Overview: Ideas that the US economy is not doing as poorly as many feared after the Q1 GDP contraction was dissected helped the dollar appear to confirm a bottoming pattern yesterday. However, indications that China is considering the US request for trade talks have bolstered risk-appetites today, ahead of the US jobs report and dragged the greenback lower. We are skeptical that US-China trade talks are about to begin, especially given America's new threat of sanctions on countries that buy Iranian oil, of which China is the primary one. Also, the tariffs on small packages from China are to come into effect. The US dollar is trading lower against all the G10 currencies and most emerging market currencies, with the notable exceptions of Mexico, Türkiye, and Russia. The greenback is at its lowest level against the offshore yuan (~CNH7.2280) since March 20.
Equities in the Asia Pacific rallied today. Although China's mainland market remains closed (until Tuesday) the index of mainland companies that trade in Hong Kong rose nearly 2% and Taiwan's Taiex surged 2.7%. Europe's Stoxx 600, which eked out a 0.02% gain yesterday, is up almost 0.9% today, its nineth consecutive gain and the biggest increase since last Wednesday. US index futures are slightly firmer. European benchmark 10-year yields are mostly 2-3 bp higher, but the 10-year UK Gilt yield is off nearly six basis points, and near 4.42%, is at its lowest level in three months. The 10-year US Treasury yield is off a basis point to 4.20%. It finished last week near 4.24%. Gold held the $3200 level yesterday, its lowest level since April 14, and has come back better bid today. It is near $3265 in Europe, and is still off about $50-$55 this week. US actions on Iranian oil helped extend the June recovery in WTI to almost $60 today but sellers reemerged ahead of Monday's OPEC+, and it is back below $59. It settled near $63 a week ago.
USD: Yesterday, the Dollar Index broke above the neckline (~100.20) of a potential head and shoulders bottom pattern. Depending on precisely how it is measured, it could project toward 102.40. Still, there has been no follow-through buying and the Dollar Index has pulled back to around 99.80. A break of the 99.50-60 area would be disappointing. The focus is on today's April jobs report. The median in Bloomberg's survey is for a rise of 138k, or which 125k from the private sector. What some newswires call the whisper number, which seems to be little more than some market participants second guessing economists’ forecasts with new information is likely to be lower given the disappointing ADP estimate. In any event, the key to the Federal Reserve's reaction function may be the unemployment rate, but less than 10% of the 67 respondents see it ticking up to 4.3%. Still, barring a significant shock, expectations for next week's FOMC meeting are unlikely to change. The futures market is discounting about a 62% chance of a cut at the June meeting and nearly four cuts this year even though nearly everyone recognized that Q1 GDP's contraction was a bit of a statistical fluke, distorted as it was by behavior ahead of the tariffs.
EURO: The euro fell to almost $1.1265 yesterday and nicked the 20-day moving average (~$1.1280) for the first time in nearly a month. A close below there would offer technical confirmation of a bearish topping pattern, suggesting potential for another two-cent decline in the period ahead. However, it is bid near $1.1350 in the European morning. The eurozone preliminary estimate of April CPI was slightly firmer than expected. The 0.6% month-over-month increase allowed the year-over-year rate to remain steady at 2.2%. The core rate rose to 2.7% from 2.4%, which matches the high for the year. Still, the market remains confident that the ECB will cut its key rates at next month's meeting. The pace of easing is likely to slow. The swaps market has a cut discounted for Q3 and almost a 55% chance of a cut in Q4. The final April manufacturing PMI confirmed the fourth consecutive monthly increase, but at 49.0 (vs. 48.7 preliminary and 48.6 in March) remains below the 50 boom/bust level as it has since June 2022.
CNY: China's Commerce Ministry was quoted indicating that it is "evaluating" the possibility of trade talks with the US given the senior American officials expressed willingness to talk. This development has helped lift risk-appetites today. Investors seem to want to believe it, but we are skeptical. First, just yesterday's the US threatened retaliation against countries buying Iranian oil, and China is the by far the largest. Second, the de minimis tariffs (on small imports) are becoming effective today. Third, just when the pressure is about to hit the US in the form of a dramatic drop in container shipments is about to bite is probably not the more opportune time to relieve the pressure. Mainland market remains and will re-open next Tuesday. The dollar was near CNH7.2730 when the onshore yuan stopped trading (CNY7.2714) for the May Day Holiday. For what it is worth, the dollar was near JPY142.80. Still, the hope that the bilateral embargo could end has seen the dollar fall to about CNH7.2345, its lowest level since March 20. The dollar is also trading near JPY144.60.
JPY: The March unemployment rate ticked up to 2.5% from 2.4%, while the job-to-applicant ratio rose to 1.26 from 1.24. The BOJ meeting is behind us and the swaps market has eight basis points of tightening priced in for this year, down from almost 40 bp as recently as late March. The near-term real sector data may lose whatever market-moving potential it may have had. More important for the near-term outlook for the yen is that the dollar settled above the neckline of a potential head and shoulders bottom that projects into the JPY148.00-50 area initially. There are $1.1 bln in options at JPY146 that expire today and another batch for $1.5 bln expires there next Tuesday. Today's high has been slightly above JPY145.90 and the low is near JPY144.45. Separately, Finance Minister Kato suggested that Japan's $1.1 trillion of US Treasury holdings could give it leverage in talks with the US but also indicated that foreign exchange has still not be discussed in the bilateral talks.
GBP: Sterling looks toppish, even if the pattern is not as clear as the euro, or bottoms for the Dollar Index and dollar-yen. It is firm near $1.3310 in the European morning. Still, a break the $1.3235 area, last week's low, could signal a further two-cent pullback. The next important event for the UK is the Bank of England meeting on May 8. There is no doubt (in the swaps market) that a quarter-point cut will be delivered. It will put the base rate to 4.25% and a 3.5% year-end rate is expected in the swaps market. As of early April, it was seen slightly below 4.0%. A cautionary word comes from the British Retail Consortium, which sees the 6.7% increase in the minimum wage and the GBP26 bln increase in the payroll tax translating to higher prices, especially for food. The Reform Party seems to be the big winner in yesterday's local elections. It won the only parliamentary seat that was contested from Labour. The poor results for both Labour and the Conservatives will likely see both parties turn on themselves.
CAD: The close at a six-month low against the Canadian dollar on Wednesday appears to have been a bear-trap that was snapped yesterday amid the broader gains for the US dollar. If last month's US dollar losses are being retraced, the first target may be in the CAD1.3925 area and then CAD1.4000. Options for almost $700 mln at CAD1.3895 expire today. Also, on Monday, options for $1.65 bln at CAD1.3870 expire and another $1 bln at CAD1.3865. The greenback has held below CAD1.3860 so far today, re-tested the CAD1.3800 area, which has held. Next week sees the services and composite PMI and the March goods trade report, but the highlight is the April jobs report at the end of the week. After losing almost 33k jobs in March (-62.0k full time positions) Canada is expected to have recovered 25k jobs, leaving the unemployment rate unchanged at 6.7%.
AUD: Australia's national election is tomorrow, and the polls favor a victory for the incumbent Labor Party. Investors may prefer a coalition government to a minority one. Many high-income countries are providing more fiscal support and Australia's was announced before the election. At the same time, central banks, leaving aside the BOJ, are also easing policy, with the Fed, BOE, and RBA expected to ease more aggressively going forward than the ECB, Bank of Canada, Sweden's Riksbank, and Norway's Norges Bank. The Australian dollar was turned back from the four-month high seen earlier this week near $0.6450 but it has recovered from around $0.6355 and is trading near session highs (~$0.6445) amid hope of US-China trade talks. Still, a topping pattern has not been negated, and this may be the last gasp of the rally that began with a big upside key reversal on April 9 from around $0.5915. A modest correction could bring it back into the $0.6200-45 area initially.
MXN: The dollar may be forging a base against the peso, or it could be an extended consolidative phase. We are more inclined to see greenback recover as part of its broader upside correction. The greenback is firm near MXN19.6550 in the European morning. It may need to take out the MXN19.78 area to get the ball rolling. The MXN20.00-MXN20.10 would be a reasonable initial objective. Mexico sees the April manufacturing PMI and the IMEF surveys. March worker remittances are due, too, and although they may appear to be slowing, they tend to be seasonal. Even with softer January and February reports, remittances in the first two months of 2025 were slightly above what was remitted in January-February 2024. Another $5 bln was estimated to have been sent home in March.
Reviewed by Marc Chandler
on
May 02, 2025
Rating:
