Overview: The US dollar is mostly firmer in thin May Day turnover. The Japanese yen is the weakest of the G10 currencies following what is seen as a dovish hold by the Bank of Japan, which cut growth forecasts, shaved inflation projections, and delayed reaching its inflation target on a sustained basis. The market downgraded the chance of another hike this year. The euro was sold a little through $1.1290 before rebounding through $1.1330. Sterling extended its pullback and found support near $1.3275. After falling to CAD1.3270 yesterday, its lowest level since last October, the greenback recovered through CAD1.3820 today. The market has largely shrugged off yesterday's negative Q1 US GDP print, recognizing the significant distortions caused by positioning around US tariffs, which bolstered imports, inventories, and may have prevented a sharper drop in consumption.
Equity markets in Asia Pacific that were open, including Japan, Australia, and New Zealand rose. In Europe, the gains in the UK are lifting the Stoxx 600 Index for the eighth consecutive session. Strong US earnings (e.g., MSFT and META) are helping lift US index futures today. The 10-year JGB yield fell nearly six basis points to slightly below 1.25%, its lowest level since April 9. The US 10-year Treasury yield is 1-2 bp lower, below 4.15%. Not only did US equities recover from the sharp losses since earlier in April but so did Treasuries. Recall that 10-year yield rose to almost 4.60% amid worries of a capital strike earlier in April. Gold is extending its pullback. It reached $3500 on April 22 and is hovering around $3220 now. It has fallen through the 20-day moving average (~$3233) for the first time since April 9. June WTI is continuing its sharp retreat. It is off another 2.3% after falling nearly 8% over the previous three sessions. It is below $57 after finishing last week, slightly above $63.
USD: Despite the disappointing ADP private sector jobs estimate and the contraction in Q1 GDP, the Dollar Index posted its highest settlement in three days. Follow-through buying saw the DXY rise to almost 100.10 today, its best level since April 15, before pulling back to around 99.70 by early European turnover. The consolidative phase still looks constructive, but it needs to settle above 100.00, and ideally 100.25 to confirm the positive technical impulses. Most of the high-frequency US data today is unlikely to be market moving unless there is a significant surprise. The weekly jobless claims are overshadowed by tomorrow's non-farm payroll report. Construction spending is for March, and after yesterday's Q1 GDP estimate is of tertiary significance. The ISM manufacturing is for April and has been tracking below the manufacturing PMI. We already know that most of the regional Fed's April manufacturing surveys disappointed. April vehicle sales are likely to remain elevated as many continued to seek to move in front of the tariffs but are unlikely to have sustained March 17.77 mln annualized pace. Moreover, the surge in auto sales likely brings forward purchases that may have been planned for later in the year ("eating one's corn seed"
EURO: The euro slipped through $1.1290 today, its lowest level since April 16 today, to approach the 20-day moving average (~$1.1280), which it has not traded below since April 3. It rebounded to almost $1.1335 before running out of steam in the holiday-thinned turnover in Europe. It must settle below $1.1300 to be of technical significance. A possible head and shoulders pattern may be in the process of forming, which could project a 2.5-cent decline. Tomorrow, the aggregate preliminary April CPI is due. A 0.5% month-over-month increase is expected, which, due to the base effect, will allow the year-over-year rate to slow slightly (2.1% vs. 2.2%). On the other hand, the core rate may edge up to 2.5% from 2.4%. Still, the appreciation of the euro and decline in oil prices still allow the ECB staff to shave their 2025 inflation forecast at next month's meeting from 2.3% projected in March. The swaps market has 2 1/2 quarter-point cuts discounted before the end of the year.
CNY: China's markets are closed for an extended May Day holiday and will not re-open until next Tuesday. The onshore yuan is finished April at the lower end of the month's wide range (~CNY7.26-CNY7.35). Typically, the market is cautious about moving the offshore yuan much in either direction when the mainland is closed, but the broader dollar movement is key. The onshore band, which the offshore market typically respect is about CNY7.0575-CNY7.3455. The dollar is trading in a CNH7.2665-CNH7.2870 range today. Contrary to the projections of many, Beijing has not opted for a devaluation of the yuan to blunt the impact of the tariffs. After all, how much devaluation is needed to offset the 100%-plus tariffs? Instead, as we have argued, the PBOC is allowing slightly more flexibility in setting the dollar's reference rate. Moreover, by keeping the yuan broadly stable against the dollar, the greenback's depreciation translates to a weaker yuan against most other countries.
JPY: A less hawkish, more uncertain Bank of Japan helped lift the dollar toward JPY144.75 today after the greenback found support on Monday and Tuesday on dips slightly below JPY142.00. It recovered from JPY143.15 yesterday. The JPY144.00 area may be the neckline of a bottoming pattern that could project toward JPY148. As widely anticipated, the Bank of Japan left its overnight target rate at 0.50%. The next meeting concludes on June 17. It is most likely to standpat then too. The BOJ did revise its projections. This year's growth forecast was halved to 0.5% from 1.1% and the core CPI (which excludes fresh food) was trimmed to 2.2% from 2.4%. The forecast for core CPI in the next fiscal year pared to 1.7% from 2.0% and seen at 1.9% in the following fiscal year. It pushed out to the second half of the forecasting period, which extends through 2027 to achieve on a sustainable basis its inflation target. It continued to emphasize the uncertainty spurred by the US tariffs and retaliatory measures.
GBP: Sterling fell for the second consecutive session yesterday but merely unwound the lion's share of Monday's gain. Sterling's pullback yesterday accelerated in the North American morning to around $1.3310 and reached $1.3275 today. It has recovered to new session highs near $1.3335 in London turnover. The UK holds local elections today, and it seems of greater interest than today's high-frequency data of (weaker) mortgage approvals and consumer credit figures. On the other hand, the final read of the April manufacturing was revised up to 45.4 from the initial 44.0, which had been a decline from March's 44.9. The rise was the first since January. It stood at 49.1 in April 2024 and 47.0 at the end of last year. The market remains confident that the Bank of England will resume its easing course next week. The swaps market has three cuts discounted and around a 90% chance of a fourth cut this year.
CAD: The US dollar began April near CAD1.4400 and fell to its lowest level since last October yesterday, near CAD1.3770. The greenback is better bid and is trading near session highs (~CAD1.3820) ahead of the North American session. A move above CAD1.3835 would suggest the downside break was a fake break. On a convincing break, the next near-term technical target may be the CAD1.3730 area, the (38.2%) retracement of the post-Covid US dollar rally that began near CAD1.20. The April manufacturing PMI is due today. A preliminary estimate is not made available for Canada so in that regard it is new information. In March, it stood at 46.3 and fell for the third consecutive month. It was at 49.8 in March 2024 and 52.2 at the end of last year.
AUD: The Australian dollar continues to straddle the $0.6400-level as it has since the start of last week. It reached its best level since early last December on Tuesday near $0.6450 and almost a cent before finding new bids that lifted it back above $0.6400. After it poked above $0.6425 today, it has reversed low to nearly $0.6380. The 200-day moving average is around $0.6460, and the Aussie has not traded above it in nearly five months. Australia reported March goods trade figures earlier today. There are three noteworthy observations. First, the US-Australia free-trade agreement has been in effect since the start of 2005. The US had a bilateral trade surplus of about $18 bln in 2024, roughly a 16% year-over-year increase. Australia was, nevertheless, hit was the 10% across the board tariff by the US. Second, Australia goods trade greater with China so far this year than its next three trading partners (US, Japan, and South Korea) combined. Third, Australia goods surplus peak on 12-month rolling basis two years ago and on a three-month rolling basis nearly three years ago. The March surplus jumped to A$6.9 bln, more than twice what the median in Bloomberg's survey projected and well above the A$4.3 bln in March 2024. Exports fell by an average of 0.3% a month in 2024 and surged 7.6% in March, lifting the Q1 average to a 1.4% monthly gain. Imports rose by an average of 0.8% a month in 2024. With the 2.2% slump in March, imports have averaged a 0.3% decline in Q1 25.
MXN: The peso found little favor despite reporting a better than Q1 growth of 0.2% quarter-over-quarter. It followed a 0.6% contraction in Q4 24. Economic activity was boosted by an 8.1% surge in agriculture output, which reflects a recovery from a poor Q4 24. Output from the industrial sector fell by 0.3%, while services were flat. The risk off mood and the sharp drop in oil prices, especially in light of PEMEX earnings loss. The dollar continues to appear to forge a base in the MXN19.47-MXN19.50 area. The momentum indicators stalled but have not yet turned up. Given the interest rate differentials, one is still paid to be long pesos in a sideways market. The greenback reached a four-day high near MXN19.6775 today. It may take a move above MXN19.75 to force some late peso longs to reconsider. Tomorrow sees the April manufacturing PMI, the IMEF surveys, and remittances.
Reviewed by Marc Chandler
on
May 01, 2025
Rating:
