China Replaced US Demand. Will the US Replace Chinese Supply? Investors Hopeful of Sino-American De-Escalation

Overview: After recovering impressively yesterday, the US dollar saw some follow-through buying initially but has reversed lower and is paring yesterday's gains against the G10 and most emerging market currencies. East Asian emerging market currencies that had surged have now traded lower for the past three sessions. The main talking point today is tomorrow's trade talk between the US and China. The mutual tariffs are so high that even if they were halved, they would still be prohibitive. China's April trade figures show it was able to more than replace the loss of exports to the US and overall Chinese exports rose. While China has replaced US demand, at least initially, now attention may turn to whether the US can replace Chinese supply. The drying up of container shipments suggests not so quickly. The US economic calendar features nine Federal Reserve officials, but there is little that will be said that would encourage investors to bring forward a rate cut to next month. 

Asia Pacific equities are mixed, with China, South Korea, and India among the losers, while Japan, Taiwan and New Zealand, the Philippines, and Pakistan markets rising by at least 1%. Europe's Stoxx 600 is up almost 0.5% and is poised to settle higher on the week. US index futures are firm after yesterday's strong gains. The sharp sell-off in US Treasuries yesterday helped drag yields higher today. In Japan and among the Antipodeans, the 10-year yields rose 4-5 bp, and in Europe, they are up mostly 4-6 bp. The 10-year US Treasury yield is little changed near 4.37%. Gold is trading firmer after falling by $125 in the past two sessions after rallying $190 in the first two sessions of the week. June WTI has fully recovered from the drop to nearly $55 on Monday. It is pushing above the 20-day moving average near $60.80 for the first time in a couple of weeks. 

 USD: The Dollar Index reached its best level in nearly four weeks yesterday around 100.75 and settled close to the session high. The gains were marginally extended today to around 100.85 before being knocked back to 100.35 by early European turnover, where it stabilized. A close below 100.00 would be disappointing. There are nine Fed officials that will be speaking throughout the day in a session devoid of economic reports. Still, there seems to be little that can be said that will substantially boost the odds of a cut at the next FOMC meeting in June. Attention next week turns to inflation and both the headline and core CPI look fairly steady. The weekend sees US-China trade talks. Expectations seem to be for de-escalation, but we are less sanguine. Even if the tariffs are cut in half, wouldn't it still be tantamount to an embargo? Even talks with Japan, which have been fast-tracked, are not expected to result in an agreement until next month at the earliest. Japan wants to all the tariffs to be on the table, but the US seems to only want to discuss the so-called "reciprocal tariff." Note that around the time that the postponed tariffs come into effect will coincide with Japan's upper house election in July. Meanwhile, China wants a broad agreement, and its red lines respected. Trump administration officials are still playing down the impact of the effective trade embargo. Treasury Secretary Bessent has suggested China is playing poker with a "pair of twos," i.e., a weak hand, which may risk violating a cardinal principle to not under-estimate a rival.

EURO: The euro has broken down, out of what was a choppy consolidation. It slipped briefly through $1.12 today for the first time since April 11 but found bids to lift it back to $1.1260. This former support should act as resistance and a close above there would leave it apparently still rangebound. Still, the euro settled slightly below $1.13 last week, and barring a stronger recovery, it will finish lower for the third consecutive week. In terms of macro data, outside of Germany's ZEW survey next week, the economic calendar is limited to Q1 data in the coming days. 

CNY: The dollar's broad recovery saw it rise to about CNH7.2470 yesterday and to almost CNH7.2530 today. The next technical hurdle ahead of CNH7.30 may be around CNH7.26. For the second consecutive session, the PBOC set the dollar's fix a little higher (CNY7.2095 vs. CNY7.0273 yesterday), which would seem to be a potential signal of willingness to accept a stronger dollar/weaker yuan. China has shown in the first instance that it was in fact able to replace the drop in US demand. China's exports fell by 21% to the US in April but rose overall by 8.1%, with stronger exports to India, Southeast Asia, and the European Union. Imports from the US fell by nearly 14% but fell only 2% overall. China will report April CPI and PPI early Saturday. According to the median forecasts in Bloomberg's survey the CPI should be steady at -0.1% and the deflation in producer prices may deepen (-2.8% vs. -2.5%).

JPY: The dollar posted its highest close in nearly a month yesterday around JPY145.90. The trendline from the mid-January high (~JPY158.90) and late March high (~JPY151.20) comes in today at about JPY147. It has not been able to rise through yesterday's high near JPY146.20 and has retreated to almost JPY145.00. A close below JPY145 would weaken the technical tone. Japan reported slower growth in labor cash earnings (2.1% in March from 2.7% in February). When adjusted for inflation real cash earnings fell 2.1% year-over-year. Last March, they had also fallen by 2.1% year-over-year and in March 2023, they were 2.3% lower. Household spending jumped 2.1% in real terms year-over-year, considerably stronger than expected. It contracted by 0.5% in February. Japan reports its first estimate of Q1 GDP next week. The median forecast in Bloomberg's survey is for a 0.1% contraction, with net exports a drag on growth and offset slightly by a contribution of inventories. Private consumption looks a little better after today's report. It was flat in Q4 24. 

GBP: Sterling broke down yesterday, lending credence to the topping pattern that appears to have formed. It fell to about $1.3210 today before recovering a little through $1.3270. A close above $1.3260 would suggest further consolidation is likely. As widely expected, the Bank of England delivered a quarter-point cut yesterday (to 4.25%). The market's takeaway is that the easing will be more gradual. The market sees the year-end base rate around 3.64% (from 4.25% now). It settled last week near 3.53%. Next week, the UK reports on jobs data and Q1 GDP and details. The economy is expected to have expanded by about 0.3% after nearly stagnating in H2 24.

CAD: The US dollar rose to nearly CAD1.3935 yesterday, its best level since mid-April. It reached a marginal new high today in front of CAD1.3945 before it lost its mojo and was pushed back to CAD1.3910 in European turnover. The next technical area is around CAD1.40. The area houses the 200-day moving average and the (38,2%) retracement of the early April high (~CAD1.4415). The greenback is up around 0.75% this week, which is sustained, would be the best weekly performance since the end of February. April employment data will be released today. Some stabilization is expected after Canada's employment shrank by 32.6k in March. The participation rate may tick up and this may lift the unemployment rate to 6.8%, which would be the highest since 6.9% last November. Canada lost about 46k full-time in Q1 25, which is nearly as many as it had gained in Q1 24. The swaps market straddles the fence on the outlook for the June 4 central bank meeting ahead of today's report. 

AUD: After posting the key reversal on Wednesday, follow-through selling yesterday saw it hover in the $0.6400 area. Options for A$1 bln expire there today. It fell to almost $0.6370 today before returning to the $0.6400 area. The 20-day moving average, which it has not traded below since mid-April, is there today.. Still, some may not become convinced that a high is in place until the $0.6350 area yields. Although some confidence surveys and the index of wages, labor costs, and productivity are due next week, the highlight is the April employment report next Thursday. Full-time employment grew by 9k in Q1 25 after rising nearly 132k in Q1 24. The unemployment rate stood at 4.1% in March 2025, up from 3.9% in March 2024, which can largely be accounted for by the increase in the participation rate (from 66.5% to 66.8%).

MXN: The peso remains resilient, perhaps encouraged by the risk-on environment. The peso rises and falls with the S&P 500. The rolling 30-day correlation of the changes is nearly 0.65, the most since late 2023. Given the carry, it looks as if some large positions that were using maybe the offshore yuan, or other Asian currencies to fund long Latam positions like the peso. And the dollar did rise a bit through MXN19.78 on Tuesday but there were no follow-through gains. Instead, the greenback returned to almost MXN19.51 yesterday and edged a little closer to MXN19.50 today. Despite fraying the area on an intraday basis last month, the dollar has not closed below there since last October. Mexico reported a rise in both the headline and core CPI measures for last month yesterday, but it is unlikely to deter the central bank for delivering another 50 bp rate cut next week. Today's data is limited to April vehicle production and exports. In March, Mexico exports almost 88% of the autos its produced. In March 2024, Mexico exported nearly 95% of its auto production. 

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