Overview: While the US dollar is a little softer today against the G10 currencies, it remains mostly within Wednesday's range. The yen is a notable exception. It made a new high for the week despite the contraction in Q1 25 GDP. Most emerging market currencies are firmer. The markets have not reacted to a statement from President Trump that his administration lacks the capacity to negotiate with all the parties so in the next 2-3 weeks, the US will simply set the tariff rates.
Asia Pacific equities ended the week on a mixed note. Europe's Stoxx 600 is up about 0.6%, the fourth daily advance this week. US index futures are up about 0.25%. European bonds are rallying. The 10-year benchmark yields are off 4-5 bp today. The US 10-year Treasury yield is down almost four basis points to slip below 4.40%. Note that the ECB's pressure on its member banks to reduce dollar funding needs could lead to sales of USD assets, but the impact has been offset by signals that the US will lower the Supplemental Leverage Ratio, which will incentivize banks to hold more Treasuries. Gold staged an impressive recovery yesterday, rallying from $3120 to $3240. Follow-through buying lifted it to around $3252 today where sellers drove it back through $3200. It is hovering near there in late European morning turnover. July WTI is consolidating within yesterday's broad range and is trading mostly between $60.80 and $61.80 today.
USD: The Dollar Index is in a narrow range (~100.50-80) and remains inside Wednesday's range (~100.25-101.15) for the second consecutive session. Today's data do not have much market-moving ability. This includes housing starts and permits, NY Fed services survey, and the March portfolio capital report (TIC). After an 11.2% plunge in March housing starts, a modest recovery is expected. Perhaps, the market may be most sensitive to the preliminary May University of Michigan consumer confidence survey and inflation expectations. Consumer expectations may have improved a little. The one-year inflation expectation stood at a lofty, even though it seemed exaggerated at 6.5% in March. The 5–10-year inflation outlook was at 4.4%. In comparison, the two-year breakeven (difference between the inflation protected security and the conventional note) is about 2.65%, while the 5-10 year breakevens are around 2.35%-2.40%. Meanwhile, the month-over-month increase in the April CPI was a smidgeon less than expected and the PPI actually fell. In nine of the 10 sessions through Wednesday, the market downgraded the chances of a September cut. However, odds increased after yesterday's soft retail sales (decline in the control measure, which excludes autos, gasoline, building materials and food services) and contraction in manufacturing output. A week ago, the Fed funds futures market had priced in about 66 bp of cuts this year and now a little less than 57 bp. Once again, the market deviated from the Fed's guidance and has converged again with it, rather than the other way around. Turning to the TIC data, many column inches have been recorded this year discussing capital flight from the US. Yet, note that in the Jan-Feb period, the TIC data showed a net inflow of about $338 bln compared with a net outflow of around $59 bln. In March 2024, the US recorded a net inflow of almost $98 bln. The concern became acute in April, for which the TIC data will not be available until mid-June.
EURO: The euro has been confined to about a two-cent range this week between around $1.1065 and $1.1265. It is trading today in about a 20-tick range on either side of $1.12, where options for nearly 4 bln euros expire today. The eurozone reported a March trade surplus of 36.8 bln euros, widening from the February 24 bln euro surplus. This puts the Q1 surplus at about 61.6 bln euros. The surplus in Q1 24 was around 58.2 bln euros. Some observers see a seasonal pattern favoring a wider surplus in March, but in the last 20 years, the surplus widening on 13 March's. That said, the surplus has widened in eight of the past 10 March's.
CNY: The dollar's recovery from the low for the year set Tuesday near CNH7.1790 has been stymied near CNH7.2160. The greenback is has remained within Wednesday's range (~CNH7.19-CNH7.2160). The PBOC set the dollar's reference rate at CNY7.1938. (CNY7.1963 yesterday and CNY7.2095 a week ago). It was set lower for the fourth time this week. Many observers, including ourselves, think that China came out ahead in last week's trade talks. The US dropped (for 90 days) the reciprocal tariffs announced in early April, as Beijing required to hold the talks. Still, the sectoral tariffs, the de minimis tariffs (54% instead of 120% and $100 fee), and the planned port charges remain in effect. Taking advantage of the 90-cooling off period has seen a surge in container bookings from China to the US, pushing up shipping costs. Walmart indicated that despite the lower tariffs, it plans on raising prices shortly. Meanwhile, the US has stepped up its efforts to block other countries from taking Huawei chips. India appears to have been emboldened by China and is threatening to retaliate for what it says are really "safeguard" tariffs and not really national security protections in the steel and aluminum tariffs. Meanwhile, the US administration says a trade deal with India may be near. Brazil and China signed over around 30 sectoral and investment agreements with China this week and Colombia has reportedly signed a memorandum of understanding (MOU) with China's on the Belt Road Initiative. In the region, Venezuela, Ecuador, Chile, Peru, Bolivia, and Panama have formally joined the BRI.
JPY: After rallying to JPY148.65 on Monday, its highest level since April 3, the dollar has unwound the gains and set a new low for the week today slightly below JPY145.00. There are options for $735 mln that expire today. The four-day decline has seen the greenback retrace (38.2%) of its gains since the eight-month low was recorded on April 22, near JPY139.90. The (50%) retracement is near JPY144.25. Counter-intuitively, the yen's gains came despite a disappointing Q1 GDP. Japan reported a 0.2% contraction in Q1 GDP after a 0.6% expansion in Q4 24. Consumption was flat after Q4 consumption was revised from zero to 0.1%. Business spending jumped 1.4% after a 0.8% increase in Q4 (initially a 0.6% increase). Inventories contributed 0.3% after dragging GDP lower by 0.3% in Q4. Net exports cut growth by 0.8% after adding 0.7% in Q4 24. On a more positive note, March industrial production was revised to 0.2% from an initial estimate of a 1.1% decline. The swaps market has about 16 bp of tightening discounted for this year, down a few basis points from this week's high.
GBP: Sterling continues to consolidate inside Wednesday's range (~$1.3255-$1.3360). The down trendline drawn off the recent highs comes in near $1.3360 today. A move above there would re-set the sights on $1.3400-45 area. On the other hand, a break of the $1.3225-50 area could signal a return to the $1.3140 area. Although yesterday's first reading of Q1 GDP was better than expected (0.7%) and the strongest since Q1 24 (0.9%), which itself was the best since the end of 2021, the momentum may have stalled as the quarter wound down. Attention next week turns to Q2 data, with April CPI, retail sales, and the preliminary May PMI. The swaps market sees little chance of back-to-back rate cuts, which nearly rules out a cut next month. The market shaved the odds of a cut in August to about 72% from nearly 97% at the end of last week.
CAD: For the third time this week, the greenback was greeted by sellers when it poked above CAD1.40. Chart resistance is seen in the CAD1.4015-20 area. It settled near CAD1.3960 yesterday and was sold to about CAD1.3935 before finding new bids. Still, the momentum indicators are still moving higher, and this suggests that despite the frustration, there is scope for another try higher. However, a break of the CAD1.3890-CAD1.3900 area would weaken the technical outlook. Canada also reports its March portfolio flows today. In the first two months of the year, Canada reported a net inflow of C$1.5 bln. In the Jan-Feb 2024 period, Canada recorded net inflows of C$9.2 bln. In March 2024, Canada saw C$14.7 bln capital inflows.
AUD: After being turned back from a slight push above $0.6500 on Wednesday, the Australian dollar fell a little below nearly $0.6390 yesterday. That has held today, and the Aussie has recovered to about $0.6435. The momentum indicators have only recently turned lower, suggesting scope for further Aussie losses. We suspect that the downside correction can continue and target the $0.6300 area. There is little doubt in the market mind that the Reserve Bank of Australia will cut its cash target rate next week by 25 bp to 3.85%. Moreover, the market is confident of another cut in Q3 and Q4.
MXN: As widely expected, Mexico's central bank cut is overnight target rate by another 50 bp to 8.50%. It is the third cut this year and the seventh consecutive cut. The central bank is not done and suggested that "more adjustments of a similar magnitude" was possible. This is a bit more dovish than we and the market expected. The US dollar made new highs for the session on the announcement to nearly MXN19.52 but has come back offered today, returning to the MXN19.4500 area in the European morning. The swaps market has almost another 125 bp of Banxico cuts discounted over the next 12 months. The peso has appreciated by about 7% this year, of which a little more than 5% took place this quarter.
Reviewed by Marc Chandler
on
May 16, 2025
Rating:
