Overview: The dollar has begun the new week under pressure, though many financial centers are closed today. The upside pressure on Asia Pacific currencies remains notable. The offshore yuan, the Taiwanese dollar, and Malaysian ringgit, the Japanese yen, and Australian dollar are among the strongest currencies today. The ostensible trigger is speculation of US semiconductor tariffs to be announced Wednesday and continued speculation of a "Mar-a-Lago" currency agreement modeled as it were on the 1985 Plaza Accord that drove the dollar lower. Less fanciful is the idea that the US will seek local currency revaluation in trade talks. Many local markets will re-open tomorrow. The Australian dollar is a new five-month highs following a sharp victory for the ruling Labor Party.
The equity markets that were open in the Asia Pacific region were mixed. Taiwan, Australia, and the Philippines markets fell. India and Singapore, New Zealand, and Indonesia advanced. European bourses are mixed, while the US index futures are off by 0.65%-0.90%. European benchmark yields are mostly around two basis points lower. With holidays in Tokyo and London, US cash Treasuries have not traded, but the futures show sharply lower yields. After falling 2.4% last week, gold is rebounding. It is up nearly 2% today to push back above $3300. OPEC+ agreement to boost output by another 411k barrels per day in a bid to punish the quota cheaters, sent the June WTI contract to almost $55 after having been turned back from $60 before the weekend. Still, after gapping lower, the contract has recovered to about $57.50 in the European morning.
USD: The Dollar Index appeared to have broken out of a bottoming pattern last Thursday but its pullback before the weekend was disappointing and leaves a mixed technical picture in its wake. Still on balance, given the 1) still resilient labor market, 2) a likely hawkish hold by the Fed on Wednesday, and 3) the favorable momentum indicators, we favor a continued upside dollar correction. However, given the pullback in yields today as the equities and oil drop, the Dollar Index is consolidating inside its pre-weekend range. Last Friday's low was was near 99.40. Moreover, there are expectations for an announcement on semiconductor tariffs on Wednesday. Today's final April services and composite PMI are less important the services ISM, and even then, in the big picture, the survey data will have little impact on Wednesday's Fed decision or the next one in June. Soft survey data are par for the course, the key issue is whether it is spilling over into the real sector. The nonfarm payroll report suggests not so much so far and seem appropriately dismissive the heavily distorted distortions in Q1 GDP.
EURO: The final April services and composite PMI typically do not draw much attention; the generalization is likely to hold tomorrow. The market is confident that the ECB will deliver another rate cut at its next meeting on June 5. More important for the immediate price action is the status of the technical topping pattern in the euro that seemed to have been undermined by the euro's recovery ahead of the weekend. Th euro is trading inside last Friday's range and is confined to a roughly $1.1295-$1.1350 range. The $1.1260 area must yield to confirm the topping pattern. A move above $1.1400-25 would negate it.
CNY: Hopes that the US and China will soon de-escalate the effective embargo against each other, and the US dollar broadly heavier tone saw the greenback fall nearly 1% to below CNH7.21 before the weekend. It fell to its lowest level since last November. It finished below its lower Bollinger Band Follow-through selling saw the greenback slip below CNH7.119 earlier today before steadying. The lower Bollinger Band is around CNH7.2070 today. Recall that the dollar settled near CNY7.2715 before the May Day holiday, and the reference rate was last set at CNY7.2014. After surging before the weekend, several Asian emerging market currencies continues to rise today. The Taiwanese dollar rose for the sixth session and another large move (~2.4% after 3.7% on Friday), muted on the margins by dollar-buying intervention. The Malaysian ringgit rose 1.1% and after a similar gain before the weekend. It is also the fifth consecutive daily advance. Many financial centers are closed today in the region, including Tokyo, China and Hong Kong, South Korea, and Thailand. The first thing tomorrow, Caixin will report its April services and composite PMI. US semiconductor tariffs, and ideas of another Plaza-like agreement, coupled large dollar exposure by financial firms (think Taiwanese life insurers) and exporters appear to be the main considerations. We are skeptical that the US and China are about to enter talks. Neither side appears to have experienced sufficient pain to force a change in position. So far, judging by the seeming US pivots around extreme market turmoil, it appears the US is more sensitive to the pain than Beijing. The US has threatened fresh action against China for buying Iranian oil. If the narrative about container shipments from China is fair, Beijing will likely get a better deal from the US in a few weeks than now.
JPY: Last week's dovish hold by the BOJ helped the dollar confirm a bottoming pattern against the yen. And it happened as the dollar appeared poised to correct higher from the technical perspective. From about 10-days before President Trump's second inauguration until April 22, the dollar fell nearly 12% against the yen. The move above the JPY144.00-50 on May 1 lent credence to the head and shoulders bottom pattern that projects toward JPY148.00-50. However, the dollar fell back to around JPY143.75 ahead of the weekend, after it was turned back from almost JPY146. It is holding above the pre-weekend low today, but a break below JPY143.40 may put it at risk. Meanwhile, Finance Minister Kato who brandished the implicit leverage of a large holder of US Treasuries indicated he would not be playing the card in trade negotiations. The signal was sent, just the same.
GBP: UK markets are closed for a bank holiday today. Tomorrow's final services and composite PMI will not distract the market from Thursday's Bank of England meeting, which is widely understood to result in a quarter-point rate cut (to 4.25%). The BOE cut rates twice in 2024, beginning in August. After this week's cut, the swaps market is anticipating two and nearly three more cuts this year. If sterling recorded a double top (~$1.3425-$1.3445), the neckline is near $1.3235. It made a marginal new seven-session low today slightly below $1.3260 before stabilizing. A break of the neckline could signal a move toward $1.3035. Alternatively, if sterling were simply retracing last month's rally from almost $1.27 on April 7, the (38.2%) retracement is near $1.3165.
CAD: The US dollar fell to a marginal new six-month low before the weekend near CAD1.3760. But as happened a few times last month, US dollar demand quickly emerged, and it settled above CAD1.3800. The CAD1.3860 offers the nearby cap. The swaps market is almost 50/50 for a rate cut at the June 4 Bank of Canada meeting. Today's April PMI is not nearly as important as the employment data at the end of the week.
AUD: The Liberals electoral victory was consistent with the latest polls. As was the case in the recent Canadian election, the head of the opposition lost their own parliament seat as overtures to Trump or Trumpian politics were punished. Recall, Australia like others with a free-trade agreement with the US still faced a 10% across-the-board tariff. Unlike last year, when the incumbents in the high-income countries generally lost, the two G10 elections this year have seen them fare better. The Australian dollar made new five-month highs before the weekend near $0.6470 and it closed firmly, even if below the 200-day moving average (~$0.6460). It was lifted to almost $0.6490 today and is the strongest of the G10 currencies ahead of the North American open. The next target is in the $.6500-25 area.
MXN: The central bank may find itself between weak growth impulses, even though the economy eked out growth in Q1 (helped by the agricultural sector), and inflation, which may be flirting the upper end of the target range. The market has been favoring a 50 bp cut (to 8.50%) but should the CPI (Thursday) surprise to the upside, it may have second thoughts. Meanwhile, the dollar has forged a floor around a little below MXN19.50. It is holding in a narrow range so far today, mostly between MXN19.55 and MXN19.63. A move above MXN19.75 could signal a breakout, and an initial and conservative estimate is around MXN20.00, which is also near the 200-day moving average.
Reviewed by Marc Chandler
on
May 05, 2025
Rating:
