### United States
After a sharp decline in US yields, a sell-off in equities, and a depreciating dollar prompted by the Philadelphia Fed’s non-manufacturing activity survey and a drop in the Consumer Confidence Index, markets display a tentative stability today. The US dollar shows slight gains, primarily maintaining yesterday’s ranges against major currencies. Notably, President Trump included copper in the list of potential tariff targets, causing May copper to rally by nearly 5.2% from recent lows. However, prices have now settled closer to yesterday’s peaks.
The 10-year US Treasury yield fell for the fifth consecutive session, closing below 4.30%—a first for the year. Currently, it’s hovering around the 4.30% mark. European benchmark yields are down by 2-4 basis points. Additionally, China’s decision to recapitalize several significant banks has buoyed Chinese equities domestically and in Hong Kong. While the HK index of mainland shares boasts a 20.6% increase this year, other major markets in the region, excluding Japan and Australia, also advanced.
The Stoxx 600 index in Europe reported a rise of about 0.80%, marking its largest gain in nearly two weeks if sustained. In the US, index futures are rebounding after yesterday’s decline. Despite a 1.25% drop in gold yesterday, it’s holding above $2900 and remains steady today. The yellow metal has maintained levels above the 20-day moving average since January 7. Meanwhile, April WTI prices posted a bearish outside day yesterday, dropping by 2.5% to close at a year-low just under $69, and it’s fluctuating around the same level today.
Contributing to the dollar’s vulnerability, falling US rates overshadowed any tariff threats. The two-year Treasury yield struck 4.07%, the lowest since November 1, showing a steep decline from its February peak of 4.38%. Similarly, the 10-year yield dropped below 4.30%, marking a low since December 12. Meanwhile, the Dollar Index encountered resistance at 106.75, and despite Trump’s renewed tariff threats on Canada and Mexico, it slipped slightly below 106.20, staying above Monday’s 106.10 low. Market participants will be closely watching January’s home sales, building starts, and permits data.
### Eurozone
In recent sessions, the euro has fluctuated within a $1.04 to $1.0530 range and continues to do so. In terms of the German-US two-year yield spread, it reached a high for the month near 225 basis points on February 10, dropping to roughly 200 basis points yesterday. The euro’s January peak was just shy of $1.0535. Germany’s CDU/CSU is attempting to pass a 200 billion euro defense budget through the Bundestag prior to the new parliamentary session beginning March 24, employing tactics reminiscent of those used during the Kosovo War.
Amidst expectations of more European Central Bank policy easing next week, at least two additional cuts seem likely, softening the short end of the yield curve. Anticipated supply pressures have influenced long-term yields. This is evidenced by a rise of 8 basis points in Germany’s 10-year yield this year, compared to France’s 3-point decline and Italy’s 3-point gain.
### United Kingdom
Sterling maintained levels above $1.2600 yesterday but continues to face barriers around the $1.2680 mark, keeping it within a tight range today. Last week’s low of around $1.2565 needs to be breached to confirm a short-term peak. After a 10% decline from late September to mid-January, the pound has since climbed by about 4.9%. A 50% retracement of this downtrend would position the currency near $1.2765, with the 200-day moving average approaching $1.2785.
The UK economic calendar remains light, with the Nationwide house price index set to release its data soon. Expectations are that the year-over-year increase will moderate from January’s 4.1%. Prime Minister Starmer’s upcoming meeting with US President Trump seems unlikely to sway the latter’s perspective on Ukraine or modify his belief that US allies pose a greater risk than Russia or China.
### China
Recently, the US dollar made a three-day high slightly above CNH7.2700, testing a two-week downtrend line before settling back down by the end of the European session. It hit its lowest on Monday near CNH7.2260, maintaining a trade within yesterday’s bounds today. The offshore yuan has appreciated by about 1.1% against the dollar this year, with the onshore yuan gaining around 0.6%.
Significantly, the People’s Bank of China set the dollar’s reference rate at CNY7.1732, an elevation comparable to post-Trump’s inauguration levels. Beijing announced a plan to inject capital into three major banks, totaling at least CNY400 billion. This decision fueled a surge in share prices for Chinese banks.
### Japan
The reduction in the US 10-year Treasury yield contributed to dollar weakness against the yen. The yield difference between the US and Japan narrowed to about 290 basis points, the smallest since last October, down from a September bottom of 275 basis points. This shrinkage comes after reaching a 358 basis point peak last month, the highest since May 2024.
On the foreign exchange front, the US dollar peaked at JPY150.30 before retreating to about JPY148.55 in North America, breaking December 2024’s low. Volatility continues, with further downside risks potentially extending to JPY147, aligned with a 61.8% retracement of the mid-September 2024-January 10, 2025, dollar rally. Analyzing upcoming economic indicators, Tokyo’s February CPI might moderate, a soft January industrial output is expected, and January’s retail sales may show recovery.
### Canada
Yesterday, the US dollar achieved a nine-day high close to CAD1.4320 and advanced to CAD1.4340 during European trading today. President Trump’s affirmation of impending tariffs on Canada and Mexico unsettled markets, although many view this as a negotiation strategy rather than a direct trade affront. The greenback’s rally has continued for four consecutive days and seven out of the last eight sessions. Notably, it surpassed the 20-day moving average for the first time since February 3.
Previously, the US dollar hit a two-month low near CAD1.4150 on February 14, and its recovery nears the 38.2% retracement level at CAD1.44. Supporting a possible shift towards monetary easing, rate cut odds for next month are climbing, approaching 50%. The ramifications of US tariffs could significantly counterbalance economic data developments.
### Australia
The Australian dollar encountered resistance before reaching the 38.2% retracement threshold from its drop from $0.6940 in late September to the early February low just below $0.6090. It’s currently lower for the fourth consecutive session and the sixth in seven days. Breaking through $0.6320, as evident during current European trading, points toward potential testing of $0.6285 or $0.6250.
January’s CPI, holding steady at 2.5% from December, was anticipated to edge upward, with the trimmed mean experiencing a rise. The inflation rate had bottomed at 2.1% between September-October and stood at 3.4% in January 2024. The impending release of private sector credit figures, after a 0.6% increase in December, does little to alter the anticipated timing of the Reserve Bank of Australia’s next rate cut. Market forecasts suggest a 77% likelihood of a May cut, with further rate decreases expected by year-end.
### Mexico
The US dollar slightly surpassed its eight-day high near MXN20.5460, buoyed by continued follow-through on President Trump’s tariff threats against Canadian and Mexican goods. Presently, it’s consolidating within this range amid low trading volumes. Although Mexico faces pressure to introduce 25% tariffs on Chinese imports, the prevailing sentiment is that Trump’s tariff threats are intended as negotiation tools. Over five years, Mexican imports from China have nearly doubled, with products like Chinese EVs lacking similarly priced North American alternatives.
The prospect of US tariffs deters new direct investment inflows, pending clarity on the situation. Mexico’s central bank has halved its growth projection for this year to 0.6%, following a 50-basis point rate cut recently, and market sentiment leans towards a repeat rate decrease of similar magnitude at the next meeting on March 27.
