Overview: The US and China struck an agreement that would lower tariffs for a 90-day cooling off period. The US tariff on China falls to 30% from 145%, while China's tariff on the US falls to 10% from 125%. A new forum was established to allow recurring discussions on economics and trade. The dollar spiked sharply higher on the news but was quickly sold into the rally, and while it remains sharply higher on the day, it is well off its peak. The Japanese yen is weakest of the G10 currencies, and it is off about in late European morning turnover. The Australian dollar, sometimes treated as a G10 proxy for China, is down the least, less than 0.15%. Most emerging markets in Asia and Europe are weaker. The China yuan and Russian ruble are notable exceptions.
Equity markets have rallied on the news, but some markets in the Asia Pacific region closed, like Japan and Taiwan closed before the news was announced. The index of mainland shares that trade in Hong Kong rose by 3%. The calming of hostilities between India and Pakistan lifted local markets by around 3.7% and nearly 9%, respectively. Europe's Stoxx 600 is up around 1%, It is the 13th rising session in the past 15 sessions. US index futures are up sharply, with the Nasdaq up near 3.8% and the S&P 500 up around 2.8%. Bonds have been sold. Benchmark 10-year yields jumped seven basis points int Japan and Australia and are up 6-7 bp in Europe. The 10-year US Treasury yield is up five basis points to 4.43%. Before the weekend, the Fed funds futures were discounting nearly 66 bp of easing this year and are now pricing in 57 bp. The rising dollar and yields have sapped demand for gold. The yellow metal is off more than $100 and is approaching last week; slow near $3200. A break targets $3164. June WTI is extending last week's recovery. A week ago, it approached $55 and today it has pushed above $63.00. Resistance is seen near $65.
USD: News of the 90-day cooling off period between the US and China on the trade war helped extend the dollar's upside correction we have been anticipating. The Dollar Index rose to almost 101.80 today. We thought potential existed to 102.00-50. Initial support now may be in100.80-101.00. Attention turns to the CPI and the year-over-year rate is expected to be steady. That is not until Wednesday. On tap today is the federal deficit in the first month of the new fiscal year. Due to tax revenues, the budget is in surplus in April, with the exceptions in 2020 and 2021 due to the pandemic. In April 2024, the surplus stood at almost $210 bln. In Q1 25, the deficit was about $596 bln compared with nearly $555 bln. Ideas that DOGE cuts were going to be substantial and lead to a check to American households always seemed like fantasy and even more so now. Rather than the initial promise of $2 trillion in savings, independent auditors put it at around $2 bln and that does not appear to include the loss of tax revenue from the cuts in the IRS auditors. News reports suggest 280k federal workers and contractors have been laid off, but it has yet to be seen in the data.
EURO: The euro has been sold to about $1.1085 before stabilizing. We have been looking at a target near $1.1050. It recovered to almost $1.1150. Resistance may be in the $1.1180-$1.1200 area. With a 3% jump in German industrial production in March and a 0.9% rise in Spain's the risk in on the upside for the aggregate figure due on Thursday. Ahead of it is tomorrow's German ZEW survey. The expectations component collapsed in April (-14 vs. 51.6), and we will see if it was a fluke. The current assessment rose in each of the first four months of the year but remains in the trough.
CNY: The dollar briefly poked above CNH7.25 ahead of the weekend and was repulsed and sent to new session lows near CNH7.2340. It briefly traded below CNH7.20 today. Last week's low was near CNH7.1845. After setting the dollar's reference rate lower for seven consecutive sessions, the PBOC set it higher in the last two sessions but lowered its again today (CNY7.2066 compared to CNY7.2095 before the weekend) China reported continued deflationary pressures. The April CPI was -0.1% year-over-year, the same as in March, though core prices rose 0.5%, also the same as in March. Producer price deflation deepened to -2.7% from -2.5%. China cut rates last week and the deflation will boost calls for fiscal measures. Separately, China reported a record current account surplus of $165.6 bln in Q1. It reported a $424 bln surplus in 2024 and $263.4 bln surplus in 2023.
JPY: The greenback was turned around JPY146.20 before the weekend, its best level since April 10. It was sold to about JPY144.85 before buyers emerged. It overshot out technical objective (~JPY148) to reached nearly JPY148.25, perhaps encouraged by the jump in US rates and the tougher trade stance by Prime Minister Ishiba indicating that Japan will not accept a trade deal that excludes autos, and that it won't sacrifice is agriculture sector to protect autos. Japan reported another large current account surplus for March. The JPY3.7 trillion surplus follows the record JPY4.06 trillion in February. Two-thirds of the decline can be accounted for by the smaller trade surplus (JPY516.5 bln vs. JPY713 bln).
GBP: Sterling held support in front of $1.32, a three-week low, before the weekend and recovered to nearly $1.3320. It was sold to $1.3160 today, which meets the (38.2%) correction of the leg up from the April low (~$1.2710). The 50% retracement is near $1.3075. A message the swaps market took from last week's Bank of England meeting is that there was less a chance of a cut at next month's meeting. At the start of last week, the market had about a 70% chance of four cuts this year and now it is discounting about a 10% chance of three more after the BOE's rate cut. This week's data--March/April UK employment report and the first estimate of Q1 GDP, with March details.
CAD: The 0.2% rise in the April unemployment rate (to 6.9%) and the 31k loss of manufacturing jobs, concentrated in the auto industry, weighed on the Canadian dollar. It was the only G10 currency that was unable to gain against the greenback before the weekend. The odds of a June rate cut rose to about 60% from less than 50% the previous day. Now it is around. 55%. The US dollar set a new low for the year last Tuesday near CAD1.3750 and approached CAD1.3945 at the end of last week. It is recording an outside day today, having traded on both sides of the pre-weekend range. It reached CAD1.3980 today. The next important chart area is CAD1.4000-20. Above there, the next hurdle is near CAD1.4080.
AUD: The week begins slowly with confidence surveys, while the highlight, April's employment report is due Thursday. Last week's high was set on Wednesday near $0.6515, the high for the year. However, it reversed lower and fell to almost $0.6370 ahead of the weekend. It caught a bid and briefly traded above $0.6430 in North America. It spiked to $0.6460 on the details of the US-China deal but was quickly sold to nearly $0.6390 before steadying. Initial resistance may be in the $0.6420 area. Options for A$425 mln at $0.6350 expire today.
MXN: With last week's CPI report showing inflation remains within the targeted range even if barely the weakness of the economy justifies a half-point cut at this week's central bank meeting. The resilience of the peso should also give the officials some comfort. The dollar fell to its lowest level in seven months against the peso ahead of the weekend. Initially, the dollar's losses were extended to almost MXN19.42 before the broad demand lifted it to almost MXN19.58. It has traded on both sides of the pre-weekend range and a close above Friday's high (~MXN19.5480) would lift the technical tone. The MXN19.60 area marks the halfway point of the leg down from last week's high near MXN19.7820.
Reviewed by Marc Chandler
on
May 12, 2025
Rating:
