Overview: The dollar is finishing the week heavily. It is off against nearly all of the world's currencies. The only exceptions are the Turkish lira and Hong Kong dollar. For the week, among the G10 currencies, only the Australian dollar has not risen at least 1%, Helped by stronger than expected retail sales, sterling set a new three-year high (~$1.3500). Between the tariffs and the budget, the Dollar Index is set to snap a four-week upside correction, even as the market has pushed the next cut by the Federal Reserve into Q4.
Asia Pacific equities mostly rallied, except for China, Taiwan, and South Korea. Europe's Stoxx 600 is little changed on the day and week. US index futures have a slightly heavier bias. The S&P 500 ended a six-day rally and has a three-day downdraft in tow coming into today. Bonds enjoy a bid today, including the long-end of the Japanese curve, despite the firm April national CPI. European benchmark yields are 1-2 bp lower and the 10-year US Treasury yield is off a little more than a basis point to 4.51%. Gold is firm, though within yesterday's range. It is near $3330 after settling last week slightly above $3200. July WTI reversed lower from $64.20 in the middle of the week and, at yesterday's lows, was $4 lower. It is consolidating quietly today and is hovering near $61.00.
USD: The Dollar Index was already recovering before the stronger than expected preliminary PMI, but it helped extend the gains even as yields counter-intuitively fell. It rose for the first time this week yesterday and resurfaced above 100.00. However, again Asia and Europe sold it and DXY is trading fraying support near the week's low set Wednesday a little below 99.35, which is also roughly the (61.8%) retracement of the rally from the April 21 low (~97.90). It is set to snap a four-week advance. The US reports April new home sales today, and after the heady 7.4% jump in March, the biggest gain in five months, economists expect a pullback. A 4% decline, which is what the median forecast in Bloomberg's survey anticipates would being the seasonally adjusted annual to 695k, which would be about 5.5% lower than in April 2024. It is not typically a market-mover. Nor is the KC Fed's services survey. Next week's highlight include durable goods order, for which a sharp slowing of Boeing orders will weigh on the headline though shipments jumped. The April PCE deflator will also be released. The CPI and PPI suggest there is scope of an inconsequential slight slowing, depending on the rounding.
EURO: The euro peaked Wednesday near $1.1380, (61.8%) of the decline in the past month. It was turned back yesterday and fell to almost $1.1255 in North America and has recovered back to almost $1.1355 today. And the five-day moving average is crossing back above the 20-day moving average. It settled slightly below $1.1165 last week, which was the fourth consecutive weekly decline that followed a four-week advance. The move is about the dollar more broadly, but it did not hurt that Germany's Q1 GDP was revised to 0.4% from 0.2%, helped by stronger consumption and investment. The negotiated wage indicator may draw some attention ,but the significance is marginal. The 2.4% year-over-year rise in Q1 25 follows a 4.1% increase in Q4 24. The fact of the matter is that barring a significant surprise, the ECB is set to cut rates at its June 5 meeting, at which growth and inflation projections will likely be reduced. ECB President Lagarde has suggested that the neutral rate (r*) is around 1.75% and that is where the market expects the deposit rate to be by the end of the year (2.25% now). Late today, Moody's is set to announce its review of Italy's sovereign rating. It has been on negative watch at the lowest investment grade rating (Baa3, which is equivalent to BBB-). S&P assigns it a BBB+ rating with a stable outlook and Fitch says Italy is a BBB rating with a positive outlook. Next week's economic diary consists of mostly surveys and money supply/lending figures.
CNY: The dollar recovered from a four-day low yesterday near CNH7.1940 and was knocking against CNH7.2050 by the end of the session. The greenback has been sold to new six-month lows today near CNH7.1745. The next important technical area may be CNH7.1460-CNH7.1500. The PBOC set the dollar's reference rate at CNY7.1919 (CNY7.1903 yesterday and CNY7.1938 a week ago). There are two broad models of competition. The Anglo-American model, for which companies depend on the capital markets, compete for profits. This is the key to securing lower cost capital from the impatient investors. What is sometime called the Rhine model, but includes Japan, as well, relies more on bank lending. The access to more patient capital encourages competition for market share. China, with its extensive state-own companies, is more the latter. April Industrial profits are due next Tuesday. In March, profits had risen 2.6% year-over-year. In March 2024,they have fallen by 3.5%. On May 31, China's PMI is scheduled for release. The risk is on the downside.
JPY: The dollar broke that three-day downdraft against the yen yesterday, rising for the first time this week, despite the large decline in the US 10-year yield since last Thursday. It has been falling since peaking on May 12 near JPY146.85. Selling pressure re-emerged today ad pushed the dollar back to JPY143.15, to bring yesterday's low near JPY142.80 back into view. The US CPI and PPI steal the thunder from the Fed's inflation target, the PCE deflator. The eurozone's preliminary CPI steals the thunder from the final estimate. In Japan, Tokyo's CPI is usually a good indicator of the national figure. Tokyo's April CPI was reported on April 25 and it showed a large jump (3.5% vs 2.9% headline and 3.1% vs. 2.2% core). The national headline figure converged with Tokyo's at 3.6% (unchanged from March) and the core rate stands at 3.5% (up from 3.2%). The swaps market has about 15 bp of tightening discounted for this year, slightly less than a week ago and practically flat since the end of last month. At the end of next week, Tokyo's May CPI will be reported alongside the April industrial production and retail sales. The bigger story in Japan is the dramatic jump in long-term bond yields. This is the fourth consecutive week that the 30-year bond yield rose. It has risen by about 35 bp during the advance and has approached German levels (3.02%-3.11%). Japan's 40-year bond yield has risen for the seventh consecutive week and is up around 93 bp to almost 3.55%. The strain on Japanese banks seems minimal and the Topix index of bank shares has risen for the third consecutive week. It is up a nearly 11.5% over these three weeks. Japanese insurers may be more exposed to the ultra-long end and the five-week, nearly 17% rally, ended this week with a 3.1% pullback.
GBP: After setting three-year highs on Wednesday (~$1.3470), sterling consolidated firmly and spent most of yesterday's session above $1.34. In fact, it was the strongest of the G10 currencies and settled barely higher on the day. The greenback's heavier tone and stronger than expected UK retail sales have lifted sterling today to $1.35. It may be of psychological importance by the next chart resistance is in the $1.3650 area. April UK retail sales jumped 1.2% (in volume terms) well above expectations and after March's 0.4% increase was revised to only 0.1%. That means that through the first four months of the year, UK retail sales have risen by a little more than 9.5% at an annualized rate. In the Jan-Apr 2024 period, UK retail sales rose an annualized rate of a little more than 5%. With the rise in core CPI and services, coupled with the robust retail sales, the swaps market is pricing in a less aggressive path for the Bank of England. It sees the year-end base rate near 3.82%, the upper end of what it has been since early April and about 32 bp higher than seen at the end of last month. The UK has a light economy calendar next week.
CAD: The US dollar consolidated quietly yesterday between about CAD1.3850 and CAD1.3890, though edged slightly higher to snap a three-day losing streak. It has been greeted by sellers that have driven the greenback to a marginal new low for the week, a little closer to CAD1.3800. needs to got off the CAD1.38-handle to be of any importance. The low for the year was set earlier this month near CAD1.3750. Lifted by the strongest auto sales in the month of March since 2018, the Bank of Canada estimated that overall retail sales rose by 0.7%. This seems likely to have been an attempt to get ahead of the US tariffs. Excluding auto sales, retail sales may have fallen by 0.1% (after rising 0.5% in February). While the Bank of Canada may look through it, the decisive development this week was the firmer than expected core CPI measures. The market downgraded the likelihood of a cut next month (June 4) and, in fact, does not have the next cut fully discounted until September. Next week's highlight is the first estimate of Q1 GDP. The median forecast in Bloomberg's survey is for a 1.8% annualized pace (down from 2.6% in Q4 24). Here in Q2, the median forecast sees the risk of a contraction, and stagnation in Q3.
AUD: The Australian dollar settled poorly yesterday, below Wednesday's low. But it remains within the broad consolidation range that has dominated since the middle of last week, roughly $0.6385-$0.6470. It is trading near the upper end of that range, having reaching nearly $0.6465 in Europe today. Last week's high was near $0.6500. Australia's economic diary is quiet until the middle of next week's monthly inflation report. The Reserve Bank of Australia's delivered 25 bp cut this week and revealed that it had considered a half-point move. The odds of a cut at its next meeting in July jumped from a little less than 25% to around 60%. The overnight cash target rate is at 3.85% and the swaps market sees it near 3.15% at the end of the year, or slightly more than 15 bp lower than a week ago.
MXN: The dollar peaked yesterday near MXN19.46 after the firmer than expected CPI for the first half of May. The headline rate shot to 4.20% (from 3.90%), and through the upper end of the target range for the first time this year. The core rate held barely below the 4% cap. Even as the greenback recovered against the euro and yen yesterday, it fell back below MXN19.30, making the lows late in the session. It has been sold to almost MXN19.2550 so far today. The low from earlier this week was closer to MXN19.25. The dollar carry-trade is in vogue and we still see potential toward MXN19.00-MXN19.10. We suspect, and look for confirmation, in next week's central bank report, in which it may revise its growth forecast again. Remember it recently cut in half to 0.6%. But, this still may be optimistic. The IMF, for example, projects a 0.3% contraction. The peso's resilience was again demonstrated. Mexico's trade surplus will be reported shortly. It tends to narrow sequentially in April and it is expected to have done so last month. Mexico's March surplus, which was almost three-quarters larger than the March 2024 surplus was likely flattered by attempts to get ahead of US tariffs.
Reviewed by Marc Chandler
on
May 23, 2025
Rating:
