Overview: Moody’s took away the US AAA rating before the weekend. It was the last of the big three rating agencies to do so. We do not think there is fresh information content in its belated decision, but participants in Asia and Europe have reacted by selling the US dollar and US assets. The 30-year bond yield is above 5% and the 10-year yield is near 4.50%. The S&P 500, which rose by over 5.25% last week, its second-best week of the year, is set to snap a five-day advance. It is poised to gap lower. The greenback is broadly lower. Nearly all the G10 currencies are at least 0.5% higher against the dollar but the New Zealand and Canadian dollars are trailing. Nearly all the emerging market currencies are firmer too, with the Philippine peso and Taiwanese dollar the notable exceptions.
The MSCI Asia Pacific Index rose for the fifth consecutive week but began this week on a heavier tone. It fell for the third consecutive session. None of the large bourses escaped the pressure. Europe's Stoxx 600 also has a five-week advance in tow. It is off about 0.65% in late European morning turnover. The sharp rise in US Treasury yields triggered a global bond sell-off. The Antipodean 10-year rates rose 7-8 bp. The 10-year Japanese government bond yield rose nearly four basis points to 1.48%. European benchmark yields are 5-8 bp higher, with peripheral yields rising faster than the core. Gold is offering a haven today and is a little better than 1% higher near $3240. July WTI remains in last Thursday's range (~$60-$62.50).
USD: The Dollar Index settled firmly last week, before Moody's downgrade. It had reached a three-day high and posted a bullish outside day. Moody's move came almost 14-years after S&P first took away the US AAA rating and nearly two years after Fitch's move. Although there seems to be little new news in the Moody's downgrade, the Dollar Index has been sold through last week's lows near 100.25 to about 100.15. Near-term risk may extend to 99.50. And still, late yesterday, with minor adjustments that sped up some Medicaid-related cuts, a House committee passed the White House-sponsored budget after some last-minute negotiations yesterday, which is going to pile on more debt. In what is a subdued week for US data, the Index of Leading Economic Indicators are due today. Most of the components of the index have already been released so it is little wonder that the markets do not often react to it. Still, the LEI has fallen for the past three months. In fact, it only rose in two months last year after falling every month in 2023 and all but one month in 2022. The Philadelphia Fed's non-manufacturing survey is due tomorrow. Like the business outlook survey released last week ( -4.0 vs. - 20.4 in April). it may improve from the -42.7 reading in April, the poorest since the pandemic.
EURO: The euro settled at three-day lows but has returned bid. A down trendline off last month's high (~$1.1575) comes in near $1.1260 today. The euro has been bid through it in the European morning. A move above the $1.1285 area targets $1.1320 and possibly $1.1380. That said, intraday momentum indicators are overbought. There two data points of note this week are on Thursday when the German IFO survey and preliminary May PMI are released. The market remains confident of an ECB rate cut next month and has another cut discounted in H2, which, together, would bring the deposit rate to 2.75%. Some ECB officials have suggested that it is around the neutral rate. Meanwhile, reports indicate that the ECB is encouraging member banks to reduce their dollar funding needs; to de-risk from the possibility that in the next crisis, the US does not grant access to the swap lines (though it is a Fed not Treasury decision, and Chair Powell has indicated its commitment). One way to do this is reduce holdings of dollar-denominated assets. A possible offset may arise from reports that the US is preparing to retract capital rules adopted in the post-Great Financial Crisis period, and in particular the easing of the Supplementary Leverage Ratio. There is some talk in the press that the new plan, which Treasury Secretary Bessent has called a "high priority" that the measure may include granting Treasury bonds an exemption. Currently, large US banks are required to hold 5% of Tier One capital under the SLR. That is higher than in other high-income countries.
CNY: The six-month low the dollar recorded last week (~CNH7.1790) may hold for a while. The greenback is trading with a slightly firmer bias against offshore yuan. It reached CNH7.2180. The 200-day moving average is near CNH7.2235. The PBOC set the dollar's reference rate at CNY7.1916 (CNY7.1938 Friday), the lowest since April 3. China has already released the most important high-frequency data of the week. Despite the myriad of reforms announced, the property market remains depressed (property sales -1.9% year-to-date, year-over-year), property investment weakened (-10.3% YTD YOY, vs -9.9%), and house prices (new and used) fell at a faster rate sequentially. April retail sales slowed (5.1% YOY vs. 5.9%), as did industrial production (6.1% YOY vs. 7.7%). Tomorrow, the banks will likely pass through the 10 bp cut in the key seven-day repo rate to the loan prime rates. Still, without more fiscal support the Chinese economy may struggle. After expanding 1.2% quarter-over-quarter in Q1, growth may slow below 1% this quarter, which would be the weakest since Q4 23.
JPY: After it recorded new lows for the week ahead of the weekend, slightly below JPY145, the greenback caught a bid that lifted it back to new session highs in North American through JPY146.00. Today it has extended last week's pullback and approached JPY144.65. Initial support may be in the JPY144.25-45 area. With Q1 GDP reported before the weekend (-0.2% quarter-over-quarter), the March tertiary index (-0.3%) was not so important. Wednesday's April trade balance may be more notable. It may report a third consecutive monthly trade surplus for the first time since February-April 2021. Meanwhile, the US said it is close to a trade agreement with Japan, but we have not seen confirmation by Tokyo. That means it could be subject to the tariff regime President Trump said will be announced in the next 2-3 weeks. The first national election under Prime Minister Ishiba's term (started last September) will be held in July. Half of the seats of the 248-seats upper chamber of the Diet will be contested. Ishiba and his cabinet do not enjoy strong public support and a poor showing in the election will likely spur a stronger leadership challenge last in October.
GBP: Before the weekend, sterling traded on both sides of Thursday's range, and today, it has trading on both sides of last Friday's range. It reached $1.3400 in the European morning. The near chart area of note is the three-year high set late last month near $1.3445. Meanwhile, the UK and EU struck a new tentative agreement on defense and security. Also, the UK agreed to extend fishing rights until 2038 in exchange for agreements on energy cooperation and agricultural standards. The UK's market-sensitive high frequency data is in the second half of the week. The highlights are the CPI, flash PMI, and retail sales. That said, there is little chance of back-to-back cuts by the Bank of England, which means no cut next month. The Monetary Policy Committee will have more data in hand when it meets in August. The odds of an August cut were pared to a little less than 75% from almost 85% a week ago.
CAD: The CAD1.4000-20 area continues to frustrate US dollar bulls. That area capped the greenback several times last week. The US dollar is trading softer against the Canadian dollar today but so far has held the pre-weekend low near CAD1.3935. A break of it could target CAD1.3900. Tomorrow is the data highlight of the week for Canada: April CPI. Given the base effect, a 0.2% month-over-month decline the median forecast in Bloomberg's survey calls for will push the year-over-year rate to around 1.6% from 2.3% in March. The underlying core measures, which the central bank puts weight on, have crept up this year but were still below 3% in March (2.6% at the end of 2024). The swaps market has seen a small increase in the chances of a Bank of Canada rate cut at its June 19 meeting to around 67%, virtually unchanged over the past week.
AUD: The Australian dollar traded in an almost 1.5-cent range last week and settled a little below the middle of it. The three-day low recorded ahead of the weekend (slightly below $0.6390) and the falling momentum indicators make for a heavier technical tone. Today's gains, on the back of the broadly weaker greenback have been limited so far to almost $0.6450 area. A move above there could see $0.6460. The first thing tomorrow, the Reserve Bank of Australia is widely expected to deliver the second cut in the easing cycle that began in February. The quarter-point cut will bring the cash target rate to 3.85%. During the market turmoil early last month, the futures market briefly toyed with the idea of a half-point move but calmer conditions have encouraged a less aggressive view. The market is pricing in two more cuts in H2 25. The swaps market is pricing a terminal rate of about 3.25%.
MXN: After being sold to a seven-month low near MXN19.30 in the middle of last week, the greenback stormed back to MXN19.5660 ahead of the weekend. It stalled near the 20-day moving average (~MXN19.57), which has not closed above since April 11. Sellers appeared ready and drove the dollar down to around MXN19.47. The dollar slipped through the pre-weekend low to almost MXN19.4150 today. The peso resilience remains impressive given the aggressiveness it is cutting rates and the multifaceted challenge by the US. Of the 13 sessions this month coming into today, the peso has fallen in only three. There are two questions that will be tentatively answered with this week's high-frequency data, which begins in earnest in the middle of the week. First, is what kind of momentum did the Mexican economy enjoy at the end of Q1. The March retail sales on Wednesday and the IGAE economic activity (similar to a monthly GDP reading) the following day will be useful. The second question is about the price pressures, which seem to have picked up though not sufficiently to deter the central bank's third successive 50 bp rate cut last week. Indeed, Banxico's forward guidance put the market on notice that another half-point cut is likely as the central bank has grown more concerned about the growth outlook. The implied 12-month overnight rate in the swaps market fell to 6.55% at the end of last week from 7.28% at the end of the previous week.
Reviewed by Marc Chandler
on
May 19, 2025
Rating:
