United States
The US dollar is currently retreating following a sharp rally on Monday. This rally had reached several technical targets, driven by momentum and news such as the downgrading of US recession forecasts and the expectation that the next Federal Reserve rate cut might be delayed until the fourth quarter. Despite these factors, the dollar is weakening against almost all global currencies. Notably, the South Korean won has strengthened significantly, appreciating by nearly 1.8%, followed by the Japanese yen, which is up almost 1.2%. Equity markets are showing mixed results today. In the Asia Pacific, markets like Hong Kong’s Hang Seng have surged by 2.3%, fueled by gains in mainland shares and other regional indexes. However, European markets, specifically the Stoxx 600, are threatening to end a four-day advance, and US index futures indicate a downward trend. European benchmark 10-year rates are mostly 1-2 basis points lower, with UK Gilts holding flat. Meanwhile, the 10-year US Treasury yield has dropped a couple of basis points to 4.45%, after peaking at 4.50% yesterday. The ongoing dollar weakness might be expected to buoy gold prices, but the metal remains trading quietly within yesterday’s range. After a recent high, WTI crude oil is trading below $63 today. The Dollar Index continues to lose ground from Monday’s gains, following the US-China 90-day trade tension de-escalation. The market has adjusted its expectations for the next Fed rate cut, now anticipated in Q4 rather than Q3, with Fed funds futures no longer fully pricing a cut by the end of Q3. The agreement with China has seen a reduction in recession probabilities according to many economists. Furthermore, progress on the budget bill in the House of Representatives is notable. The bill aims to make the 2017 tax cuts permanent and eliminate certain taxes, estimated to cost $4 trillion over the next decade, with offsetting spending cuts valued at about $1.5 trillion.
Eurozone
The euro, recovering from Monday’s low of approximately $1.1065, approached $1.1200, and subsequent buying has lifted the currency slightly above the 38.2% retracement of its losses since the April 21 high, approaching the $1.1300-20 area. Industrial production figures for Germany and Spain were robust in March, suggesting a strong aggregate report on the horizon. This week’s highlight will be the European Commission’s updated economic forecasts due at week’s end. Previously, the EC projected the eurozone’s economy to grow by 1.3% in 2023, contrasting the ECB’s 0.9% projection. For inflation, the EC forecast was 2.1%, against the ECB’s 2.3%.
United Kingdom
Sterling rebounded from its Monday low of $1.3140 to reach nearly $1.3310 yesterday, extending today to $1.3360. If the buying momentum continues, it could target the $1.3400-40 area. The UK is set to report Q1 GDP tomorrow. The Bank of England had predicted a 0.6% expansion, contrasting with the stagnation in the latter half of 2024. The Bloomberg monthly survey’s median forecast was set at 0.3% before the BOE update.
China
The dollar rebounded from a six-month low near CNH7.1790 yesterday, but remained below CNH7.20 for the first time since November. Today, it reached CNH7.2160, straddling CNH7.20. The PBOC has set the dollar’s reference rate below CNY7.20 for the first time since April 7, continuing to lower it for the third consecutive session to CNH7.1956. This suggests that speculative selling pressure on the yuan has subsided, especially amid the easing of Sino-American trade tensions. Economists have downgraded US recession chances and upgraded China’s growth prospects. US tariffs on China’s de minimis products have been reduced significantly and are now accompanied by a flat $100 fee per shipment. China’s lending activity, year-to-date, has increased notably compared to last year’s figures.
Japan
Following the US-China trade agreement, the US dollar has receded against the yen, falling from JPY148.65 on Monday to JPY145.60 today. Monday saw the yen near lows of JPY145.70, with a potential break below JPY145.30 signaling a move towards JPY144.30. Japan’s producer prices increased by 0.2% in April, reflecting a 4.0% year-on-year pace, the slowest this year yet still matching last year’s high. Trade talks with the US seem unsteady, keeping the BOJ cautious, although hawkish comments from BOJ’s Uchida have raised expectations of a rate hike before year’s end. Currently, the swaps market is pricing in a modest hike.
Canada
For a second consecutive session, the US dollar encountered resistance near the Canadian dollar’s 200-day moving average at almost CAD1.4020. The dollar pulled back to CAD1.3930 yesterday, approaching CAD1.3900 today, with Monday’s low near CAD1.3895. A movement through this could aim for CAD1.3850. Canada is set to report March building permits, not typically a key market driver, anticipated to show a small decline after gains in February and mixed results in prior months. Housing starts, along with manufacturing and wholesale sales data, are due tomorrow.
Australia
The Australian dollar emerged as a leader among G10 currencies with a gain of about 1.6% yesterday, recovering all of Monday’s losses. After testing $0.6500 today, it appears set to challenge the year’s high of $0.6515. Surpassing this level might target the $0.6550 area, reflecting a significant retracement of last September’s sell-off. Australia awaits the release of April employment data tomorrow. Job growth has stagnated in Q1, with a minor increase overshadowed by robust employment growth figures in previous quarters. The unemployment rate has fluctuated between 3.9% and 4.1% over the past year.
Mexico
The dollar retreated from its gains against the Mexican peso seen on Monday, as the broader dollar pullback and risk-on sentiment led to new year-to-date lows. After peaking around MXN19.6650 Monday, the greenback dipped to MXN19.3765, nearing our identified target and breaching MXN19.35. The Bank of Mexico will meet tomorrow, and the resilient peso plus subdued inflation are expected to lead to a third consecutive half-point rate cut of the year, reducing the target rate to 8.50%. The risk lies in a potential moderation signal regarding the pace of easing. The swaps market currently discounts 25 basis point cuts for the next two policymakers’ meetings.
