Between its trade war and the "big, beautiful budget", which is both regressive and adds on more debt, the US has roiled the capital markets. Before the weekend, the US said the EU was not negotiating in good faith. President Trump threatened a 50% tariff as of June 1. This looks harsher than the current state of play with China. Europe's Stoxx 600 was sold, and it suffered its biggest loss since April. He also called for a 25% tariff on Apple and Samsung smartphones. Benchmark 10-year yields fell 5-8 bp. The euro itself dropped about two-thirds of a cent but recovered to settled around 0.7% higher on the day and posted its first weekly gain since the week ending April 18. Among the currencies we track closely, the British pound, Canadian dollar, Mexican peso, and Chinese yuan made new highs for the year ahead of the weekend.
Meanwhile, the world's two largest bond markets remain under pressure. Japan's 30-year bond yield rose for the fourth consecutive week, gaining about 35 bp to 3.05%. The 40-year bond yield rose for the seventh consecutive week. Its yield is up almost 100 bp to 3.55%. April's CPI was reported ahead of the weekend at 3.6%. The US 10-year and 30-year yields rose for fourth consecutive week. The former yield is up nearly 25 bp to about 4.50%, while the yield of the latter has risen around 35 bp to a little above 5.0%. What is often missed in the discussions is that the rise in long-term rates can be fully accounted for by the reassessment of the overnight rate. The implied overnight rate in the Fed funds futures for the end of the year has risen by about 40 bp over the past four weeks.
US
Drivers: The market has pushed out the next Fed cut until Q4, but this did not translate into a firmer dollar. We continue to hypothesize that given the extent of the uncertainty, or what has been spun as "strategic ambiguity," means that many market participants demand a higher US interest rate premium to hold on to dollars.
Data: The US has a busy economic calendar in the last week of May. We are well aware of the emphasis that Fed officials are placing on real sector data, which it suggests has yet to see the weakness that has been picked up in the survey data. This would seem to dampen the market's reaction to survey data, and there are several such data points in the coming days, including the Conference Board's measure of consumer confidence, the final University of Michigan May survey, and the Dallas and Richmond Fed surveys. Real sector data include April durable goods orders and April personal income and consumption data. Of note, Boeing orders fell dramatically in April to eight from 196, which will weigh on the headline figure. Personal income and consumption data will factor into Q2 GDP projections, while the thunder for the deflators has been stolen by the CPI and PPI. The core PCE deflator looks flat at 2.6% year-over-year.
Prices: The Dollar Index made a marginal new low for the month ahead of the weekend slightly below 99.00. President Trump's social media message that he was going to "recommend" a 50% tariff on imports from the EU as of June 1 helped it stabilize. The squeeze higher stalled near 99.60 and set session lows late in the North American session. It lost nearly 2% last week to end a four-week advance with prejudice. The momentum indicators have turned down and the five-day moving average crossed below the 20-day moving average. The uptrend line off last month's lows was violated in the middle of last week. A break of the 98.85 area warns of a retest on the three-year low set in April slightly below 98.00.
EMU
Drivers: Europe seems to be one of the chief beneficiaries of the diversification out of dollar assets. Speculators in the futures market have their largest net long euro position (~75k contacts, 125k euros per) since last September when the 2024 high was set around 100k contracts. Good euro buying emerged on the pullback that approached the (61.8%) retracement of the gains since late March found near $1.1050.
Data: The eurozone sees confidence surveys at the start of the week and the ECB's inflation survey. Germany and Spain report April retail sales, and France reports consumer spending. But the highlight of the week is that the four largest members of the EMU report April CPI figures ahead of the aggregate estimate on June 3. Barring a significant surprise, the market will continue to look for another ECB rate cut at the June 5 meeting.
Prices: The euro posted its first weekly increase since the weekend ending April 18. The upticks stalled ahead of the weekend near $1.1380, which is the (61.8%) retracement of the losses from the April 21 high (~$1.1575) to the May 12 low (~$1.1065). US President Trump's 50% tariff threat knocked the euro back to around $1.1300 were buyers emerged. The euro's gains came despite the widening US two-year premium over Germany, which often tracks the exchange rate. It reached 220 bp at the end of last week, the highest since mid-February. The momentum indicators are constructive, and the five-day moving average crossed back above the 20-day moving average. A move above the $1.1380 area targets $1.1575 and maybe $1.1685.
PRC
Drivers: The yuan is a closely managed currency. Officials have let the yuan appreciate to new highs for the year against the dollar. Still, the yuan's appreciation is among the least in Asia. The onshore yuan has risen by about 1.7% against the dollar this year, while the offshore yuan has appreciated by around 2.3%. The PBOC has eased monetary policy but without more fiscal support, the 5% growth target may be difficult to achieve.
Data: China reports industrial profits on May 27. Despite being a huge manufacturing center, profits tend to be weak in China. Chinese companies, with access to patient capital, are more concerned with securing market share than profits. In contrast, American businesses that rely on impatient capital (bonds and stocks over bank loans) typically pursue short-term profits. China reports its May PMI early on May 30 (Saturday).
Prices: The broad weakness in the US dollar saw it pressed to new six-month lows before the weekend to almost CNH7.1700. There is little to hang one's hat on from a technical perspective until the CNH7.1460-CNH7.1500 area. The dollar fell for the fifth consecutive week against the onshore yuan and approached CNY7.18 at the end of the last week. A break of this area would suggest technical potential toward CNY7.1380-CNY7.1400.
Japan
Drivers: While the exchange rate's sensitivity (30-day correlation) with the US 10-year yield remains at the lower end of where it has been in the last couple of years (~0.25), its correlation with the changes in the US two-year yield is near 0.50, which is the upper end of the three-year range. On occasion, it has reached 0.80. Still, even more impressive is that the changes in the exchange rate and changes in the Dollar Index have a little more than a 0.90 correlation over the past 30 days, which appears to be the highest since the mid-1990s.
Data: After reporting a small contraction in Q1 GDP, attention shifts to Q2 GDP and the April employment, retail sales and industrial production will help shape expectations. More important for expectations for the Bank of Japan and Japanese interest rates may be Tokyo's May CPI. Recall that elevated April figures, which saw the headline CPI rise to 3.5% from 2.9% and the core jumped to 3.4% from 2.4%. There were several factors that will not be repeated, including the low base effect from the waiver of school tuition, the start of the new fiscal year, and an unexpected increase in rents.
Prices: In the last nine sessions, the dollar has risen twice; once by about 0.02% and once by a little less than 0.25%. It has fallen by about 4% over those nine sessions to nearly JPY142.40. It approached the month's low (~JPY142.35) was recorded on May 6. Still, last week, the dollar snapped a four-week advance. The momentum indicators have turned lower, and the five-day moving average is below the 20-day moving average. Nearby support is seen around JPY142.00, but the risk may extend to the JPY140 area, which was tested in April, September 2024, and December 2023, without settling below it.
UK
Drivers: UK officials are in a bind. The stronger than expected Q1 growth (0.7%) and the jump in April CPI would seem to allow the Bank of England some latitude in the next rate cut. Yet, both are overstated, and both growth and prices are expected to moderate going forward. This will compound the fiscal challenge Chancellor Reeves will likely face in the Fall. At the same time, Prime Minister Starmer's support is at a new low according to the recent YouGov poll, and he spent precious capital to outflank Farge's Reform Party on immigration, to the dismay of many in his Labour Party. Starmer secured a limited trade arrangement with the US, which surrendered some sovereignty to the US in exchange for a carve out of 100k vehicle exports. Its attempt to re-set its relationship with the EU by focusing on defense and security issues falls victim to the cherry-picking criticism often levied against it. The US threat of a 50% tariff on the EU gives the UK a competitive advantage, but a weak EU is not in the UK's interest. Sterling settled little changed against the euro despite the volatility around the President Trump's social media posting of the potential tariff on the EU.
Data: The UK's data in the coming days features the CBI surveys and Nationwide house price index. These tend not to be market-movers. Meanwhile, the swaps market has lifted the year-end base rate projection to about 3.80% (4.25% currently), which is the highest since early April.
Prices: Firm core and services inflation, followed by stronger than expected UK retail sales lifted sterling to almost $1.35, i40ts best level since February 2022. That said, its 1.9% gain against the dollar last week put it in the middle of the G10 performers. A note of caution is that sterling settled above its upper Bollinger Band ($1.3485). But the momentum indicators are moving higher, and the five-day moving average is about 20-day. The next chart resistance is not until the $1.3630-50 area. As UK rates have risen against Germany, sterling has recouped previous ground lost against the euro. The euro has fallen around 4% against sterling since reaching an 18-month high on April 11 near GBP0.8740. It is finding support near the 200-day moving average (~GBP0.8385).
Canada
Drivers: The Canadian dollar appears more sensitive to the broad direction of the greenback than risk, or oil. It has not been sensitive to changes in US or Canadian short-term interest rates. The rolling 30-day correlation of changes of the Canadian dollar and the Dollar Index is around 0.72, the highest for the year. Changes in Canadian dollar is most often inversely correlated with the S&P 500 (a proxy for risk). However, over the past 30 sessions, there is a positive correlation (~0.25). It happened late last year for the first time since November 2021.
Data: Canada reports March and Q1 GDP at the end of the week. It is difficult to go from the monthly GDP figures to the quarterly. In Q4 24, the monthly GDP prints were a cumulative 0.4%, but the quarterly GDP was 2.6% at a seasonally adjusted annual rate. In January, the economy expanded by 0.4% and contracted by 0.2% in February. The median forecast in Bloomberg's survey for Q1 25 GDP is 1.8%. The importance of the data may lie with the central bank's response. Following the elevated underlying core inflation readings, the swaps market downgraded the chance of a rate cut at the next central meeting (June 4) to about 25% from slightly less than 60% at the end of April. Still, the year-end target rate is seen near 2.40%, up from around 2.20% at the end of last month.
Prices: The US threat of a 50% tariff on the EU saw the Canadian dollar bought on the news. The greenback was trading near CAD1.3830 and was sold to CAD1.3750 by the time Europe closed shop for the week. It took another leg down in the NY afternoon, falling to about CAD1.3710, a new seventh month low. A break of CAD1.3700 area could target the CAD1.3600 area but we suspect there is potential back to last September's low near CAD1.3420. The momentum indicators have are moving lower and ahead of the weekend, the five-day moving average fell below the 20-day moving average. That said, the greenback settled below its lower Bollinger Band against the Canadian dollar (~CAD1.3735).
Australia
Drivers: The Reserve Bank of Australia cut its cash target rate by 25 bp last week, as widely expected. The next cut is fully discounted for August (not the July meeting, for which the futures market is pricing in a 2/3 chance). The exchange rate may be more influenced by the performance the greenback's general direction, and especially against the Canadian dollar, than the macro data. Over the past 60-sessions, changes in the Aussie are as correlated with the S&P 500 as China's CSI 300 (~0.50).
Data: It is unreasonable to expect the RBA to cut rates at back-to-back meetings, which means this week’s data may not be so consequential. Moreover, officials put more weight on the quarterly CPI figures than the monthly estimate, and April's will be released this week. The central bank has been concerned about the strength of domestic demand. Australian consumers slowed their shopping in Q1 25. Retail sales rose at an annualized pace of 3.6%, down from 4.8% in Q1 24. On the other hand, private credit growth rate hardly changed in Q1 25 from Q1 24, remaining near a 5.8% annualized pace. The April reports are due in the coming day. The Reserve Bank of New Zealand meets early on May 28 and is expected to cut its cash target rate by a quarter-point to 3.25%. It began cutting rates last August from 5.50%. The terminal rate is expected to be between 2.75% and 3.0%.
Prices: The Australian dollar recovered from weakness early last week that frayed the $0.6400 area. It recovered to knock on $0.6500. It settled strongly near session highs and above the down trendline (~$0.6485), drawn the two highs this month above $0.6500. The momentum indicators and moving averages are constructive. A move above the $0.6515 high from May 7 targets $0.6550 next.
Mexico
Drivers: Over the past 60 days, the main considerations for the peso seem to be the general risk appetite and oil prices. The correlation of changes of the peso and the S&P 500 reached a two-year high near 0.60 earlier this month and is now a little above 0.50. The correlation of changes of the peso and WTI is also near 0.50, which is around the most since early 2020.
Data: The central bank's inflation report (Wednesday) and minutes from the recent meeting that resulted in a half-point cut and suggestion that more cuts of a similar magnitude may be delivered (Thursday) are the highlights of the week. The central bank is clearly more concerned about growth than inflation, especially given even with the overnight cash target rate at 8.5%, monetary policy remains restrictive with inflation near 4%. Although Banxico recently cuts this year's growth forecast to 0.6% (from 1.1%), it may still be optimistic. The IMF's forecast, by contrast, is for a contraction of 0.3%.
Prices: MSCI's emerging market currency index rose for its sixth consecutive week. During this run, it rose by around 3.6%. JP Morgan's emerging market currency index rose for seven consecutive weeks, during which time it has risen by about 3.6% as well. In the past seven weeks, the dollar has fallen by about 5.8% against the Mexican peso. The greenback reached a new seven-month low against the peso near MXN19.2350 ahead of the weekend. Dollar-funded carry trades are popular with LATAM currencies (leaving aside the Argentine peso), while in East Asia, boosting short-dollar hedge ratios seem to be the driver, especially in Taiwan and South Korea. Note that South Korea's central bank meeting concludes on May 29, and it is likely to result in a quarter-point cut of the base rate to 2.50%. It has cut rates three times in the cycle that began last October. April CPI (headline and core) was slightly above 2.0%. The terminal policy rate is seen between 2.25% and 2.50%.
Reviewed by Marc Chandler
on
May 24, 2025
Rating:
