Overview: The dollar is firm against most of the G10 currencies, but well within recent ranges. Liquidity is likely to dry up quickly after the ECB meeting, which is widely expected to result in a quarter-point cut, ahead of tomorrow's holiday for much of Europe and North America. Many centers in Europe, including the UK are on holiday Monday as well. The yen is the weakest today after it reached a six-month high yesterday. A positive spin put on the trade talks by President Trump, though foreign exchange, was not discussed saw yesterday's gain unwound nearly fully. The greenback is also firmer against most emerging market currencies. The yuan, ruble and rupee are the main exceptions.
Despite yesterday's sharp losses on Wall Street, equities in the Asia Pacific region jumped. China's CSI 300, and Taiwan's Taiex, among the large bourses did not participate in the rally today. Europe's Stoxx 600 is of for the second consecutive session after gaining about 4.3% in the first two sessions of the week. US index futures are up around 1% to pare yesterday's steep drop. Benchmark 10-year yields are firmer today. The 10-year JGB yield rose five basis points to poke above 1.30%, while European yields are mostly 2-3 bp higher. The 10-year US Treasury yield is up nearly four basis points to almost 4.32%. It finished last week slightly below 4.50%. Gold set a record high near $3358 before succumbing to profit-taking that knocked it back to $3313 where buyers re-emerged. June WTI is extending yesterday's constructive outside up day to reached almost $62.85 today, its best level since April 6. This month's range has been roughly $54.70-$71.75.
USD: The Dollar Index remains on the defensive. It settled yesterday near session lows (~99.25). It is trading quietly and hovering around the middle of today's range (~99.20-99.75) ahead of the North American session and the ECB meeting. Last Friday's low near 99.00 is the obvious target. A break could target the 97.50-80 area. Ahead of a long holiday weekend, today's data, which includes housing starts, weekly jobless and the Philly Fed survey, are unlikely to be market movers. The focus is the trade war and there is some speculation that the US wants to show some quick results. The administration continues to insist it is winning the trade war, but many, including ourselves, suspect it will be easier for China to replace the US demand that has been levied away, via domestic stimulus and alternative markets than it will be for the US to replace processed critical earths and consumer electronics. We concur with those who argue that China enjoys escalation dominance in goods trade. President Trump has hinted at postponement of the auto tariffs, which were initially to come into effect on May 3, but so far there have not been any more details. Federal Reserve Chair Powell did not change his stance in yesterday's speech. The combination of labor market conditions and price pressures allows the central bank to continue to be patient waiting for greater policy clarification. Real sector data appear to be holding up better than the soft (survey) data.
EURO: The euro rivaled the Swiss franc for the leadership in yesterday's G10 currency move against the dollar. It rose above Tuesday's high (~$1.1380) and pushed to almost 1.1415 in late North American dealing. The high for the week is about $1.1425 and last Friday's high for the move was closer to $1.1475. Some late longs may have moved to the sideline as the euro slipped back to $1.1345 in late Asia Pacific turnover. The bounce to nearly $1.1390 in the early European turnover was greeted by sellers. The ECB meeting front and center. There is little doubt but that it will cut its key rates today and bring the deposit rate to 2.25% which is the upper end the neutral range that many estimate for the eurozone. The lower end is around 1.75%. Before the cycle is over, the ECB will likely have to bring its deposit rate below the neutral range. The combination of the euro's strength and the decline in oil prices pushes the ECB into cutting rates today. There is some speculation that the Swiss franc's strength and low inflation may encourage the Swiss National Bank not to wait for its regularly scheduled in two months to cuts its deposit rate, which now sits at 0.25%. The swaps market expected it to go negative (again). Of course, it could intervene, but to do so may incur more wrath by the Trump administration. Yesterday, the Swiss government warned that US tariffs will translate into weaker growth than the 1.4% it expected this year. The median forecast in Bloomberg's survey puts growth at 1.1% this year, and even that may prove optimistic.
CNY: It is still early, but so far there is no sign that Beijing is seeking to blunt the steep US tariffs with currency devaluation. The dollar posted what would be a bearish outside down day against the offshore yuan yesterday: It traded on both sides of Tuesday's range and settled below its low (~CNH7.3075). Follow-through selling has been minimal today (~CNH7.2950) and is consolidating in a its narrowest range in a couple of weeks. For all practical purposes, the yuan is flat this year against the dollar, which, as we have noted, means that it is depreciated against all the currencies the greenback has fallen against. We recognize that the PBOC has been moving the dollar's daily fix by a little more than it was in the first part of the year. It looks like the change took place last month. The average over the past 11 sessions, since the start of April, has been 0.055%. In the first 11 sessions in February the average was slightly more than 0.01%. Yes, small, and subtle, but still evident. Today's reference rate was set at CNY7.20885 (CNY7.233 yesterday), a 0.07% and as small as that may seem, it is the largest in seven sessions.
JPY: The trade war and volatility has seen the correlation between changes in the exchange rate and changes in the US 10-year yield break down. Near 0.25, the rolling 30-day correlation is at its low since last 2023. On the other hand, the changes in the exchange rate and the Dollar Index have risen to above 0.75, its highest in five months, underscore the dollar move itself that is underway. That said, the broad selling pressure on the greenback saw it fall below JPY142 for the first time this year. Last year's low set in September was near JPY139.60, and the JPY139.25 area is the (38.2%) retracement of the post-Covid rally that began around JPY102.60. Earlier today, Japan reported that its March trade balance was about JPY544 bln. Exports rose 3.9% from a year ago, while imports rose 2.0%. Japanese exports to the US rose by 3.1% in March after 10.5% in February. Exports to China fell 4.8% and shipments to Europe was 1.1% lower. President Trump sat in on yesterday's talks and he said there was "big progress" and that seemed to weaken the yen. Reports from Japan that foreign exchange as not discussed extended the dollar's gains, but indications are the at it would be discussed when the US Treasury Secretary would hold talks with Japan's Finance Minister. The administration wants a quick result. Previously, Trump accused Japan of seeking trade advantage through the exchange rate. Last year, Japan spent around $100 bln to strengthen the yen.
GBP: Sterling has climbed relentlessly against the dollar recent days. Its seven-day advance is stalling today after the rally extended to almost $1.33, sterling reversed course. It was sold to session lows near $1.3210 before recovering back above $1.3250 and it has struggle to resurface above there so far today. The seven-day rally matches the longest rally since July 2020. For the first time in three sessions, sterling settled within its upper Bollinger Band, which is near$1.3280 now. After this week's employment and inflation data, market expectations for next month's meeting are virtually unchanged since last Thursday and the market remains confident of a 25 bp cut.
CAD: Yesterday, the US dollar traded inside Wednesday's range (~CAD1.3850-CAD1.3980). With a brief exception on Monday, the greenback has remined within last Friday's range (~CAD1.3840-CAD1.3990). It is trading in the lower end of yesterday's range and remained below CAD1.3900 today. The Bank of Canada left policy steady, with the target rate at 2.75%. Officials cited the uncertainty around the US tariffs, but that uncertainty alone is weighing on business and consumer sentiment. We suspect that the unspoked reason for not moving yesterday is not so much the lack of visibility, but the proximity of the national elections. Barring a significant positive surprise, we expect the central bank to cut rates at the next meeting on June 4. The swaps market puts it near a 37% probability. We would be higher.
AUD: The Australian dollar reached nearly a two-month high yesterday as it edged closer to $0.6400. It has not closed above $0.6400 since last December, though there were two days in February that it rose above there on an intraday basis. It has held below $0.6380 today and found support near the five-day moving average, a little below $0.6340. The momentum indicators are still constructive despite the nearly 8% rally in the Aussie over the past six sessions. A move above $0.6400 could spur a move toward $0.6440 as the next interesting chart area. Australia grew 32k jobs last month after losing 57.5k in February. The unemployment rate ticked up to 4.1% after the February's was revised to 4.0% from 4.1%. to 4.2% on the back of a slight increase in the participation rate. After losing about 23k full-time positions over the past three months through February, Australia gained 15k in March.
MXN: Despite the sharp slump in US equities, and the risk-off mood, the Mexican peso was resilient. Yesterday, the dollar traded within Tuesday's range and settled around 0.55% lower. It is nicked the 200-day moving average (~MXN19.92) for the first time since last June. On the downside, support is seen near MXN19.90, though the low since last November was seen earlier this month near MXN19.84. Here in April, the peso has risen by about 2.4%. If it settles here, it would be the fourth consecutive monthly advance. Note that domestic markets are closed for the holiday day and will remain closed tomorrow.
Reviewed by Marc Chandler
on
April 17, 2025
Rating:
