Overview: The capital markets are continuing to digest the implications of the US-China 90-day cooling off period. There were dramatic moves yesterday, and with a few exceptions, a consolidative tone has emerged today. The domestic US political focus is shifting to the budget, while the May CPI is due today, and it is expected to be little changed. The dollar is softer against the G10 currencies but the Canadian dollar. While there was no follow-through dollar buying after yesterday's surge, the pullback has been rather shallow. Against emerging market currencies, the dollar is mixed. Most of the Asian currencies weakened, though not the Chinese yuan, central European currencies and the Mexican peso.
Asia Pacific equities advanced, but there were two notable exceptions: Hong Kong and mainland shares that trade there were off around 2%. The other exception is India, where its main indices are around1.5% lower in late trade. Europe's Stoxx 600 is up about 0.2% after yesterday's 1.2% surge. US index futures are pulling back by 0.3%-0.5%. European benchmark 10-year yields are 2-3 bp higher, while the 10-year US Treasury yield is off a couple of basis points to around 4.45%. Gold has stabilized. After holding $3200 yesterday, it recovered to almost $3266 today and is hovering above $3250 in late morning turnover in Europe. June WTI reached $63.60 yesterday and recorded a low near $61.65 today. It has recovered and is near $62.40.
USD: After yesterday’s outsized move, the Dollar Index is consolidating today in the upper end of yesterday's range. It reached nearly 102.00. The 102.10 area is the (61.8%) retracement of the leg lower from late March (that began near 104.70). The 102.60 area is the (38.2%) of this year's decline, and the 103.00 area is the measuring objective of the possible head and shoulders bottom that was forged in recent weeks. Beijing had appeared to demand the end of the so-called reciprocal tariffs as a precondition for talks and that seems to be what has happened, more or less. The US kept the 10% "universal tariff" and the tariff as punishment for fentanyl and China backtracked on its retaliatory tariffs, for 90 days. The US reports April CPI today. The median forecast in Bloomberg's survey anticipates a 0.3% rise in both the headline and core rates. Given the base effect, the year-over-year rates are expected to be steady at 2.4% and 2.8%, respectively. A 0.3% increase in the headline rate puts the annual rate through April at about 2.7%, down from 3.9% in the first four months of 2024. A 0.3% rise in the core rate translates into 3% annualized rate, down from 4.5% in the first four months of last year. The market has already pushed the next Fed fund into September. Lastly, today the US Court on International Trade hears a case challenging the presidential authority to impose tariffs under the International Emergency Economic Powers Act (1970), which does not explicitly grant the president tariff authority.
EURO: The euro retraced nearly (61.8%) of its advance since late March (~$1.1055). The $1.1025 area is the (38.2%) retracement of this year's rally. It is consolidating in quiet turnover. It reached $1.1125 but the upside momentum faded. The odds of June ECB rate cut have been trimmed to about 85% from nearly 93% before the weekend. The swaps market is now discounting about 45 bp of easing in the remainder of the year, down from almost 62 bp ahead of the weekend. The possible head and shoulders topping pattern has an initial measuring objective that would bring the euro to around $1.0950. Germany reported improvement in the ZEW survey. The expectations component collapsed in April (-14.0 March and 51.6 in February) but bounced back in May to 25.2. Although the assessment of current conditions weakened for first time this year (-82.0 vs. -81.2).
CNY: The US dollar peaked before the weekend near CNH7.2530 and slipped below CNH7.20 yesterday. Last week's low, which was its lowest since last November was near CNH7.1845. It took out briefly today, with the dollar slipping below CNH7.18. The PBOC set the dollar's reference rate at CNY7.1991 (CNY7.2066 yesterday). With the exception of the first two days back from the extended May Day holidays, the PBOC has continued to change the dollar's daily reference rate by slightly more than it had been previously. Today's adjustment of 0.1% is the largest change since April 7. It is still small, and perhaps too small for many observers, but we suspect it is a signal of slightly more flexibility. The only concession China seemed to have made in the weekend talks was to promise (again) to stem the flow of fentanyl and lifted its ban on Boeing planes,
JPY: The dollar reached almost JPY148.65 yesterday. It has eased to JPY147.65 today and is knocking on JPY148 in the European morning. The next important chart area is in the JPY149.40-70 area, which houses the (50%) retracement of this year's decline and the 200-day moving average. Tomorrow's PPI is not typically a market mover. The highlight of the week is the first estimate of Q1 GDP. The median forecast in Bloomberg's survey anticipates a small contraction. The swaps market has about 18 bp of tightening discounted for this year, which is around twice as much as a week ago.
GBP: Sterling was sold to $1.3140 yesterday. It slightly overshot the (38.2%) retracement of its rally from the April 7 low (~$1.2710) to the April 28 high (~$1.3445) that was found near $1.3165. It is bid near $1.3220 in Europe. The UK reported average weekly earnings slowed slightly to 5.5% in March (from 5.7%), while the measure excluding bonuses moderated to 5.6% from 5.9%. The ILO measure of unemployment ticked up to 4.5% from 4.4%. The number of payrolled employees fell (-33k) for the third consecutive month (and the fifth month in the past six).
CAD: The US posted a bullish outside up day against the Canadian dollar yesterday by trading on both sides of last Friday's range and settling above its high. The greenback approached CAD1.4020 to toy with the 200-day moving average. By rising above CAD1.4005, the US dollar took out the (38.2%) retracement of the leg down from the April 1 high (~CAD1.4415) to the last week's low (~CAD1.3750). The greenback remains firm today, having pulled back to only CAD1.3960 before recovering. The (50%) retracement is closer to CAD1.4085. The odds of another rate cut next month have eased to around 62% from almost 67% after the employment report at the end of last week. The unemployment rate r0se to 6.9% from 6.7%, a new post-pandemic high, and a whopping 31k loss of manufacturing employment.
AUD: The Australian dollar was turned back from $0.6460 yesterday and frayed $0.6360 and posted an outside down day. However, there was no follow-through selling today. The $0.6360 level held, and it recovered to almost $0.6420. The $0.6435 area may offer a sufficient cap. A break of $0.6350 to strengthen the corrective forces. The five-day moving average slipped below the 20-day moving average, and the momentum indicators have only recently turned lower. The futures market remains confident that the Reserve Bank of Australia will cut the overnight cash rate by a quarter-point when it meets next week. However, the market trimmed the extent of the cuts this year to about 83 bp from 106 bp a week ago.
MXN: The US dollar traded on both sides of its pre-weekend range yesterday and settled above last Friday's high (~MXN19.5480). This is potentially a bullish key reversal for the dollar. Last week's position adjustment that lifted the greenback to around MXN19.78, stalled in front of the 20-day moving average. Yesterday, it frayed the 20-day moving average, which is found a little below MXN19.63 today. It is consolidating and the dollar eased to MXN19.5650 so far today. Yesterday, Mexico reported a 0.9% decline in March industrial output. While it was not as large of a decline as expected (median forecast in Bloomberg's survey was -1.4%), it was third decline in four months. The weakness of the economy now seems to be more salient for policymakers than inflation, which is slightly inside the target range. Banxico meets Thursday and is widely expected to deliver the third half-point cut of the year.
Reviewed by Marc Chandler
on
May 13, 2025
Rating:
