Overview: There is one driver today. The US Court of International Trade ruled against the Trump administration's "Liberation Day" tariffs. The court rules that the 1977 law used to justify the actions did not apply. The ruling also applies to the earlier tariffs on security of the US borders and fentanyl trafficking. The dollar initially rallied but is now more mixed, with the dollar bloc and Scandis firmer on the day. Emerging market currencies have not recovered as well, but after the Russian ruble, the South African rand, Mexican peso, and Chinese yuan are making advances.
Equities mostly like the development, but the Trump administration will appeal. Taiwan and India were notable exceptions. The Stoxx 600 recovered a little more than half of yesterday's losses and is rising for the third time this week. US index futures are broadly higher (S&P ~1.5%, Nasdaq ~2%). Bonds are under some pressure. Japan's 30-year yield rose nearly eight basis points to almost 3.0%, the 40-year yield fell by 22 bp. European 10-year benchmark yields are around two basis points higher while the 10-year Treasury yield is up almost six basis points to 4.54%. Gold is recovering after dropping to $3245 from $3287 at yesterday's settlement. It is little changed on the day in late European morning turnover. July WTI is extending yesterday’s gain. It traded above $63 before pulling back toward $62.50, which is still $1 above last week's settlement.
USD: The Dollar Index gapped higher in response to the US Court of International Trade ruling. It opened slightly below 100.50 and that has proven to be the high. It has been gradually sold but a small gap exists to yesterday's high near 99.95. With two-thirds of Q2 nearly past, the revisions to Q1 GDP will have little interest for the forward-looking market. The Atlanta Fed's GDP tracker sees growth at 2.2% here in Q2. Wall Street economists surveyed by Bloomberg are less optimistic and the median is for a 1.3% annualized pace. Container shipments from China appeared to improve before the recent agreement in Switzerland as US retailers reported anticipated some relief but shipments have fallen off again more recently. Payroll withholding taxes are weak and US fuel demand (gasoline, distillates, and jet fuel) is unusually weaker than seasonal consideration suggest. Meanwhile, the labor market continues to gradually slow. That said, the four-week moving average of weekly jobless claims may have fallen for the first time in five weeks. Still, May nonfarm payrolls will be reported at the end of next week, and the early call is for a130k (down from 177k in April, which was accompanied by 58k downward revisions in February and March).
EURO: The euro, which peaked on Monday near $1.1420, reached $1.1210 early today, a nine-day low. It was soft coming into today after posting the first back-to-back in three weeks. The euro has recovered into the $1.1280 area in Europe. A close above $1.1300 would lift the technical tone. The news stream outside of the US trade development is light. US-EU trade negotiations move into high-gear. The EU's trade minister Sefcovic reportedly will speak at least every other day to the US negotiating team led by Commerce Secretary Lutnick and Trade Representative Greer starting today.
CNY: The dollar rose against the offshore yuan yesterday to post its third consecutive daily gain. The dollar has now risen in seven of the past nine sessions. The early dollar gains today saw it take out the three-week down trendline comes in today (~CNH7.2030) to reach almost CNH7.2090. It reversed lower and fell to session lows around CNH7.1880. The PBOC set the dollar's reference rate at CNY7.1907, the first time this week above CNY7.19. Officials have gradually raised the dollar's fix since setting it a CNY7.1833 on Monday, its lowest level since early April.
JPY: The dollar recorded a potential key reversal on Tuesday, trading on both sides of Monday's range and settling above its high. Follow-through buying yesterday lifted the greenback a little through JPY145.00 and today to almost JPY146.30. It has pulled back to find support ahead of JPY145.00 in Europe. Japan's weekly Ministry of Finance portfolio flow report shows that this year Japanese investors bought on average JPY215 bln of foreign bonds a week compared with JPY220 bln in the same period last year. They have been net buyers of foreign stocks (~JPY355 bln on average vs sellers a year ago at an average weekly pace of -JPY44 bln). For their part foreign investors have been better buyers of Japanese bonds than a year ago (~JPY455 bln vs 14.6 bln) while they were small net buyers of Japanese stocks (~JPY30.6 bln a week on average) compared with in the year ago period (~JPY279 bln weekly average) in the year ago period. Keep in mind that where a transaction is booked rather than the ownership determines whether it is a domestic or foreign transaction, according to Japanese practices. Some of the "foreign activity" could be Japanese institutions transacting in offshore markets, like Cayman Islands, for example. Tomorrow, Japan has a deluge of data (jobs, industrial production retail sales, and Tokyo's CPI). Tokyo's May CPI is expected to be firm with the headline and core up 3.4%-3.5%. Industrial output likely fell in April as business cut back in the face of US tariffs, while retail sales likely bounced back after a steep 1.2% drop in March.
GBP: Sterling pulled back yesterday to $1.3450. It recorded a three-year high slightly shy of $1.3600 on Monday. The losses were extended today to almost $1.3415. It returned to session highs in early European turnover, near $1.3470. A close above here would lift the technical tone.
CAD: The US dollar posted a bullish hammer candle stick against the Canadian dollar on Monday after it recorded a seven-month low near CAD1.3685. It reached CAD1.3945 yesterday to meet the (50%) retracement target of the leg down from the May 15 high, the last time it traded above CAD1.40. The gains were initially extend to almost CAD1.3865 today in the knee-jerk reaction and has subsequently returned to the CAD1.3820 area. The CAD1.3875-85 area, which holds the 20-day moving average and the (61.8%) retracement objective. Canada reports Q1 current account deficit today. It tends not to be a significant factor for the market. In the decade until the pandemic, Canada recorded annual current account deficits of 2.0%-3.5% of GDP. Since Covid, and the adjustment to the terms of trade, Canada's current account deficit has been less than 1% of GDP. The deficit in Q1 is expected to be around C$3.24 bln compared with C$2.23 bln in Q1 24. Still, the 2024 current account deficit was about 0.5% of GDP near C$15.6 bln.
AUD: The Australian dollar set the high for the year on Monday slightly above $0.6535, stopping shy of the $0.6550 target. It was unable to sustain the momentum and finished a smidgeon lower on Monday and fell further Tuesday and yesterday to reach $0.6410. The three-day drop matches the longest losing streak since the spring equinox. It slipped to a marginal new low today, slightly above $0.6405 and recovered to $0.6440 to threat to snap its losing streak. Australia does not report Q1 GDP until June 4, so the weaker than expected private capital expenditure report (-0.1% vs. 0.2% in Q4 24) adds incrementally to our data set. Tomorrow's data includes April retail sales (expected to match March's 0.3% gain) and private sector credit (expected to rise by 0.5%, the same as March).
MXN: The MSCI Emerging Market Currency Index snapped a four day advance yesterday. It was the second loss in the past ten sessions. The resilience of Latam currencies cracked yesterday. Three of the four largest declines among emerging market currencies yesterday were from Latam, led by the nearly 0.9% decline in the Brazilian real, followed by the 0.75% loss of the Mexican peso. The Czech koruna squeezed into third with a nearly 0.55% loss, followed by the Chilean peso's 0.45% decline. The dollar set a new low for the year on Tuesday near MXN19.1830 and reached MXN19.4250 yesterday. It held below the 20-day moving average (~MXN19.85). It has not settled above it since mid-April. Still, around MXN19.4120, the dollar met the (38.2%) retracement of this month's decline. The dollar is better offered now. It is trading around MXN19.37 in Europe. The central bank's inflation report updated its economic projections. It cut this year's growth forecast to 0.1% from 0.6% in mid-February and from 1.2% at the start of the year. Next year's growth forecast was halved to 0.9%. For comparison, the IMF forecasts a 0.3% contraction this year and 1.4% growth in 2026. The quarterly inflation forecasts were updated. The 2025 headline projection was left unchanged at 3.3% but the core edged up at 3.4%, up from 3.3%. The forecast for Q4 2026 was left unchanged at 3.0% for the headline and core. The minutes from the recent central bank meeting, which delivered the third consecutive half-point cut, will be released today. The bar to another half-point cut is low as inflation concerns have been superseded by growth concerns. The current target rate is 8.50% and the swaps market sees around 100 bp of cuts this year.
Reviewed by Marc Chandler
on
May 29, 2025
Rating:
