Progress in US-Iran negotiations and a ceasefire between Israel and Lebanon fed investor optimism. The US S&P 500 and Nasdaq reached new record highs, with multi-week rallies in tow. June WTI tumbled 7.6% last week, after the 8.6% drop the previous week. It briefly traded below $79 a barrel, down from the peak on March 9 (~$104.35). Interest expectations also shifted. In Europe, the two-year yields fell by 20-25 bp last week. The US two-year yield fell a more modest 7-8 bp. Although Japan's two-year yield slipped almost three basis points there was a more dramatic move in the swaps market, which dramatically adjusted the odds of a rate hike by the Bank of Japan later this month to less than 20% from around 55% a week ago.
Developments in the Middle East may be more important than the high-frequency economic data. The risk is that the market is getting ahead of itself and the situation is likely to be clarified over the weekend. US earnings seasons features tech and airlines next week. The dollar fell against all the G10 currencies last week but recovered from its worst levels in the waning hours of last week's activity. After rallying last month, the dollar has unwound a good part of those gains. Like the 13-day rally in the Nasdaq is an extreme, the Dollar Index has fallen for nine of the past 10 sessions. The rolling 30-day inverse correlation of changes in the Dollar Index and NASDAQ is a little more than -0.60 which is the most since the end of 2023.
Data: Stronger auto sales and a dramatic rise in gasoline prices likely lifted March retail sales. Excluding autos and gasoline, retail sales may have edged up by 0.1-0.2%. Outside of retail sales, the other US high-frequency data are surveys. April Fed surveys (Philadelphia non-manufacturing survey and KC Fed's manufacturing and non-manufacturing) and the preliminary April PMI will likely pick up some of the disruption from the Middle East war. Q4 25 GDP was reported initially reported at 1.4% (annualized). It was halved in the first revision and to 0.5% in the second revision. The Atlanta Fed nowcast is for Q1 26 1.3%. It will be updated after the retail sales and business inventories on Tuesday. Also, Kevin Warsh's confirmation hearing is scheduled for next week, but could be postponed. As long as the investigations into the Fed continue, and the president indicated they would, there appears to be a blocking majority on the Senate Banking Committee. Our understanding is that if a successor has not been confirmed by the end of Powell's term as chair (May 15), he would likely be picked by the board to continue in that post. His term as governor does not end until 2028, and we suspect the odds favor him continuing to serve to protect what appears to be a strong conviction of the importance of the Federal Reserve's independence.
Prices: The Dollar Index fell for eight consecutive sessions through April 15. That matched its longest losing streak in 15 years. It fell through 97.65, its lowest level since the war began and met the (50%) retracement of the rally from the year's low recorded in late January around 95.55. The Dollar Index recovered through most of the North American session before the weekend and reached almost 98.25. The momentum indicators are over-extended but do not prevent additional near-term losses. Still, a move above 98.40-50 would suggest a near-term bottom is in place.
Drivers: The euro benefitted from the market's stronger appetite for risk and the broad dollar pullback more than a particular European development. At its peak on March 24, the swaps market discounted three rate hikes fully by the ECB this year and about 25% chance of a fourth. It now has two hikes discounted and less than a 10% chance of a third. This still seems excessive. At its most extreme last month, the swaps market had 85% chance of an April hike. It has been scaled back to about 12%.
Data: The preliminary April PMI is the highlight. Recall that the composite (output) had begun faltering. It rose from last June through November. It has now slowed three of the four months through March. The general pattern holds for both services and manufacturing. The Middle East war is disruptive on many channels, and it would be surprising if the March data fully reflected the impact. The same is true of Germany's ZEW and IFO April surveys also due.
Prices: The euro has risen in nine of the past 10 sessions. Ahead of the weekend, it took out the high set before the war began (slightly below $1.1830) and proceeded to sell off around to $1.1760. The potential key reversal warns that despite the momentum indicators are still rising, the euro's four-cent rally over the past month may be over. If so, the first corrective target may be in the $1.1675-$1.1700 area.
PRC
Drivers: The PBOC has continued its campaign that began last May or June to appreciate the yuan. It has consistently been lowering the dollar's reference rate and now is at a three-year low. The campaign does not appear over even though the end point is not clear. Judging by several bank recommendations, portfolio flows appear supportive.
Data: Chinese banks will set their loan prime rates on April 20. The one-year rate is at 3.0% and the five-year rate is at 3.50%. Before the Middle East war, expecting more monetary easing seemed reasonable, but now it looks less certain. In any event, a clearer signal from the PBOC may be necessary for the loan prime rates to be changed. The increased use of China's International Payments System (CIPS) to settle and clear international transactions would seem to make less relevant when taken in isolation the use of the yuan on the SWIFT global payment system. On SWIFT, the yuan's share of payments peaked in July 2024 near 4.75%. In February, its share was about 2.75%.
Prices: The PBOC has continued to allow gradual appreciation of the yuan. In the offshore market, it rose to its best level since February 2023. The market has been encouraged by central bank's guidance through the setting of the daily reference rate. It was set at its highest level against the dollar since April 2023 last week. The greenback found support near CNH6.80. The CNH6.85-CNH6.86 area may offer a nearby cap.
Japan
Drivers: There are three significant influences on the dollar-yen. The first is the general direction of the dollar. The rolling 30-day correlation between changes in the dollar-yen exchange rate and the Dollar Index is at 0.75. The second is the change in the 10-year US yield. The correlation with the exchange rate is near 0.65, the highest since last October. Third, there is a risk element to the yen, as well. The rolling 30-day correlation of change in the exchange rate and the S&P 500 is around -0.55, the most extreme since late 2022.
Data: While Japan has a busy calendar of high-frequency reports, they will likely have minimal impact on expectations for the BOJ meeting. The national March CPI, for example has been anticipated by the Tokyo figures out a few weeks ago. Tokyo's year-over-year headline and core CPI measures edged 0.1% lower. The BOJ targets the core CPI rate and in February, it stood at 1.6%. It was the first time since March 2022 that it was below the 2% target. One of the few things that most international economists might be able to agree on is that the Japanese yen is undervalued. And yet, it has not recorded an annual trade surplus since 2020. The deficit is shrinking. In the first two months of the year, Japan's trade deficit was around half the size of the shortfall in the Jan-Feb 2025. Yet it seems like the terms of trade (export/import price indices) are going against it. The preliminary March PMI is due, but the market does not typically respond to it. The February tertiary industry index will help economists forecast GDP, but growth this quarter seems on par with Q4 25's 1.3% annualized. Meanwhile BOJ Governor Ueda's comments were not strong enough to arrest the decline in expectation of a rate cut at the end oof the month. In the past two weeks, the odds of a hike in the swaps market went from around 67% to less than 17%. We had thought it was more likely but recognize that the Bank of Japan will most likely not surprise the market.
Prices: After the dollar was turned back from its approach of JPY160 at the start of last week, it reached JPY157.60 at the end of the week. Ahead of the weekend, the greenback posted outside down day by trading on both sides of the previous day's range, but it did not settle settling below its low (~JPY158.25), neutralizing the technical signal. The momentum indicators are falling and the dollar looks soft. The fact that the dollar fell for the third consecutive week against the yen underscores our argument that despite the finance minister’s comments about willing to take "bold action," the conditions for material intervention are not present.
UK
Drivers: Sterling benefits from a weaker dollar. The rolling 30-day inverse correlation between changes in sterling and the Dollar Index is almost -0.90, the most in six months. Sterling's correlation with changes in the US two-year yield is -0.33. The inversion is intuitively understandable, higher US rates, weaker sterling. What may be surprising is that the correlation between sterling and changes in the two-year UK yield is also inverse, though slightly (-0.12). Over the last two years the rolling 30-day correlation has spent more time in inverted than positive.
Data: It is an important week for UK data. While data feeds into the central bank's assessment, the bar for a change in policy next week seems high. Updates on the labor market, retail sales, and inflation are due. The UK is experiencing among the strongest CPI increase and one of the weakest major economies. The preliminary April PMI is due, as well. In March, the composite dropped to its lowest level, 50.3, since last April when it dipped below the 50 boom/bust level in a bit of a statistical quirk. It jumped back the following month. The data are unlikely to change anyone's mind that the BOE will standpat even though there may be a dissent in favor of a hike. Recall that the March decision to leave policy unchanged was the first unanimous decision in 4.5 years.
Prices: Sterling stalled around $1.36 last week. Some frustrated late longs look to have bailed and sent sterling back to slightly below $1.3515 in late dealings before the weekend. By settling by 1/100 of a cent below the previous day's range, sterling posted a potentially key reversal. It recorded a four-month low at the end of March near $1.3160, and with last week's advance, met the (61.8%) retracement of the losses from nearly $1.3670, the high since September 2021 in late January. The momentum indicators are over-extended, and although they have not turned lower, the month's advance long in the tooth. A break of $1.3500 could signal scope for another cent decline.
Canada
Data: Canada reports March CPI and February retail sales. Canada's headline CPI before the war was 1.8% and the core stood at 2.0%. Prices are expected to have risen in March. The median forecast in Bloomberg's survey is for the headline rate to jump to 2.6% and for the core rates to edge up. The March jobs report was uninspiring. The market recognizes that the central bank may sit on the sidelines for the next few months. Before the war began, the swaps market was discounting about a 40% chance of another cut (after cutting the target rate by 275 bp over the past two years). At the peak on March 20, the pricing in the swaps market was consistent with a little more than three hikes. Now it discounts one hike fully and almost 10% chance of a second.
Prices: The Canadian dollar has been on a run. It has risen in nine of the past ten sessions for almost a 2% gain. One way to appreciate the magnitude of the move, consider that the one-month implied volatility is about 4.5%, annualized. The US dollar reached CAD1.3650 before the weekend, a one-month low. It stalled and recovered to almost CAD1.3690. The greenback is coming down from around CAD1.3965 at the end of March and the move seems advanced. The risk-reward may be shifting against chasing the Canadian dollar higher. The risks of a greenback bounce appear to be increasing.
Australia
Drivers: The broad movement in the US dollar seems to be the more important driver of the Australian dollar's exchange rate. The rolling 30-day inverse correlation of changes in the Aussie and the Dollar Index is around -0.75, near the most extreme since last September. It is positively correlated with the S&P 500, about 0.65, for the past 30 sessions. It has spent little time above 0.70 since last November. Changes in the Aussie and oil are around -0.40, the most since last September. Counter-intuitively the Aussie is inversely correlated with changes in Australia's two-year yield. It is near this year's low, near -0.22.
Data: The only data of note in the coming days is the preliminary PMI. Recall that in March, the manufacturing, services, and composite reading were all below the 50 boom/bust period. The disruption of the Middle East war likely had more impact than the two rate hikes, with the second taking place after the war began. The composite PMI plummeted to 46.6, the lowest since late 2023, from 52.5 in February. It is the first sub-50 reading since September 2024. Ironically, the manufacturing sector held up better than services. The manufacturing PMI fell for the second consecutive month, and March's 49.8 was the weakest since last October. The services PMI peaked in January at 56.3. It fell sharply in February to 52.8 and then fell nearly twice as much in March to 46.3, signaling the deepest contraction since November 2023. The central bank meets on May 5. The futures market is discounted almost 80% of another hike. We had leaned against the third consecutive rate hike, but the prospects of an end to the war in the Middle East and hawkish official comments forced a re-evaluation.
Prices: The Australian dollar reached its best level since mid-2022 at the end of last week. It poked above $0.7220 to culminate the three-week rally of a little more than 4.5%. It frayed the upper Bollinger Band (~$0.7215) but pulled back to settled around $0.7175. Initial support may be in the $0.7130 area, and a break could signal a corrective phase that could extend toward $0.7000.
Mexico
Drivers: The Mexican peso appears most sensitive to the risk environment. Changes in the dollar-peso exchange rate and the S&P 500 is around -0.80. This is the most extreme since 2020. Ironically, the changes in the USD against the peso and changes in the Australian dollar is almost -0.80. The correlation of the exchange rate and the Dollar Index is about 0.75, the most since last September. Rising oil prices is not helpful for the peso. The rolling 30-day correlation of changes in WTI and the dollar-peso exchange rate is a little below 0.50, a four-year high.
Data: Mexico's February retail sales are too dated to have much impact on the central bank's decision early next month. It is difficult to see it sustaining momentum after the 1% surge in January. The February IGAE economic activity report may not be particularly helpful either given the disruption from the war. Mexico will also report March unemployment which stood at 2.59% in February. It recorded last year's low at 2.22% in March, a record under the current times series that began in 1994. Remember, though, that over half of Mexican workers are in the informal economy.
Prices: The dollar initially was sold to a new low since the Middle East war began ahead of the weekend, reaching almost MXN17.1275. However, it reversed higher and closed above Thursday's high (~MXN17.2960). This is the kind of price action one looks for at the end of a sustained moved. The MXN17.45-50 area may offer initial resistance.
Reviewed by Marc Chandler
on
April 18, 2026
Rating:
