Overview: A couple days away from the US-China talks, the two are sitting disputing who sought out the talks. Given the egos, the risk is that the talks are downgraded if not canceled. Expectations ought to be low in any event. On the other hand, the first US trade agreement is expected to be announced with the UK today, though it has not prevented sterling from falling ahead of the Bank of England meeting, which will most likely result in a dovish quarter-point cut. For its part, the greenback is building on yesterday's gains, encouraged by the Federal Reserve's hawkish hold. It is higher against the G10 currencies, and most emerging market currencies.
Equities are mostly firmer. Taiwan's Taiex saw a minor loss, but several bourses in Asia including India (~-0.5%) and Pakistan (~-6.8%) and a few smaller ones are under pressure. After falling for past two sessions, Europe's Stoxx 600 is recovering, led by the 1%+ rally in the DAX following a 3% surge in Germain industrial production. The S&P and Nasdaq futures are up by over 1%. Bonds are selling off. European benchmark 10-year yields are around three basis points higher though ahead of the BOE meeting and trade deal announcement, Gilts are flat. The 10-year US Treasury yield is up a little more than four basis points to 4.31%. Gold is falling for the second consecutive session. After dropping almost 2% yesterday, the yellow metal is off nearly 0.8% today to about $3340 in Europe. June WTI is up a little more than 1% today to approach $59. A five-day high was set yesterday, a little above $60.
USD: After stopping shy of 100.00 yesterday, the Dollar Index is pushing above it today. A close above 100.00 would discourage the bears, while a move above 100.40 would lend credence to our idea of an upside correction. Reports suggest that the US and UK will announce a trade deal at 10:00 AM ET today. Meanwhile, after President Trump announced on his social media platform yesterday that he will not reduce tariffs on China to ensure successful talks this weekend, China seems to have implied that these are not negotiations but an "engagement." It insists that it is doing so after the US sought it through various channels. Judging from the president's social media posts, this does not set well there. We suspect that the meeting will either be canceled or amount to practically nothing. Meanwhile, US data is of little consequence today. Nonfarm productivity and unit labor costs are not observed directly but derived from the GDP figures. The contraction in Q1 GDP will translate to a decline in productivity and a rise in unit labor costs. Weekly initial jobless claims are expected to have softened after rising in back-to-back weeks for the first time in a couple of months. In any event, the April employment report eased fears that the deterioration of the labor market was accelerating. As widely expected, the Federal Reserve stood pat yesterday and despite pressure from the White House, gave no hint that it was preparing to cut rates at the next month's meeting either. The element of hawkishness came from the seeming move away from the possibility that price increases from tariffs might be transitory. The Fed recognized that there are risks on both sides of its mandate, but this does not mean stagflation as some observers claim. Stagflation might be an appropriate label if both risks materialized.
EURO: The euro remained in the upper end of its recent range yesterday but made session lows following the Fed's press conference to almost $1.1290 after it held below $1.1380 earlier. The broader range is about $1.1265-$1.1425. It reached $1.1270 today and is consolidating mostly below $1.1300 in European turnover. The daily momentum indicators are trending lower, but the euro has moved broadly sideways. A convincing break of $1.1260 could signal a two-cent downside correction. Germany reported the first back-to-back increase in industrial production since Jan-Feb 2024. It jumped 3% in March, well above the 1.0% median forecast in Bloomberg's survey, and the most since October 2021. It is not clear how much German factory orders and industrial output was impacted by activity ahead of US tariffs. Moreover, the first estimate of German growth in Q1 was 0.2% after a contraction of the same magnitude in Q4 24.
CNY: The dollar settled higher for the second consecutive session against the offshore yuan and appears to have put in a low. Follow-through buying today lifted it a little above CNH7.24. The next technical target is in the CNH7.25-CNH7.26 area. Since around the middle of March, the PBOC has moved the daily reference rate slightly more than it had been but since returning from the extended holiday on Tuesday, the PBOC has returned to the smallest of changes in the fix. However, today's fix was set at CNY7.2073 (CNY7.2005 yesterday), the first higher dollar fix in eight sessions, and the largest change in a month. Meanwhile, most Asian currencies fell today, led by the nearly 0.9% pullback in the Malaysian ringgit.
JPY: The decoupling of the exchange rate from the US 10-year yield was underscored by yesterday's price action. The US 10-year yield slipped while the greenback rose by nearly 1.0% against the yen. It recorded session highs in late dealings yesterday at JPY144.00. The dollar is making session highs in the European session slightly below JPY145. The daily momentum indicators are still trending up despite the dollar's pullback from JPY146 last week. Although last week's high is the next immediate target, there may be potential toward JPY148.
GBP: Sterling was sold to $1.3280 yesterday after being turned back from $1.3400 on Tuesday and this is still consistent with a top being carved. It posted an inside day yesterday. Reports about the US trade agreement, after striking one earlier this week with India, helped lift sterling initially to about $1.3355, but it has succumbed to selling pressure and tested key support near $1.3260 in the early European turnover. A break of $1.3260 would lend credence to the bearish take. The 20-day moving average is near $1.3295 and sterling has traded below it for the first time since April 10. The measuring objective of the potential topping pattern could bring it toward $1.3050, which is around the halfway mark of the rally from the April 7 low a little above $1.27. The swaps market has no doubt that the Bank of England will announce a 25 bp rate cut shortly. Ahead of today's announcement, the market has about a 60% chance of another cut next month. After today's cut, the market has two more cuts fully discounted and almost a 90% chance of another. The weaker economic performance will pose a formidable challenge to Chancellor Reeves’ fiscal plans. The dismal showing of Labour in the recent local elections warns of the public's impatience.
CAD: The greenback recovered against the Canadian dollar yesterday. After setting a new low for the year on Tuesday (~CAD1.3750), the US dollar reached almost CAD1.3840 yesterday. Today, it has reached almost CAD1.3885 and is above the 20-day moving average (~CAD1.3850) for the first time since April 2. We suspect corrective potential may extend toward CAD1.40. It is a quiet session for Canadian data today, but the focus is on tomorrow's job report. After losing 32.6k jobs in March, Canada is expected to have added about 5k jobs last month according to the median in Bloomberg survey. However, the 13 projections ranged from a loss of 40k jobs to a gain of 51k. The Bank of Canada meets on June 4 and the swap market looks split about the outlook. Still, another cut is fully discounted by the end of July when it meets next.
AUD: The Australian dollar recorded a bearish key reversal yesterday by making a new high ($0.6515) and then falling through and settling below Tuesday's low (slightly below $0.6440). It is hard to separate the greenback's advance in response to the hawkish hold by the Fed and President Trump's announcement that there would be not pulling back from the 145% tariff on China. Initial support near $0.6400 is holding so far today, but if a larger correction is underway, a move toward $0.6285 initially seems reasonable. The 20-day moving average, which the Aussie has not traded below since April 14 is nearly $0.6395 today.
MXN: The peso was unexpectedly resilient yesterday. On Tuesday, the dollar looked like it was breaking out of the extended consolidation. It traded above MXN19.78, its highest level in nearly three weeks. Yesterday, the greenback fell a little below MXN19.56. It is trading in a narrow range between roughly MXN19.56 and MXN19.6230. President Sheinbaum seemed optimistic about her relationship with Trump. Yet Trump's endorsement Tuesday of the USMCA he negotiated in is firm term is a bit disingenuous. The tariffs he has announced appear to violate the treaty. Maybe his comments were misunderstood. The USMCA treaty is to be re-examined next year. Trump said might be unnecessary but that is because of US unilateralism. We suspect that the US might be more interested in two bilateral agreements rather than North American Free-Trade Agreement. Ironically, the peso fared better than the Brazilian real, which fell by about 0.50% yesterday ahead of the central bank's decision to hike the Selic rate by 50 bp to 14.75%. The Deputy Governor of Banxico played up the scope for rate cuts. Mexico's central bank is expected to deliver another 50 bp rate cut next week.
Reviewed by Marc Chandler
on
May 08, 2025
Rating:
