The dollar traded choppily last week but settled higher against all the G10 currencies. It finished the week on a firm note. The messy upside correction for the dollar may continue. Despite disappointing retail sales and manufacturing output, and softer than expected CPI and PPI, the market has pushed the next Fed cut into Q4 from Q3. Most of the other G10 central banks will likely (again) cut before the Federal Reserve. Halfway through the quarter, the Atlanta Fed's GDPNow Tracker has Q2 growth at 2.4%, which if accurate, would probably be the best in the G10. Still the 90-day reduction of US (and Chinese) punitive tariffs has seen shipment orders surge, and imports, with knock-on effects on consumption, inventories (business investment) may again distort the underlying economic signals.
Nearly 14 years after S&P took away the US AAA rating, and almost two years since Fitch did, Moody's matched the move after the markets closed Friday. There was a wobble in the thin post-equity close activity, but we suspect that Moody's move will be seen as a belated catch-up move without real implications of the US creditworthiness. Foreign investors have boosted their holdings of US debt since the S&P and Fitch's decision. Still, the greater US debt servicing costs and the budget the administration is seeking, which failed to pass a House committee last week underscores we nearly everyone recognizes, the US deficit and debt are on an unsustainable trajectory. The Reserve Bank of Australia is expected to cut is cash target rate for the second time this year early next week. The futures market discounts another two cuts this year. Chinese banks may shave the loan prime rates after the recent cut in the seven-day repo rates. While Canada is expected to see a fall in the headline year-over-year rate of inflation back below 2%, higher energy and water fees will drive UK inflation sharply higher. Mexico reports inflation for the first half of May, but the central bank's forward guidance last week signaled that the bar to another half-point cut is low. The preliminary PMI are among the surveys that will be released next week, and the Federal Reserve Chair Powell highlights the divergence between the real sector "hard" data, and the weaker "soft" survey data.
US
Drivers: The dollar sold off broadly from around mid-January through at least late April. US yields have risen for the past three weeks, and many economists have downgraded the chances of a recession following the US-China 90-day de-escalation agreement. Once again, the market diverged from the forward guidance of the Federal Reserve, but has re-converged, despite the softer the expected inflation readings and disappointing real sector data (April control/core measure of retail sales and a contraction in manufacturing output). Indications that authorities will likely announce a revision to the Supplemental Leverage Ratio appear to help support the US Treasury market and blunt the impact of the ECB's encouragement of member banks to reduce their dollar funding needs.
Data: Federal Reserve Chair Powell continues to argue that the real sector data has not shown the weakness of the survey reports. The week ahead sees more survey data (several regional Fed surveys and the preliminary May PMI). These may pose headline risk, but the point is that real sector data are more important, and new and existing home sales, which will be released, are not mission critical.
Prices: The Dollar Index rose for its fourth consecutive week. It retraced nearly (61.8%) of its decline from the late March high (~104.70) to the late April low (97.90). It posted a bullish outside up day ahead of the weekend by trading on both sides of Thursday's range and settling above its high. The momentum indicators are still rising but getting stretched. Still, it does not necessarily prevent a retest on the 102.00-102.10 area. The trendline off the lows is found near 100.15 at the start of the new week.
EMU
Drivers: The market has already discounted a strong chance (~90%) that the ECB cuts rates in June and maybe even another time before the next Fed cut is fully discounted. Many attribute the euro's relative resilience to portfolio re-allocation decisions. Recalling that the euro rallied more than 14% from early February through late April, the subsequent pullback has been thus far limited to about 4.3%.
Data: Wage data and the preliminary May PMI are the highlights, though Germany's IFO survey may also draw some attention. This is not the data that will dissuade the market against its belief that the ECB will cut rates again next month.
Prices: The reaction of the US-Sino 90-day cooling off period saw the dollar jump and the euro slump to $1.1065 at the start of last week. This nearly met the (61.8%) retracement of the leg up from the March 27 low (~$1.0735) found near $1.1025. Since the low last Monday was recorded, the euro has not been above $1.1265. It settled last week poorly. The single currency fell to a three-day low before the weekend near $1.1130. It looks vulnerable to more selling pressure and a return to the recent lows.
China
Drivers: Chinese officials continue to manage the exchange rate so that it is broadly stable against the dollar. The onshore yuan has risen by around than 1.3%% against the US dollar so far this year, making it among the weakest in the region, though the Indian Rupee is up less than 0.2%. That said officials appear to have introduced slightly more flexibility into the exchange rate by moving the dollar's daily reference rate by a little more than it had been.
Data: After reporting April inflation last week, the high-frequency data cycle turns to the real sector--retail sales, industrial production, surveyed unemployment, as well as some indications on the property market and house prices. The year-to-date, year-over-year, way of reporting the data is expected to show some improvement in the pace but the recent rate cut and reduction in reserve requirements reflects the recognition that the economy needs more support if the 5% growth target is to be achieved. The property sector continues to bleed. Given the 10 bp in the seven-day repo rate the prime lending rate will likely be adjusted to match it.
Prices: The offshore yuan set a six-month high against the dollar on May 13 (~CNH7.1790). It recovered to almost CNH7.2160 the following day and remained in the range for the past two sessions. The greenback closed firmly ahead of the weekend near CNH7.21. We suspect there may be scope for additional near-term USD gains, perhaps toward CNH7.2230-50, which houses the 200-day moving average and the (61.8%) retracement of the dollar's fall from the May 9 high (~CNH7. 2530). The rolling 60-day correlation of changes in the offshore yuan and the Dollar Index is near 0.25, its weakest since April 2022. The PBOC has reduced the dollar's reference rate in 11 of the past 14 sessions. The lower reference rate caps the dollar's upside (raising floor for the yuan).
Japan
Drivers: The exchange rate has continued to trade less influenced (correlation) with the US 10-year yield and this has corresponded to a period of elevated volatility. Three-month implied volatility has not been below 11%, where the 200-day moving average is found, for over a month. A year ago, it was near 9.5%. Arguably, it remains more about the broad dollar movement.
Data: Japan's April trade balance may be of some interest as we get our heads around the impact of the tariffs. Given the strong seasonal patterns, it is likely the surplus narrowed from JPY559 bln in March. Exports rose by 2.3% in the first 20 days of April (year-over-year), which is slower than the 4% pace in March. Autos and steel were among the industries that saw weaker exports. The April CPI at the end of the week will likely show a more modest increase than the Tokyo CPI a few weeks ago, primarily because of the different weightings of the components in the respective indices. Several factors drove the Tokyo CPI jump, but the two that seem to account for most of the rise are a technical adjustment after last year’s tuition waiver and an unexpected jump in rent prices (biggest gain in 30 years). The BOJ already had the Tokyo CPI in hand when it met recently. Despite the contraction in Q1 GDP, the swap market finished last week discounting about 17.5 bp of tightening this year. While it was the least last week, it was also a little more than four basis points higher than the prior week.
Prices: The dollar was slightly firmer against the yen last week. It was the fourth consecutive weekly gain. The greenback's high at the start of the week was near JPY148.65. It stopped short of the halfway mark of this year's range (~JPY149.40) and the 200-day moving average (~JPY149.70). It set new lows for the week ahead of the weekend, slipping briefly below JPY145.00, but recovered in the North American session to almost JPY146.10. Re-establishing a foothold above JPY146.35 would improve the near-term technical tone, though we note that the momentum indicators are getting stretched.
UK
Drivers: Sterling record a three-year high in late April near $1.3445. It has been moving broadly sideways, holding above $1.3200. The trade agreement with the US, which does not seem to be particularly impactful, although all the details have not been worked out. The Bank of England has cut rate rates twice this year and the bar to a cut in June seems high.
Data: April CPI and retail sales, and the preliminary PMI are unlikely to impact the outlook for next month's meeting. Given the rise in household energy and water bills, inflation is likely to be strong. The median forecast in Bloomberg's survey is for a 1.1% month-over-month increase. Retail sales were robust in Q1, rising 1.6% in volume terms quarter-over-quarter, Wage growth is outstripping inflation, but consumer confidence dropped in April and the latest YouGov polls shows Prime Minister Starmer's support has fallen to its lowest level, mostly due to the erosion of support from his Labour Party. Excluding gasoline, retail sales may have slowed. Turning to the PMI, recall that in April, the composite fell to 48.5 (from 51.5). That matches the lowest since October 2022. The manufacturing PMI has been below the 50 boom/bust level since the start of Q4 24. The services PMI in April stood at 49.0, the least since January 2023. Bloomberg's survey found economists expect a sequential improvement in the PMI.
Prices: Sterling was sold to about $1.3140 last Monday, meeting the (38.2%) retracement objective of the recovery from the April 7 low (~$1.2710) to the best level since February 2022 (~$1.3445). It reached $1.3360 in the middle of last week before being bogged down in consolidative activity in the last two sessions (~$1.3250-$1.3335). It settled last week near the lower end of the range. The downside correction does not appear complete. Nearby support is seen near $1.3225 and then last week's lows. The momentum indicators are still falling, and the five-day moving average remains below the 20-day moving average.
Canada
Drivers: The Canadian economy is vulnerable. The private sector lost nearly 75k jobs in the March-April period. Employment in the goods sector fell by 31k jobs in April, or 1.6%. Inflation is poised to ease. The risks of a cut next month by the Bank of Canada is increasing. Consistent with our hypothesis that rather than idiosyncratic factors, exchange rates are being broadly driven by the US dollar. The rolling 30-day correlation of changes in the exchange rate and the Dollar Index is at a new high for the year, a little above 0.70.
Data: Two important high-frequency data points are due in the coming days. The first is the April CPI. A sharp drop is expected as the consumer carbon tax was eliminated, and oil prices fell. The Bank of Canada expects the year-over-year rate to fall to 1.5% (from 2.3% in March). The second report is March retail sales. They fell by 0.6% in January and another 0.4% in February. Preliminary data from StatsCan suggest retail sales recovered by around 0.7% in March, helped perhaps by consumers moving ahead of the tariffs. Vehicle sales jumped to the best March sales since 2018.
Prices: The US dollar set a range Monday against the Canadian dollar (~CAD1.3895-CAD1.4015) that confined the price action for the rest of last week. It met sellers again ahead of the weekend as it approached CAD1.40. Still, the greenback managed to settle slightly higher on the week to record its first back-to-back weekly gain since the end of February. A move above CAD1.4020 targets the CAD1.4080 area.
Australia
Drivers: Over the past 30 and 60 sessions, changes in the Australian dollar and China's CSI 300 are about as correlated as is exchange rate and the S&P 500 (~0.60 and ~0.50 for 30- and 60-days, respectively). Still, it more correlated with the Canadian dollar (0.75 over the last 30 sessions and 0.72 over the last 60 session). The correlation with the Dollar Index is around 0.52 over the past 30 sessions and 0.55 over the past 60 sessions.
Data: The Reserve Bank of Australia meets on May 20. It started the easing cycle in February with a quarter-point cut to 4.10%. The futures market has another quarter point fully discounted in the week ahead, and four cuts between now and the end of the year. The derivatives market sees the terminal rate near 3%. The flash May PMI is due the following day. The composite stood at 51.0 in April. It finished last year at 50.2 and was at 52.1 in May 2024.
Prices: The Australian dollar initially was sold on last weekend's US-China agreement and tested this month's low slightly below $0.6360. It recovered to probe the $0.6500 area where it was turned back, like the previous week. The Aussie settled lower for the second consecutive week for the first time since the first half of January. A break of the $0.6355 area could spur the next leg down in the correction, which could target the $0.6285-$0.6300 area.
Mexico
Drivers: Given that the US push for re-shoring challenges the essence of Mexico's modernization, the peso has been unexpectedly resilient. It has allowed the central bank scope to cut interest rates by 150 bp so far this year despite inflation moderation stalling so to respond to the economic weakness. The peso remains, though, a risk-sensitive currency. The rolling correlation between the peso and the S&P 500 is near 0.70, the upper end of where it has been for the past two years. The US is threatening to tax worker remittances, which is often the largest source of hard currency revenue for Mexico, more than tourism and net exports. President Sheinbaum is trying to resist, but her options seem limited. The central bank delivered the widely expected 50 bp cut last week, and contrary to our expectations, signaled that it still saw scope for additional half-point cuts.
Data: With the first estimate of Q1 GDP behind it (0.2% quarter-over-quarter) March retail sales are of little consequence. The revisions to Q1 GDP are also not very consequential. Instead, the focus is om the CPI for the first half of May. Both the headline and core rates are barely inside the 3% +/- 1% target range. At the end of the week Mexico reports April trade figures. Mexico's exports rose by 7.4% in Q1 25, the strongest quarterly showing since Q1 23. Some of the increase was likely influenced by the US tariffs. Seasonally, April tends to be a difficult month for Mexican exports. They have fallen in 14 of the past 20 years in April.
Prices: The dollar was sold to a seven-month low against the peso in the middle of last week, slightly above MXN19.30. It recovered, as it did more broadly, and reached a three-day high ahead of the weekend, near MXN19.56. A move above the MXN19.57 area lifts the greenback's tone, but the more important hurdle was last week's high near MXN19.6650. The momentum indicators have turned up, and given the fundamental backdrop (weak US consumer sentiment and potential pullback demand, the US economic nationalism, the weak Mexican economy, risk of another 50 bp cut before the Fed cuts), we suspect the risk is more a move toward MXN19.90-MXN20.00.
Reviewed by Marc Chandler
on
May 17, 2025
Rating:
