Last week, the capital markets were not as manic as the previous week but the uncertainty stemming from Washington remains intense. Outside of tariffs on Mexican tomatoes, the US tariffs were not extended but new investigations were opened that will likely lead to more tariffs down the road. President Trump hinted at the possibility of a postponement of the 25% auto tariffs that are to come into effect early next month. The administration did announce that in six months, foreign-owned ships, and especially Chinese ships will be charged a fee per tonnage starting in October, and the fee will increase every year for the next three years.
The relative stability is fragile. Outside of the preliminary April PMI and Tokyo's April CPI, the economic calendar is light on market-moving high-frequency data. Two other events capture our attention. First, US-Japan bilateral trade negotiations move into a new phase with US Treasury Secretary Bessent meeting with Japan's Finance Minister Kato. The average tariff difference at the end of last year was negligible, less than 0.5%. Japan does not seem to be purposely seeking a weak yen. The central bank is hiking rates as most other high-income countries are engaged in cutting rates, and last year Japan spent around $100 bln to strengthen the yen. Still, the US seeks a quick deal as does Japan. There may be a sigh of relief in risk appetites should it be announced. Second, the World Bank and IMF hold spring meetings. This strikes as a likely venue for the US administration to break from the past and possibly curb funding or support for some missions that go against its values, such as environmentally friendly projects or those that promote diversity, equality, and inclusion principles. As important as Miran's essay (here) for framing the administration's foreign economic policy, Project 2025 offers insight into the administration's attitude toward the multilateral institutions, and ought to be taken just as seriously by investors. Withdrawal from the IMF and World Bank is difficult without Congress, but funding and support is a different kettle of fish.
US
Drivers: Sentiment toward the US has soured. Even with the postponement of the reciprocal tariffs, the average tariff is now about 14.5%, up from 2.5% at the start of the year. It is the highest since 1938. The other significant disruption is coming through the labor market, where a combination of federal government layoffs and an immigration curb will have knock-on effects, even if they have not yet materialized in the data. We may have been early, but we have suggested here for some time that dollar-based investors should diversify out of the US. Not for ideological reasons, but because of valuation. The dollar and US stocks were overvalued. We also recognized that the record buying of US equities by Europeans in 2024 was a yellow flag of a potential market peak.
Data: The US has a packed economic diary in the week ahead. It can be broken into two buckets. The first are the reports, like durable goods orders, which will help economists fine tune forecasts for Q1 GDP. The first official estimate is due April 30. The Atlanta Fed's GDP tracker sees a 2.2% contraction and only around a 0.1% decline in activity when gold imports are excluded. The median forecast in Bloomberg's survey is for a 1.1% expansion. In the second bucket are regional Fed surveys and the preliminary PMI that are for the start of Q2. In this bucket, we include the Fed's Beige Book, whose saliency in the central bank's reaction function under Fed Chair Powell seems to have risen. Also, in this bucket are the weekly jobless claims that cover the week that the survey for the April nonfarm payroll is conducted.
Prices: The Dollar Index spent last week inside the range set on April 11 (~99.00-100.75). In fact, it was unable to rise above 100.30, and finished the week, pinned near its lows. The key question is whether it is basing and set to recover or nesting before the next leg down. We suspect the latter. In September 2022, when the Dollar Index peaked, it fell by almost 12.2% over the next four months. An equivalent move now would take the Dollar Index a little below 97.00 in the coming weeks.
EMU
Drivers: The depth and breadth of European capital markets helps the euro be the un-cola as the US re-brands its older cola formula. The US offers an interest rate premium over EMU, but given the doubts about the US commitment, including access to swap lines in an emergency, investors appear to be requiring a greater premium to hold dollars.
Data: The ECB cut rates last week, and the deposit rate is now 2.25%. The outlook for the next meeting (June 5) will be not decided by this week's data, which includes February trade figures, construction spending, and the preliminary April PMI. March new car registrations, a proxy for sales, may draw some attention. They fell on a year-over-year basis in both January and February. However, if the euro's recovery is sustained and oil prices remain weak, while the tariff shock (10% and 25% on autos, until the reciprocal tariffs return). We suspect that the efforts to get ahead of US tariffs may be masking the underlying weakness. Consider that March industrial output fell 1.3% in Germany and 0.9% in Italy, while France and Spain both reported a 0.7% increase. These are the biggest four economies in EMU. The eurozone reported that the aggregate industrial production rose 1.1%. That implies a jump in industrial output in other countries. Ireland and Belgium are likely candidates as they ae integrated into US pharma and tech industries.
Prices: The euro spent last week consolidating within the April 11 range (~$1.1190-$1.1475) but here, even more than the Dollar Index, the price action looks like bullish consolidation. The momentum indicators are stretched but do not appear poised to turn lower immediately. The euro briefly traded below $1.1275 last week, which corresponds to the 2023 high that was unable to be taken out in 2024. It is also the (61.8%) retracement of the post-Covid decline (January 6, 2021, remember for other reasons, near $1.2350 to the September 2022 low around $0.9535). The next band of resistance is $1.15-$1.17.
China
Drivers: Beijing has succeeded in preserving the broad stability of the yuan, but it has had to allow for a bit more volatility. That seems prudent given the larger economic environment and the volatility emanating from the world's largest and deepest capital markets. Beijing appears to believe it has more to gain than lose by maintaining its course. This could change, but the broader setback in the US dollar buys it time, at the minimum.
Data: China sets the one and five-year loan prime rates. They are likely to remain steady at 3.10% and 3.60%, respectively.
Prices: We do not see other reports that have recognized the subtle change that has taken place in the PBOC daily dollar fixing. The average daily change is five times more than it had been earlier this year--from about 0.01% to more than 0.05%. It is small and subtle, but clearly evident. Our takeaway is that it reflects official efforts to allow for a little more flexibility. If the US dollar rallied in the face of the tariff war, as many, including several top officials in the Trump administration assumed, it might have been a different story, but the greenback has fallen against all the G10 currencies since Trump's second inauguration, and half of which are up by more than 9%.
Japan
Drivers: The swaps market scaled back the scope for hikes by the BOJ this year. At the end of January, after the BOJ hiked rates, the market was fully discounting another. It was still fully discounted at the end of February and the end of March. The swaps market now is only slightly better than 50/50 of a hike this year. Meanwhile, the rolling 30-day correlation between changes in the US 10-year yield and the exchange rate has collapsed to less than 0.30, the lowest in about a year. As recently as April 2 it was above 0.60 and was above 0.70 in late January through mid-February. On the other hand, the correlation with the US two-year yield is near 0.70 after reaching a four-year low in mid-January below 0.15.
Data: Japan sees the preliminary April PMI and the tertiary industry index for February, but these typically are not market movers. At the end of the week, Tokyo reports April CPI. Recall that the government's household subsides have added some volatility to the bellwether. In March, it edged up to 2.9% from 2.8% and the core, which excludes fresh food, rose to 2.4% from 2.2%. Processed food seems to be picking up the rise in fresh foods prices. In April 2024, the Tokyo CPI stood at 1.8% and the core at 1.6%.
Prices: The dollar fell to new lows for the year last week near JPY141.60. A break targets the JPY140 area and the 2024 low was near JPY139.60. If the dollar is unwinding the post-Covid rally, the JPY139.25 area corresponds to the (38.2%) retracement, and the 200-day moving average is rising but begins the week a little below JPY138.00. The bilateral trade talks, for which we think the US would very much like a quick agreement, are thought to focus on foreign exchange in the upcoming talks between the US Treasury Secretary and Japan's Finance Minister. Japan spent around $100 bln last year trying to strengthen the yen.
UK
Drivers: On a rolling 30-day basis, changes in sterling correlation with the euro have been trending lower since peaking near 0.90 in early April. It is now below 0.70, the weakest since last November. For most Q1, the euro-sterling correlation was higher than the euro-Swiss franc. But the euro-franc correlation has been trending higher and is now slightly above 0.85. Sterling's inverse correlation with the Dollar Index has been reduced from almost 0.90 in early April to a little better than -0.75 now.
Data: The UK sees the preliminary April PMI. The composite was at 51.5 in March, the highest since last October. It finished 2024 at 50.4 and set last year's high in April at 54.1. Yet, the manufacturing sector slump deepened, with the PMI in March at 44.9, the weakest since October 2023. The services PMI reached 52.5 in March, its best since last August. March retail sales are reported at the end of the week. UK consumers appear to have gone on a bit of shopping spree in January and February, when retail sales rose by 1.4% and 1.0%, respectively, the best two-month performance since March and April 2021. Recall, UK retail sales are reported on a volume basis and fell in the last four months of 2024.
Prices: Sterling has a nine-day rally in tow. It is the longest advance since July 2020. During the run, it has appreciated by about 4.5% to reach almost $1.3300. Last year's high, near $1.3435, is the next obvious target. The momentum indicators are stretched but a turn does not appear imminent. Initial support is around $1.3200, but it may take a break of $1.3150 to signal a correction has begun of this impulsive leg up.
Canada
Drivers: On a rolling 30-day basis, the correlation of changes in the Canadian dollar and the Dollar Index is around 0.60, the upper end of where it has been over the past four months. Despite some recent apparent exceptions, the Canadian dollar still has a risk-off bias measured by the 30-day correlation with the S&P 500, which around 0.40 is almost twice as high as with oil. At the same time, changes in the Canadian dollar and changes in the price of gold are near 0.60, the most this year.
Data: February retail sales are due April 25. The last two months have been skewed by the temporary sales tax holiday. After jumping 2.6% in December, retail sales fell 0.6% in January, which was only partially covered by the tax break. There are anecdotal reports of a consumer boycott against US brands, and it will be interesting to see if it shows up in the data. There has been a sharp drop in Canadian holiday-bookings.
Prices: The greenback fell to five-month lows last week slightly below CAD1.3830 last week. Yet, the downside momentum stalled, leaving it in its trough. Still, lower highs were recorded in the past three sessions. The momentum indicators do not preclude a push closer to CAD1.3800, which may offer stronger support for the US dollar. If it fails, the next technical target may be around CAD1.3730.
Australia
Drivers: Over the past 30 sessions, the Australian dollar has been come a stronger risk currency than the Canadian dollar. The changes in the exchange rate and changes in the S&P 500 rolling 30-day correlated are a little over 0.65. Last year's high was around 0.75, but it was inversely correlated for most of the last two months of 2024. The rolling 30-day correlation with gold reached a 10-month high earlier this month, a little below 0.70. It is now near 0.60. In the bigger picture, we are concerned recent press reports suggest that the US will use the bilateral trade negotiations to force countries reduce trade with China. That exposes Australia's dilemma: inside the US security alliance but China is by far its biggest trading partner.
Data: In an otherwise quiet week for data, the preliminary April PMI is due on Wednesday. The composite PMI was at 51.6 in March, its best level since last August. It fell to 49.6 in September, and although it recovered, it spent the entire Q4 stuck at a low gear of 50.2. Last year, it peaked in March at 53.3.
Prices: The Australian dollar snapped a seven-day rally ahead of the weekend. It recovered smartly from the five-year low on April 9 (~$0.5915) to approach $0.6400, which has largely capped the Aussie this year. Nearby support is seen in $0.6325-35 area. A break could see the $0.6250-80 as momentum traders are squeezed out.
Mexico
Drivers: The inverse correlation between the changes in the peso and changes in the S&P 500 is slightly lower than the correlation we observed with the Aussie. The ~0.65 inverse correlation is the most extreme in two years. The peso's correlation with gold is a little less than 0.40, while the exchange rate is almost as correlated to changes in the US two-year yield as near 0.30 over the past 30 sessions.
Data: Mexico has two real sector reports this week; February retail sales and the IGAE economic activity report, which is similar to a monthly GDP estimate. Retail sales jumped 0.6% in January, the largest increase since last July. However, in January it did not lift the IGAE indicator, which fell for the second consecutive month. The economy contracted by 0.6% in Q4 24 and it is off to a soft start this year, with the IGAE indicator falling 0.16% in January. The uncertainty around US tariffs will not help matters. On April 24, CPI for the first half of April will be reported. Progress on inflation seems to be stalling but within, albeit barely, the target range of 3% +/- 1.0%. However, policymakers must be wary of the cooling effect from both the certainty and uncertainty of the US tariff policy on investment and hiring decisions. In other words, the shock from the US is hitting Mexico at time when the economy was already weak.
Prices: Given the Trump administration's rhetoric about reshoring, which attacks the essence of Mexico's development strategy, the peso has been unexpectedly resilient. In fact, it reached a six-month high on April 17, though the local markets were closed. It cut through the 200-day moving average for the first time since last June (it is found slightly below MXN19.93 now). From the spike high on April 9 (~MXN21.08) to last week's low (MXN19.6550), the greenback fell by about 6.5%. It appears to be the largest pullback since last August. Some near-term consolidation looks likely and initial resistance may be near MXN19.90.
Reviewed by Marc Chandler
on
April 19, 2025
Rating:
