Overview: There are five developments to note. First, the US and China will have initial trade talks this weekend in Switzerland. Second, the PBOC cut its key rate by 10 bp and cut reserve requirements by 0.5%. It also announced several other measures to boost lending/relending. Third, German factory orders were stronger than expected, perhaps bolstered by attempts to move ahead of US tariffs. Fourth, after last week’s ruction, most Asian emerging market currencies continued to pullback. The exceptions today were the South Korean won and Philippine peso. Fifth, there has been little market impact from India and Pakistan exchanging strikes. The Indian rupee is weaker (~0.5%). Indian equities are slightly firmer, but Pakistan market slumped more than 2%. It was the third consecutive loss for the Karachi 100 and the largest loss since April 30.
The US dollar is mostly firmer against the G10 currencies and most emerging market currencies today. Most Asia Pacific equities posted minor gains today, but Thailand stands out with a nearly 2.5% gain. Europe's Stoxx 600 snapped a 10-day advance yesterday and is trading heavier today. US index futures are up about 0.5%. The highlight of the remainder of the session are the likely rate cuts by Poland and the Czech Republic, while the FOMC will leave policy unchanged, and the central bank of Brazil is expected to hike by 50 bp. European benchmark 10- year yields are 2-3 bp lower, while the 10-year US Treasury yield is a little firmer at 4.32%. Gold is pulling back nearly $200 an ounce over the past three sessions. June WTI is extending its recovery off the $55 area seen at the start of the week and is now near $60.
USD: The FOMC meeting is the event of the day. There is no doubt that the central bank will stand pat. Its statement will be adjusted to recognize the contraction in Q1 GDP. Still, Fed Chair Powell's overall assessment is unlikely to be changed much from "the economy is in a good place" and the Federal Reserve has the capacity and will to move as needed. When the Fed met in mid-March, the market had a June cut fully discounted and had two cuts discounted this year and almost a 75% chance of a third cut. It has subsequently pushed out the first cut until July (~93% chance) and has nearly three cuts fully discounted this year. The median Fed projection in March was for two cuts this year. Given the uncertainty still stemming from the administration's policies, look for sparse forward guidance, but no word cues that would suggest a June cut. The Dollar Index posted a bearish outside down day yesterday, setting new four-day lows near 99.20 late yesterday. News that US and China will begin trade talks later this week failed to impact the Dollar Index much and it is trading in a narrow range mostly between 99.30 and 99.60. The (50%) retracement objective of the bounce off the April 21 low (~97.90) is near 99.15 and the (61.8%) retracement is closer to 98.85.
EURO: The euro traded on both sides of Monday's range yesterday and it settled above Monday's high, constituting a bullish outside up day. It approached the pre-weekend high to $1.1380 in late turnover. A move above there targets the $1.1420 area. Options for 1 bln euros at $1.1400 expires today. The news of US/China trade talks saw the euro ease to almost $1.1325 but it recovered to nearly $1.1380, helped by stronger than expected Germany factory orders. The 3.6% increase contrasted with the median forecast of a 1.3% gain. The increase in orders was widespread and appears to have been due to efforts to front-run US tariffs. The optimistic camp says the Germany industrial sector is stabilizing, but the pessimists note that the manufacturing PMI, despite not falling this year, remains below the 50 boom/bust level, consistent with continued slowing. Industrial production is due tomorrow. It is expected to rise by 1% after falling 1.3% in February. The market remains confident that the ECB will cut rates at the early June meeting. The swaps market has slightly less than a 50% chance of another cut in July. Note that Poland and Czech central banks are expected to cut rates today. Poland is seen cutting 50 bp to 5.25%. It will be the first since October 2023 and comes as the presidential election on May 18 draws near. The swaps market sees a terminal rate between 3.75% and 4.0%. Since October 2023, Poland's CPI has fallen from 6.6% to 4.2%. The Czech central bank is seen cutting the repo rate by 25 bp to 3.50%. It would be the second cut of the year. The easing cycle began in December 2023 with a 7.0% repo rate. The preliminary April CPI reported yesterday stands at 1.8%. The swaps market sees a terminal rate between 3.00% and 3.25%.
CNY: In addition to trade talks with the US, China announced it was easing monetary policy. Specifically, the PBOC cut the key seven-day repo rate by 10 bp to 1.4% and lowered required reserves by 0.5%, which frees up about CNY1 trillion. Several other measures were announced that are aimed at boosting lending/re-lending. The dollar fell by almost 1.1% against the offshore yuan last Friday and Monday. It stabilized yesterday, helped by the little change in the PBOC fix as it returned from the extended holiday. The dollar bounced from about CNH7.20 to CNH7.2350 yesterday but settled in the lower end of the range; below the 200-day moving average (CNH7.2220).and beneath CNH7.21. Today, the dollar fell slightly below CNH7.19 before rebounding and to nearly CNH7.23. The fact that the dollar is trading weaker against the offshore than onshore yuan would suggest limited dollar bullish/yuan bearish speculation. Amid the uncertainty and volatility among Asian currencies in recent days, the PBOC set yesterday's reference rate for the dollar 0.01% from the last fix on April 30. Prior to the holiday, we had been tracking a subtle change in the PBOC's daily fix. It had widened starting in early March and it is possible that PBOC reverts to the narrower adjustments to promote stability. Today's reference rate was set at CNY7.2005 (CNY7.2008 yesterday). Although it was little changed, it is the seventh consecutive session that the PBOC lowered the dollar's fix, which essentially limited the dollar's upside.
JPY: The dollar’s rally from its dip below JPY140 on April 22 to a high at the end of last week, a little shy of JPY146.00. With yesterday's pullback to JPY142.35, the greenback has nearly retraced (61.8%) of its rally. A break of the JPY142.00-20 area could spur a retest on the JPY140 area. It held above JPY142.40 today and recovered to JPY143.45, setting the high in the European morning. Nearby resistance is seen around JPY144.00 Japanese markets re-opened today after a long holiday weekend. The market paid little attention to the final services and composite PMI. Recall that the composite PMI slipped to 48.9 in March, matching the lowest reading since the pandemic but it rebounded to 51.2 (51.1 flash estimate). The Japanese economy appears to have nearly stagnated in Q1 The first estimate of Q1 GDP is due on May 16. Whatever gets the BOJ to raise rates, it will most certainly not be the April PMI reading.
GBP: Sterling has forged a base in recent days around $1.3260. Yesterday, it jumped higher and briefly poked above $1.34. It may have been helped by reports suggesting that the US and UK may sign a deal this week that includes quotas but also spares the UK the full brunt of the 25% tariffs on autos and steel. Sterling was greeted with sellers that pushed it back to around $1.3350. It held around $1.3380 today before slipping back to almost $1.3320 in the European morning. A break of $1.3300 could re-target the $1.3260 support area. The euro recorded this year's high against sterling on April 11 near GBP0.8740. Yesterday, it traded near its lowest level in a month, around GBP0.8460, and recovered to GBP0.8500. Near-term potential may extend to the GBP0.8500-30 area. The Bank of England meets tomorrow. The swaps market has been discounting with at least 84% confidence of a cut since April 2. The market is pricing in three cuts fully for the remainder of the year and about 80% chance of a fourth. The BOE will update its economic forecasts. Previously, the BOE had the economy slowing to 0.8% from 1.1% in 2024 and anticipated CPI to rise to 3.5% from 2.5% last year. It had projected 2026 growth at 1.5% and CPI at 2.5%.
CAD: The US dollar recorded a bearish outside down day against the Canadian dollar by trading on both sides of Monday's narrow range and settling below its low. In fact, the greenback settled below CAD1.38 for the second time this year. It was sold to nearly CAD1.3750 yesterday, its lowest since last October. It is trading firmer today and is poking back above CAD1.3800 in European turnover. Only a move above CAD1.3850 today would be meaningful. Yesterday's goods trade figures are showed a sharp 6.6% drop in Canadian exports to the US the most since the pandemic. Imports from the US fell by almost 3%. Canada's exports to the rest of the world were flattered by gold and oil and jumped by nearly 25%. The net result was Canada reported a smaller than expected goods deficit. An eve of yesterday's Trump-Carney meeting, US Commerce Secretary Lutnick could not resist. He called Canada "a socialist regime" and that been "basically feeding off America." While Trump's bravado says the US does not need anything from Canada, almost 25% of the oil the US consumes comes from Alberta. Trump was clear: the US does not want Canadian-made steel or autos. As it became clear that despite saying he will pursue a better relationship with Carney than Trudeau, Trump had not intentions on easing the tariff burden on Canada, the Canadian dollar pared its earlier gains.
AUD: Like the Canadian dollar, the Australian dollar recorded new highs for the move yesterday, edging slighted above $0.6500. It is a new five month high, and the Aussie settled above its 200-day moving average (~$0.6460) for the second consecutive session. A convincing move above $0.6500 targets the $0.6550 area, which is the (61.8%) retracement of the Australian dollar's decline from last October's high (~$0.6940). The Aussie reached $0.6515 before being sold back to $.6465. A close below $0.6440 today would suggest a near-term high is in place. For its part, the New Zealand dollar pushed above $0.6000 but stopped short of the six-month high set last month near $0.6030. The $0.6040 area corresponds to the (61.8%) retracement of the Kiwi's slide since last October's high (~$0.6380). It was stopped ahead of $0.6025 today and has been sold back to the $0.5980 area.
MXN: The dollar reached nearly MXN19.7820 in the North American session, its best showing since April 17, but the buying dried up and the greenback returned to almost MXN19.62 before stabilizing. Today's range is about MXN19.61-MXN19.68. The greenback fared better against the Brazilian real. After gapping higher at the open, the dollar reached nearly BRL5.7380. Although it retreated too, it did not enter the opening gap and found support ahead of BRL5.70. Brazil's central bank is widely expected to hike the Selic rate by 50 bp today to 14.75%. The swaps market sees the Selic rate peaking near 15% and falling back below 14% within a year. Mexico reports April CPI tomorrow. The headline and core rate are expected to tick up but still be below 4%, the upper end of the target range. The central bank is more concerned about growth than inflation. It had previously halved this year's growth forecast to 0.6%. The median forecast in Bloomberg's survey puts it at 0.2%. Mexico's modernization has been predicated on direct investment in the off-shore, near-shore, and friend-shore regime. The Trump administration says that will no longer suffice and seeks to impose re-shoring on US and foreign companies.
Reviewed by Marc Chandler
on
May 07, 2025
Rating:
