# United States
The U.S. dollar exhibited mixed performance as the risk-appetite trend moved upward by the end of the week. The foreign exchange market showed dollar-bloc currencies leading the way within the G10, while the yen and Swiss franc lagged behind. Notably, the U.S. Dollar Index seems to be stabilizing, potentially forming a rounded bottom, but it continues to face challenges in finding support above the 104.00 level. While concerns about a government shutdown appear to be easing, obtaining at least seven Democratic senate votes remains crucial.
With the CPI and PPI reports already released, economists have clarity around the PCE deflator, with attention turning to the upcoming FOMC meeting that will likely maintain its stance and update forecasts. Additionally, data on retail sales, industrial output, and housing starts will help ease recession fears for this quarter. Today’s focus is on the preliminary University of Michigan March consumer survey. Recent policy uncertainty, market fluctuations, and declining equities are likely to influence consumer confidence negatively.
# Eurozone
The euro’s upward momentum hit a roadblock earlier in the week, unable to breach the $1.0950 mark, subsequently dipping to a three-day low shortly below $1.0825. Should the $1.08 level fail to hold, the next potential target may be $1.0725, aligning with the 200-day moving average and a 38.2% retracement of this month’s gains. Scheduled central bank meetings and a relatively light economic agenda imply that euro movement may broadly depend on external developments.
The spread between the U.S. and German two-year yields has narrowed from around 225 basis points to nearly 165 basis points earlier this week, the tightest since last October. However, a rebound could see the spread close a five-week decline if it surpasses 176 basis points today, potentially triggering a further pullback in the euro. Meanwhile, Germany is engaged in ongoing negotiations regarding the new government, fiscal constraints, and defense spending, with decisions needed before March 26 when the newly elected Bundestag convenes.
# United Kingdom
Sterling managed to maintain an “inside day” position, with a two-day period entirely above the $1.29 mark. Mid-week, it reached its highest since last November, just shy of $1.2990. Despite the UK economy contracting by 0.1% in January, after witnessing a 0.4% growth in December, GBP held steady above $1.29 today. Industrial output and construction have both faced downturns, with declines of 0.9% and 0.2%, respectively, while services also cooled down. The severe January weather likely exaggerated this weakness. Upcoming government forecasts on March 26 are anticipated, while the Bank of England has projected 0.7% growth for this year following a 0.9% expansion in 2024.
# China
The People’s Bank of China (PBOC) successfully maintained a stable yuan amid a volatile capital market environment. Marginal declines were noted in the dollar against the onshore yuan, reflecting a 0.9% decrease year-to-date. Against the offshore yuan, the dollar hit a marginal new low for the year mid-week. The PBOC set the currency midpoint at the upper end of the recent range. China’s February lending data fell short of expectations, but cumulative lending for the year remains robust at CNY9.29 trillion.
Ahead of Monday’s market open, China is expected to release January-February real sector data covering industrial production, retail sales, property investment, and house prices, conveying a slower start compared to the previous year. In light of a proposed 20% increase in U.S. tariffs on Chinese goods, entities such as U.S. importers or consumers can absorb these costs, or negotiations may lead to price adjustments from Chinese producers, as seen in Beijing’s resistance to Walmart’s demand for lower prices.
# Japan
U.S. stock downturns have pulled U.S. interest rates lower, thereby offering slight support to the yen in North America recently. Earlier, the yen hit its lowest level since last October, but has shown resilience amidst new scandals involving gift voucher distributions by Prime Minister Ishida. With the Bank of Japan’s upcoming meeting, no changes to the 0.50% policy rate are expected. However, Governor Ueda may reaffirm a rate increase, contingent on expected economic evolution.
Recent data has not entirely met expectations, boosting the uncertainty surrounding the U.S. markets’ influence. The swaps market estimates a 50% chance of a rate hike in June, slightly down from the previous week.
# Canada
The Canadian dollar continues to grapple within last week’s trading range as trade tensions amplify with no immediate resolution. The U.S. dollar reached highs against the Canadian dollar early in the week. Canada’s challenge to U.S. tariffs on steel and aluminum at the WTO is symbolic at best, while the Bank of Canada’s quarter-point rate cut was anticipated without extensive market impact. Looking ahead, February CPI data will be crucial, while recent inflationary trends suggest subdued price pressures from the trade conflict with the U.S.
# Australia
The Australian dollar, along with other dollar-bloc currencies and Scandinavian currencies, underperformed during a risk-off session where U.S. stocks suffered notable declines and gold surged to record levels. Earlier in the week, the Australian dollar reached new highs before reversing course. A break below $0.6260 might instigate a retest of last week’s lows.
# Mexico
Following the imposition of U.S. steel and aluminum tariffs, Mexico reported a disappointing 0.4% decline in January’s industrial output, contrasting a forecasted gain. Notwithstanding, the Mexican peso rallied to its highest for the year, outperforming all other major emerging currencies except the Russian ruble this week.. Meanwhile, the peso’s strength has been emphasized by the U.S. dollar’s slump, nearing its lowest since last December and not dipping below MXN20.00 since early November, in line with the FOMC’s rate deliberations, with potential targets in the MXN19.70-MXN19.75 zone.
