has forged a shelf around BRL5.83. A move above BRL5.92 could see BRL5.95-BRL5.99.
Reviewed by Marc Chandler
on
April 16, 2025
Rating:
