Overview: China's mainland markets re-opened after the extended holiday, and the by setting the dollar's reference rate little changed from its last fix helped inject a note of stability into the local Asian currencies. Indeed, most of them pulled back today, including the Taiwan dollar and the Malaysian ringgit. The yuan and yen are firmer. In fact, the yen's roughly 0.35% gain puts it atop the G10 scoreboard today, though more broadly, the greenback is mixed. There has been much speculation that the US could announce tariffs on semiconductors as early as tomorrow. While they are coming, we are skeptical about tomorrow. As we note below, the period for public commentary ends tomorrow at midnight. Can there really be a tariff announcement ahead of it?
Chinese and Hong Kong equities as did Singapore. Japanese and South Korean markets were still closed today for holidays and re-open tomorrow. Many of the other bourses in the region fell. Europe's Stoxx 600 is snapping a 10-day rally and is off around 0.8% in late European morning turnover. US index futures are under pressure and the Nasdaq futures are off around 1% with the S&P 500 down about 0.7%. Benchmark 10-year bonds are selling off, and yields jumped 6-7 bp in Australia and New Zealand. They are mostly 2-3 bp higher in Europe and the US 10-year Treasury yield is up almost two basis points to 4.36%. Gold, which fell in the past two weeks, is extending yesterday's nearly 3% recovery with another 1.3% gain. The yellow metal bottomed last week near $3200 and has approached $3390 today. June WTI held $55 yesterday and settled near session highs after gapping lower. It is building on yesterday's recovery and is near $58.75 in Europe.
USD: For the fifth consecutive session yesterday, the Dollar Index recovered in the North American session and settled near session highs. For the third session, it settled near the 20-day moving average. The consolidation looks constructive from a technical point of view, even if not particularly inspiring provided the 99.40 area holds. The daily momentum indicators are still trending higher, and the five-day moving average has crossed above the 20-day moving average for the first time since the whipsaw in late March/early April. The US reports March trade figures today. We already know from the advanced goods balance that as companies and individuals moved to avoid the tax hike tariffs, imports surged, and we know from the GDP estimate that some the imports into inventory. The trade shortfall stood at $68.55 bln in March 2024 and is expected to be near $137 bln in March 2025. There continues to be speculation about the semiconductor tariff announcement on Wednesday, and over the weekend, President Trump ordered 100% tariffs on movies produced abroad under his emergency powers for which Congress has yet moved to curtail. An effort last week was defeated in the Senate. In the ever-expanding national security umbrella, Trump is claiming movies are covered, though precisely how it is to be implemented is unclear.
EURO: The long upper wicks of the euro's candlesticks in the last two sessions appear to reflect that North American trader faded the gains scored intrasession. The five-day moving average is slipping below the 20-day moving average for the first time since early April when it was establishing a foothold above $1.09. Key support is in the $1.1260-65 area. A break would lend credence to the topping pattern, which on conservative assumptions, could project toward $1.1050. The final services and composite April PMI were reported today, but the preliminary estimate is so good that the final reading is of little market significance. Still, both services and the composite PMI were better than initially reported. The services PMI stands at 50.1 (vs. 49.7 initially and 51.0 in March). The composite (production) is at 50.4 (vs 50.1 initially and 50.9 in March). It was 51.7 in April 2024. Recall that last week, the manufacturing PMI was revised to 49.0 from 48.7 initially and 48.6 in March. Separately, Germany's Merz failed to secure a majority in the first vote in the Bundestag, falling six votes shy in a secret ballot even though his coalition has 328 seats. It was a stunning (unprecedented) setback, but ultimately meaningless. If an absolute majority is not achieved in three consecutive votes, a relative majority is sufficient on the fourth vote. And this may explain the limited market impact.
CNY: Mainland markets re-opened for the first time this month. In its absence, the offshore yuan has surged as have several currencies in the region. The Taiwanese dollar may have had the largest move but that does not mean it was the epicenter or cause. With the US perceived to be on high alert for the slightest action against its perceived interests, it is understandable why Taiwanese officials have not intervened more robustly. Hong Kong, which is rightfully less concerned, reported intervened in record size before the weekend and yesterday's holiday. Rather, we suggest the outsized move of the Taiwanese dollar reflects a large imbalance of positions. Taiwan's government indicated that in tariff talks with the US, exchange rates were not discussed, contrary to speculation. The dollar settled April slightly below CNH7.27 and traded slightly below CNH7.1850 yesterday, its lowest level since last November. Yet with the mainland back, more stable price action is likely. The PBOC set the dollar's reference rate at CNY7.2008 (CNY7.2014 on April 30). While it was the sixth consecutive low fix, the PBOC did not validate the sharp yuan advance seen in the offshore market. The dollar rose to CNH7.2352 before pulling back. Other currencies in the region have pulled back, but the Thai baht. There was additional intervention today, and Taiwan's central bank confirmed that it was buying dollars in April. The spark may have been speculation of US-China trade talks, wariness ahead of what some expect to be an announcement US semiconductor tariffs tomorrow. We are skeptical. The period for public commentary on the investigation of semiconductor imports expires at midnight tomorrow.
JPY: The dollar recorded session lows yesterday in early North American turnover near JPY143.55. It had turned down after approaching JPY146 before the weekend. It reached nearly JPY144.30 in Asia Pacific turnover before it slipped through JPY143 in early European trade. A break of last Thursday's low, slightly below JPY142.90 would sour the technical tone. Japan's market remains closed today for a national holiday. A move back above JPY143.50 would help stabilize the tone. The final services and composite PMI will be released tomorrow. The highlight of the week is March labor earnings and household spending reports at the end of the week.
GBP: Sterling traded on both sides of the pre-weekend range yesterday, but the settlement was neutral. Sterling is trading inside yesterday's range. A move above $1.3350 could spur a move toward $1.3375-$1.3400, but the market may be cautious ahead of Thursday's Bank of England meeting. A convincing break of $1.3235 would bolster the technical case that a top is in place. The BOE is widely expected to cut its base rate. The swaps market has about 92 bp of easing discounted between now and the end of the year. A quarter-point cut this week brings the base rate to 4.25%. The terminal rate is seen around 3.50%.
CAD: The US dollar has straddled CAD1.38 for the past four sessions. Bloomberg shows it settling once below there and that was at CAD1.3799 on April 30. It is holding above CAD1.3800 so far today. Nearby resistance is around CAD1.3860. Above there, a band of resistance is in the CAD1.3875-CAD1.3900. Canada reports March goods trade balance today. Another monthly shortfall on par with February's C$1.5 bln deficit would offset January's C$3.1 bln surplus. Canada recorded a goods deficit of C$7.15 bln last year and a $612 mln deficit in 2023. Note that Canadian Prime Minister Carney will meet President Trump today. The humiliation of former Prime Minister Trudeau, with references to him being a governor, and allusions to Canada being the 51st state is unlikely to be repeated, but the damage is done. Reports suggest Canadians are boycotting US brands and have dramatically reduced summer vacation plans to the US.
AUD: The Australian dollar went into the weekend election with a four-week rally in tow. Indeed, since the end of January, the Aussie has fallen only in three of the 13 weeks. The election results were not particularly surprising, but the Australian dollar rose to a new high for the year yesterday, slightly shy of $0.6500. A break above there could see $0.6550, which is also the (61.8%) retracement of decline since last October near $0.6940. On the other hand, the upward momentum has stalled and a close below $0.6435 today would suggest a topping pattern is still being formed. March building approvals fell for the second consecutive month in March and the 8.8% drop was well more than economists expected (~-1.5%). It is the first back-to-back decline since June-July 2023. March household spending unexpectedly fell by 0.3% to offset in full the February gains. It was the first decline since last September.
MXN: The dollar appears to be breaking out of the consolidative phase against the Mexican peso. Last week's range was about MXN19.48-MXN19.70. Yesterday, greenback posted its highest close in two weeks (~MXN19.69), and set session highs list in the session. The dollar has risen to almost MXN19.75 today, its highest level since April 21. A close above MXN19.80 would lift the tone and target the MXN20.00-MXN20.05 area. Mexico's President Sheinbaum revealed that she rebuffed US efforts to use its military to chase cartel members in Mexico. The March CPI will be reported Thursday. The moderation of prices has stalled with both the headline and core inflation reading slightly inside the upper end of the target range (3% +/- 1%), but the central bank’s greater concern appears to have shifted toward weak growth prospects. The central bank meets on May 15 and there is much speculation about another 50 bp cut, matching the size of the two cuts earlier this year.
Reviewed by Marc Chandler
on
May 06, 2025
Rating:
