Overview: The US dollar is extending yesterday's pullback after Monday's sharp rally. Monday's rally had met or approached several technical targets, but the momentum and news stream, including the downgrading of US recession forecasts, the pushing out of the next Fed rate cut into Q4 seemed to favor further dollar gains. Against many pairs, the greenback has given back all of Monday's gains or nearly so. The dollar is weaker against nearly all the world's currencies. The South Korean won has strengthened the most following talk that the currency was discussed in bilateral trade talks with the US. It is up nearly 1.8%, followed by the Japanese yen, which is up almost 1.2%.
Equity markets are mixed today. In Asia Pacific, Hong Kong's Hang Seng was up 2.3% and the index of mainland shares that trade there was up 2.5%. China's CSI 300 itself was up 1.2%. Taiwan's Taiex soared 2.1%, while South Korea's Kospi rose 1%. Most of the bourses in the region rose. However, the Stoxx 600 in Europe is threatening to snap a four-day advance and US index futures are trading with a heavier bias. European benchmark 10-year rates are mostly 1-2 bp lower, though UK Gilts are flat. The 10-year US Treasury yield is off a couple of basis points to 4.45%. It traded to 4.50% for the first time yesterday since the peak near 4.60% about a month ago. Despite the continued pressure on the dollar, gold is trading quietly inside yesterday's (~$3216-$3265) range. Monday's low was about $3207. After reaching a 2.5-week high yesterday a little below $64, June WTI is trading heavier today below $63.
USD: The Dollar Index continues to unwind Monday's gain scored in reaction to the US-Chinese 90-day de-escalation. After peaking near 102.00 on Monday, it frayed 101.00 in late turnover yesterday. Follow-through selling today has seen 100.30. The immediate risk now extends toward 100.00. The losses come even as the market pushes out the next Fed cut into Q4 from Q3. For the first time in three months, the Fed funds futures are no longer fully discounting a cut by the end of Q3. Moreover, after the agreement with China, many economists reduced the odds of a recession. Meanwhile, the "big beautiful" budget bill is progressing through the House of Representatives. Making permanent the 2017 tax cuts and extending them will and getting rid of the tax on overtime pay and tips will cost an estimated $4 trillion over the next decade, while the spending cuts are worth about $1.5 trillion. The House could send the bill to the Senate next week, and the narrower Republican majority warns of some compromises.
EURO: The euro recovered from Monday's low (~$1.1065) to approach $1.1200 yesterday. Follow-through buying today lifted it a little through $1. 1260, the (38.2%) retracement of the euro's losses since the April 21 high. The next push above there targets the $1.1300-20 area. Meanwhile, the strong German (3.0%) and Spanish (0.9%) figures for March industrial production point to a firm aggregate report tomorrow. The highlight remaining this week is the EC's updated economic forecasts due at the end of the week. The EC's previous forecast saw the eurozone economy growing by 1.3% this year, while the ECB has it at 0.9%. The EC had inflation this year at 2.1% while the ECB's forecast was at 2.3%.
CNY: The dollar recovered from a six-month low near CNH7.1790 yesterday and managed to settle (slightly) below CNH7.20 for the first time since last November. It reached CNH7.2160 earlier today but is straddling CNH7.20 now. Yesterday, the PBOC set the dollar's reference rate below CNY7.20 for the first time since April 7. Since the greenback is allowed to trade in a 2% band around the fix, the lower reference rate ostensibly caps the greenback's upside. It set the dollar's reference rate lower for the third consecutive session. today. It was set at CNH7.1956 today (CNY7.1991 yesterday). That the offshore yuan is trading stronger than the onshore yuan lends credence to ideas that the speculative selling pressure on the yuan has subsided. In light of the 90-day de-escalation of Sino-American trade tensions, many economists have downgraded the chances of a US recession and upgrade China's growth prospects. Note that the US tariff on de minimis products from China was reduced from 120% to 54%, plus there is a flat fee of $100 per shipment, which still seems prohibitive, goes into effect today. Lastly, China's lending figures were released. Year-to-day, aggregate lending is running almost quarter faster than last year (CNY16.34 trillion vs CNY12.74 trillion.
JPY: After reaching JPY148.65 in response to the US-China agreement on Monday, the US dollar pullback to JPY147.45 yesterday and to JPY145.60 today. Monday's low was near JPY145.70. A break of JPY145.30 could signal a move toward JPY144.30. Japan's producer prices rose 0.2% in April for a 4.0% year-over-year pace. This is the slowest of the year but matches last year's high. Meanwhile, trade talks with the US seem to be going poorly. The weakness of the Japanese economy, the uncertainty about the US tariffs keeps the BOJ on the sideline, but hawkish comments by the BOJ's Uchida may have encouraged the market to boost the chances of a hike before the end of the year. The 18 bp of tightening now discounted in the swaps market for year-end. Still the perceived delay in the move may have been a driver of the 10-year yield, which jumped from 1.25% last Monday to nearly 1.50% yesterday before profit-taking kicked in. It is near 1.46% now. The high set in late March was near 1.60%.
GBP: The (38.2%) retracement of sterling's rally from the April 7 low (~$1.2710) came in near $1.3165 and was met on Monday. Sterling recovered from Monday's low near $1.3140 to almost $1.3310 yesterday. It reached $1.3360 today. Follow-through buying could target the $1.3400-40 area. The UK will report Q1 GDP tomorrow. The Bank of England projected a 0.6% expansion in Q1. It had practically stagnated in H2 24. The median forecast in Bloomberg’s monthly survey was for a 0.3% expansion prior to the BOE's update last week.
CAD: For the second consecutive session, the greenback ran into offers near the 200-day moving average against the Canadian dollar (almost CAD1.4020). The US dollar pulled back to about CAD1.3930 yesterday and to almost CAD1.3900 today. Monday's low was near CAD1.3895. A push through there could target CAD1.3850. Canada reports March building permits today--hardly a market-mover even in the best of times. After rising 2.9% in February (following a 4.3% decline in January and 12.1% surge in December) a small decline (~-0.5%) is expected. Housing starts and manufacturing and wholesale sales are due tomorrow. They also typically do not capture the market's attention.
AUD: The Australian dollar led the G10 currencies higher yesterday with around a 1.6% gain. It recouped in full Monday's losses. Monday's high was near $0.6460, and yesterday, it made a new high, almost $0.6480. It tested $0.6500 today and looks poised to challenge $0.6515, the high for the year set last week. Above there, the $0.6550 area corresponds to the (61.8%) retracement of the sell-off from last September's high (~$0.6940). Australia reports April employment data tomorrow. Australia jobs growth stalled in Q1, rising by about 6.5k after 90k increase in Q4 24 and nearly 112k in Q1 24. Full-time employment has fared a bit better. It grew by 22.5K in Q1 after about 36.5k in Q4 24 and 33.3k in Q1 24. The unemployment rate has been bouncing between 3.9% and 4.1% over the past year.
MXN: The dollar unwound Monday's gains against the Mexican peso yesterday. The broad pullback of the dollar and the risk-on mood (e.g., rising equities) saw greenback sold to MXN19.3765 a new low for the year. It peaked near MXN19.6650 on Monday. We had identified the MXN19.37 area as a possible target, but there is little to hang one's hat on until closer MXN19.10. Today, the dollar has been pushed a little through MXN19.35. Mexico's central bank meets tomorrow. With inflation holding (just) inside its 3% +/- 1% target range and the peso's relative resilience; the central bank is widely expected to deliver its third half-point cut of the year. This would bring the target rate to 8.50%. The risk is that the rate cut is accompanied by a statement that suggests Banxico will moderate the pace of its easing going forward. The swaps market appears to be discounting 25 bp cuts at the next two meetings (June and August). The dollar approached BRL5.60 yesterday, its lowest level since the year's low was set early April near BRL5.5935. There is little chart support below there until last October's bottom near BRL5.40.
Reviewed by Marc Chandler
on
May 14, 2025
Rating:
