The Dollar and Oil are Bid

The dollar and oil remain firm. The market has a had muted reaction to President Trump’s announcement late yesterday that it will extend its pledge not to strike Iran’s energy infrastructure for ten days (April 6). At the same time, reports indicate the US is considering sending more troops to the area. The logic of “escalation to de-escalate” continues to play out and this will dampen risk appetites ahead of the weekend. Meanwhile, Beijing is taking a page from the US playbook and opened investigations into US trade practices (supply chains and renewables) apparently in response to recently announced US Section 301 investigations. 

This is the first time since late last November, the PBOC lifted the dollar’s reference rate on a weekly basis. Still, the restrain Beijing is showing is notable. Since the war began, the yuan has been among the strongest currencies in the world. Its roughly 0.7% decline is half of the loss seen among best G10 currency and most emerging market currencies. Meanwhile, a large sell-off of Japanese government bonds keeps the yen under pressure and the greenback could push above JPY160 today for the first time since mid-2024. 

Prices  

G10

• The euro extended yesterday’s losses marginally and fell to about $1.1515 today in Europe. For the fourth session, it remains in the range set Monday, when it reached a low of about $1.1485. Recognizing the risk of some “escalate to de-escalate tactics over the weekend, there seems little compelling reason to resist extending the euro’s decline for the fourth consecutive session and the third consecutive week. There are 1.16 bln euros of options at $1.1525 that expire today. 

• The yen is flirting with its recent lows as the dollar hovers near but below JPY160, with a three-day down draft in tow. Yet its performance since the war began is around the mean among the G10 currencies. Although Finance Minister Katayama cautioned against speculative moves (and, as US did previously, suggested intervention in the oil futures market was possible), the current conditions, intervention seems to be a minor risk. It would not be surprising to see the dollar push above the much-talked-about level today ahead of the weekend. There are options for almost $640 mln struck at JPY160 that expire today.

• Sterling also has fallen for the past three sessions. Options for about GBP925 mln at $1.33 expire today. Yesterday’s low was about $1.3310, and in Europe today, after the soft retail sales report, sterling is probing $1.33 ahead of the North American opening. Sterling continues to trade within Monday’s range when it found bids a little below $1.3260. 

• The Canadian dollar has risen in one of the past eight sessions coming into today. It is still the second-best performer in the G10 since the war began, but it is still off a little more than 1.5%. The greenback reached CAD1.3865 yesterday, its best level in two months. It is consolidating quietly today in the upper end of yesterday’s range. It has held above CAD1.3845. The next technical target may be in the CAD1.3900-CAD1.3930 area.

• The five-session slide took the Australian dollar through support around $0.6900 yesterday to about $0.6875. There is little chart support until closer to $0.6800. A note of caution is that the Aussie settled below the lower Bollinger Band yesterday (found near $0.6900 today), which is one way to quantify recent losses. It is trading between roughly $0.6870 and $0.6910 so far today.  

Emerging Markets

• The dollar traded firmly against the Mexican peso yesterday, even before the central bank’s unexpected rate cut. It rose to new session highs almost MXN17.96 after the rate cut. The latest inflation report, covering the first half of March, showed both the headline and core rates above upper end of the 2%-4% band. The greenback is pushing higher today, and it is flirting with MXN18.00 in Europe. Monday’s high, after the US initial ultimatum the greenback reached a new high for the year near MXN18.09. The dollar has traded above MXN18.00 two times this month on an intraday basis but has not settled above it since the middle of last December. 

• The yuan softened yesterday in the face of the greenback’s broadly firmer tone. The dollar traded above CNH6.9200 for the first time in two-and-a-half weeks. It reached CNH6.9230 today before retreating to the session low near CNH6.9145. The high for the month was recorded on March 3 near CNH6.9435. The PBOC set the dollar’s fix at CNY6.9141 (CNY6.9056 yesterday and CNY6.8898 last Friday. It is the first higher dollar reference rate on a weekly basis in four months, and only the second time since the end of last September. 

• Making up for yesterday’s holiday, the Indian rupee lurched lower today. The dollar reached a new record near INR94.8465. Foreign investors continue to sell Indian stocks and bonds. The rupee has fallen around 4% since the war began. The government efforts to cushion the blow from rising energy prices, like cutting taxes on auto fuels heightens fiscal concerns. INR95 is the next psychological target.

Other Markets

• Equities were mixed in the Asia Pacific regions. Japan’s Topix rose, as did Chinese and Hong Kong indices, but South Korea, Taiwan, Australia, New Zealand slipped. India’s indices lost more than 2%. The MSCI index for the region is off about 1% this week. It has fallen for the fourth consecutive week. Europe’s Stoxx 600 is down about 1% today after yesterday’s decline of a similar magnitude. It is holding on to a small gain for the week. US S&P and Nasdaq composite have been alternating daily between gains and losses this week. That may be challenged today. After yesterday’s losses, the index futures point to early losses. 

• Bond markets are under pressure. US coupon auctions this week have been weakly received and direct bidders (large institutional investors) have pulled back, which has left primary dealers to pick up the slack and absorbed the most in a few years. Custody holdings at the Federal Reserve (Treasuries and Agencies) fell for the fifth consecutive week. They are down by about $66 bln since the war began. Japan’s 10-year yield rose 11 bp today. It was four basis points lower on the week coming into today’s session. The 30-40-year bond yield jumped around 20 bp today. European benchmark yields are 4-9 bp higher, and the 10-year US Treasury yield is near 4.46%, up almost five basis points today and nearly 12 bp higher on the week. 

• Gold is consolidating in yesterday’s range. It settled near $4492 last week and is near $4425-$4430 now. Silver is trading within yesterday’s range, as well. It settled slightly below $68 last week and is near $69 now. 

• May WTI is trading higher and is at its best level since Monday, as it tries to re-establish a foothold above $96. Monday’s high was near $101.65 and the war high from March 9 was about $113.40. Note that it is settled near $98.25 last week and a close below there would be the first lower weekly close since mid-February. 

Data

• In the US, the final results of the March University of Michigan consumer survey are due. It ought not to be surprising if confidence waned and expected inflation rose. 

• Mexico is expected to report a modest decline in February unemployment (2.5% vs. 2.7%). It averaged 2.65% last year, practically flat from the 2024 average. Mexico also reports February trade figures. After a blow-out record deficit in January (~$6.48 bln), a modest surplus is expected in February. There are strong seasonal patterns. The trade balance almost always (15 years without fail) deteriorates in January and improves in February (19 consecutive years). 

• The ECB’s survey of inflation expectations slipped in February. The one- and three-year outlooks eased to 2.5% from 2.6% and the three-year outlook. That was before the energy and food shock that hit in March. Spain reported its EU harmonized March CPI jumped 1.5% for a 3.3% year-over-year pace (from 2.5%). This gives a sense of what to expect next week when the EMU’s preliminary March CPI estimate is published. 

• British consumers could not sustain the pace of retail sales seen in January, when they rose by a heady 1.8%. February retail sales fell 0.4% with and without gasoline. Economists surveyed by Bloomberg expect a steeper pullback. Still, recall that UK’s January unexpectedly contracted despite the busy shoppers. 

• China reported February industrial profits on its year-to-date year-over-year style. The 15.2% surge is the most since the pandemic recovery in 2021. Profits had contracted in most of H1 25 but turned positive in the second half. They rose by 0.6% last year, the first annual increase since 2021. Separately, China reported a record $243.8 bln quarterly current account surplus (Q4 25). Lastly, we note that Beijing has launched trade investigations into the US (supply chain practices and reusable products), which seem aimed to give it chits given new the US Section 301 investigations.  

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