United States
Recently, the US dollar has experienced a notable shift. Concerns about US economic growth, combined with diminishing risks in Europe, have contributed to a 6% decline in the Dollar Index since it peaked just before President Trump’s second inauguration. This decline has surpassed the 61.8% retracement of the “Trump rally,” which found its roots late last September. Despite a recovery earlier in the North American session, the Dollar Index slipped to new lows, nearing 103.40, the lowest level since just after the election when it nearly touched 103.35. A break below this threshold may put 102.00 in sight. Key data releases today include a downward revision of small business optimism and the January JOLTS report on the labor market. Of particular interest is tomorrow’s CPI data and the possibility of new US steel and aluminum tariffs. Additionally, averting a government shutdown by the end of the week will necessitate support from several Democrat Senators.
Eurozone
The euro has shown resilience, buoyed by news that the German Greens are willing to negotiate with the CDU and SPD on defense spending. This propelled the euro above $1.09 in early European trading, a level last seen in early November. Recent fiscal measures in Europe, alongside US growth concerns, suggest that the once-predicted parity of the euro, or below, is now less likely. This is reflected in options and futures markets. As of March 4, the latest Commitment of Traders report indicated a reduction in the net speculative short position for the third consecutive week, which now stands at just over 10,100 contracts. This marks the smallest net short position since last November. The US two-year premium over Germany has narrowed to approximately 165 basis points, down 60 basis points over the past month, reaching levels last observed in October.
United Kingdom
Sterling saw a significant rise in the first half of last week, climbing 2.55% to exceed $1.29, peaking near $1.2945 before the weekend. However, a new high was briefly reached yesterday, only to reverse lower, dipping below Friday’s low before settling slightly above it. Sterling managed to hold yesterday’s low around $1.2860 and is testing highs from the previous session. The economic calendar for the UK is relatively light, with RICS house prices due tomorrow and January GDP figures expected later in the week. The rise in German bond yields compared to UK yields has driven a significant rally of the euro against Sterling. From a new low in late February-early March near GBP0.8240, the euro surged 1.6% against the pound last week, marking its most substantial weekly gain in two years and teasing levels near GBP0.8445.
China
In China, the dollar is hovering near the lower threshold of last week’s range around CNH7.2280. Last month’s low was approximately CNH7.2260, while the 200-day moving average stands at CNH7.2220, marking an area not breached since last November. Chinese officials appear content with the yuan’s overall stability against the dollar. Concurrently, while there are suggestions that the Trump administration might abandon Biden’s Chip initiative, China has announced its own CNY1 trillion ($138 billion) investment in AI and quantum computing through a public-private partnership. Beijing may probe opportunities where the US appears hesitant. Discussions of a potential Trump-Xi summit around mid-year have surfaced. Recently, the People’s Bank of China set the dollar’s reference rate between CNY7.1691 and CNY7.1745, marking the third consecutive session of increases.
Japan
The Japanese yen witnessed a new five-month low against the dollar today near JPY146.55, with little notable support until around JPY145. Last week’s peak was near JPY151.30. US 10-year yields saw a decline of nine basis points yesterday, temporarily dipping below 4.20%, and again dropping to 4.15% earlier today. Disappointing economic data and declining US yields led the 10-year Japanese Government Bond (JGB) to reverse a previous 5.5 basis point surge. Currently, the US 10-year premium over Japan stands near 265 basis points, the lowest since last August, which had peaked near 357 basis points earlier this year. Japan reported a mere 0.8% increase in household spending year-over-year in January, far below the anticipated 3.7% increase after December’s 2.7%. GDP for Q4 2024 was revised downwards to an annualized growth rate of 2.2% from 2.8%. Within swap markets, expectations for a June rate hike have waned from complete certainty in September to merely 50%.
Canada
Canada remains a notable focus for the Trump administration, which, despite a general criticism of US allies, appears especially critical of Canada. With nearly all proposed tariffs affecting Canada, there are also rumors of potentially ousting Canada from the “Five-Eyes” intelligence-sharing group. Although the notion of territorial ambition towards Canada might be implausible, these tensions have weighed on the Canadian dollar, making it the weakest performer among G10 currencies, having dropped almost 0.25%. In contrast, the Australian dollar, the second weakest, has risen about 1.6% against the US dollar. The US dollar has recently attempted a recovery from last week’s low near CAD1.4240, reaching nearly CAD1.4475 yesterday before stabilizing. The currency currently trades within a narrow range between CAD1.4410 and CAD1.4450. A trendline from early February and March highs points towards resistance near CAD1.4500. The Bank of Canada is expected to meet tomorrow, with markets leaning heavily (95%) towards anticipating a rate cut. Two additional cuts are anticipated later this year.
Australia
The Australian dollar enjoyed a rally of over 2.5% during the Tuesday-Thursday window last week but saw a pullback as the weekend approached, continuing its decline into yesterday. Last week’s high was approximately $0.6365, while yesterday, it dropped a full cent lower. Today, it extended its losses to about $0.6260 before seeing a partial recovery towards session highs, close to $0.6300. Breaking below $0.6255 could sour the technical outlook. Australian economic data remains sparse until the jobs report expected on March 20. For March, the dollar bloc has generally underperformed, whereas Scandinavian currencies have performed well amongst the G10. Norway’s Consumer Price Index exceeded expectations, which diminished the likelihood of a Norges Bank rate cut later this month from 90% to less than 50%. Meanwhile, despite underwhelming real sector data, the swaps market is taken Sweden’s Riksbank as having concluded rate cuts before Norway began.
Mexico
In Mexico, President Sheinbaum has been acknowledged for helping delay US tariffs. While President Trump has employed strong tariff threats against Canada in disputed sectors like lumber and dairy, Sheinbaum has pointed out that the US lacks similar leverage over Mexico, as the latter does not impose tariffs on US goods. Sheinbaum’s mature response, absent of retaliatory threats, contrasts with Canada’s approach. Meanwhile, Deputy Finance Minister Amador is set to succeed de la O, who recently resigned but will remain an economic advisor. This appointment signals a continuity in leadership. The US dollar recorded a key reversal against the peso yesterday, trading below MXN20.20 for only the second time this year before rebounding. The settlements occurred above the pre-weekend high of around MXN20.3355. Trading today sees the peso within the MXN20.30-MXN20.40 range. Given the peso’s resilience, there are predictions that the central bank may implement another 50 basis points rate cut during its upcoming March 27 meeting.
