United States
After declining every day last week for the first time since early March 2024, the Dollar Index continues to remain within Friday’s range (~103.45-104.00) today. A move above 104.25 would help stabilize the technical tone, though the dollar is currently considered oversold with sentiment having turned against it, alongside unfavorable interest rate differentials. Following the recent employment data, attention now turns to US price statistics, with the Consumer Price Index (CPI) and Producer Price Index (PPI) due on Wednesday and Thursday, respectively. The upcoming JOLTS report appears to have lost some of its influence on market movement. US Commerce Secretary Lutnick indicated that the steel and aluminum tariffs are still expected to be implemented on Wednesday, with further tariff threats on Canadian lumber and dairy looming.
Eurozone
The euro edged towards $1.0890 at the end of last week, settling above its upper Bollinger Band for the third session in a row. The next technical target is the high from the US elections near $1.0935. Presently, the euro is trading within the pre-weekend range and might test its low near $1.0780. The premium on US two-year bonds over their German counterparts, which often correlates with euro movements, narrowed to about 167 basis points last week but is now near 173 basis points, having been above 200 in late February. The European Central Bank (ECB) cut rates by a quarter-point last week for the fifth consecutive time. Encouraged by stronger-than-expected industrial output in Germany—a 2% jump driven by the automotive sector—the swaps market sees the likelihood of another rate cut in April at slightly less than 50%. However, while German January exports unexpectedly declined by 2.5%, offsetting the December gain, imports rose by 1.2%, surpassing expectations. The rise in long-term European rates reflects increased spending in Germany and the EU at large, boosting supply and improving growth prospects, thus mitigating downside risks.
United Kingdom
Sterling reached $1.2945 before the weekend, marking its highest level since November 8. It recorded a marginal new high today (with Bloomberg noting a tiny increment), before reversing lower to edge below the pre-weekend low (~$1.2875). Nearby support lies around $1.2865. The UK economic calendar is light until the January GDP estimate and its details are released at the end of the week. Unlike the EU, the UK seems hesitant to increase spending, with defense budget boosts funded by cuts to international aid. Over the past month, the 10-year Gilt yield has increased by about 16 basis points, which is less than half of what eurozone members experienced. At the same time, the UK’s two-year yield has risen approximately five basis points in the past month, while Germany and France’s two-year yields have increased by 18-19 basis points, with the US equivalent falling by 33 basis points month-over-month.
China
The dollar has moved upward after testing the lower end of its range against the offshore yuan. Last month’s low was near CNH7.2260, and last week’s low, set just before the weekend, was near CNH7.2280. Currently, the dollar is trading around CNH7.2670, close to the 20-day moving average (~CNH7.2690). Despite significant swings in the foreign exchange market, Chinese officials have maintained relative stability in the yuan. The People’s Bank of China (PBOC) set the dollar’s reference rate at CNY7.1733 today, marking the second consecutive increase, following last week’s CNY7.1745. During the weekend, China reported its February CPI and PPI, with the CPI falling to -0.7%, its lowest print since last January’s -0.8% year-over-year figure. The National People’s Congress targets around 5% growth and a 2% CPI rate for the current year. Core prices experienced a 0.1% decline, marking the first fall in four years. Weak consumption, traditionally cited as a vulnerability for China (as a percentage of GDP), is mitigated by strong investment; however, the main drag on the CPI came from food prices, which are less elastic. Food prices plummeted by 3.3% in February, and have dropped by 1.5% year-to-date, compared to a 0.1% decline in overall inflation. The PPI has decreased by 2.2%, showing the least deflation since last August. Producer prices have been falling on a year-over-year basis since the start of Q4 2022. China has also imposed retaliatory tariffs on Canada, following last year’s extraordinary tariffs on Chinese-made electric vehicles (100%) and steel and aluminum (25%), targeting canola, pork, and seafood.
Japan
The dollar frayed the JPY147 level before the weekend and has remained barely above it today, marking the 61.8% retracement of the dollar’s rise from below JPY140 last September to nearly JPY158.90 on January 10. The 10-year US yield is trading within approximately a 10 basis point range around 4.20%. The dollar has stayed below its 200-day moving average against the yen since mid-February. A breach of JPY146 could target JPY145. Labor cash earnings in Japan decelerated to a 2.8% year-over-year growth in January, a decline from December 2024’s 4.4%. Of particular concern is the decline in real earnings, which fell by 1.8% year-over-year in January after a revised 0.3% rise in December (initially 0.6%) and a 0.5% increase in November. Last January, real labor earnings were 1.8% lower than in January 2023, which had seen a 4.1% year-over-year decline. Despite this, the wage data doesn’t significantly challenge the Bank of Japan (BOJ), with the swaps market still fully pricing a rate hike by the end of September. Separately, Japan reported its first monthly current account deficit (JPY170.5 billion) since January 2023, primarily due to a trade balance shift from a JPY62.3 billion surplus in December to a JPY2.94 trillion deficit in January. Tomorrow, Japan will release household spending data and final Q4 GDP figures.
Canada
Despite a partial deferment of US tariffs on Canada, the Canadian dollar couldn’t maintain the momentum that saw the greenback drop to a seven-day low (~CAD1.4245) on Thursday. Following the release of weaker Canadian employment data, the US dollar rose to CAD1.4425. Today, it is consolidating within a roughly CAD1.4340-CAD1.4400 range. As widely expected, Carney has succeeded Trudeau as leader of the Liberal Party and Prime Minister, with an election decision anticipated soon. The Bank of Canada’s decision on Wednesday is the week’s key event. Over the past four weeks, the US two-year premium over Canada has narrowed, dropping by nearly 20 basis points. The threat of US tariffs affected the Canadian economy before they were enacted, witnessed in Canada’s largest trade surplus in January since 2008, as exports to the US spiked ahead of the tariffs. The economy seems to be slowing, post a 2.4% growth in the second half of 2024. Given monetary policy’s delayed effects, the Bank of Canada may need to cut rates to cushion against potential economic downturns. The swaps market, which has fluctuated, currently prices an 80% chance of a rate cut this week, with two cuts fully factored in by year-end and nearly an 80% chance of a third. Underlying CPI measures are at 2.7%, while the headline rate was 1.9% in January with an overnight target rate of 3.0%.
Australia
The Australian dollar ended the week on a downward note, reaching last week’s high near $0.6365 on Thursday, falling to almost $0.6280 in North America on Friday, and closing near its lows. For now, the assumption might be that the Australian dollar is range-bound between $0.6200 and $0.6400, with both bulls and bears unable to find satisfaction at its mid-range position. Currently, it is trading firm near $0.6325 but remains within the range observed before the weekend (~$0.6280-$0.6340). The week is fairly quiet in terms of market-moving Australian data, consisting mostly of surveys. On Wednesday, the Melbourne Institute Consumer Inflation survey might gain attention, especially after it rose sharply to 4.6% in February from 4.0% in January. Though the central bank meets on April 1, no moves are anticipated. The futures market fully anticipates the next rate cut by July, with about an 85% chance of a cut by May.
Mexico
Ultimately, the peso appreciated for the first time in three weeks, almost entirely recovering its losses from the previous two weeks. Last Thursday, the dollar fell to a two and a half week low near MXN20.2150. By the weekend, it remained steady within a narrow band below about MXN20.3355. Today, the greenback is trading quietly within the MXN20.2370-MXN20.3015 range, inside Friday’s range. More than many foreign leaders, Sheinbaum has firmly resisted US pressures—ranging from tariff threats and rejecting the “Gulf of America” to challenging US gun manufacturers. Her diplomacy appears crucial in tariff delays and avoiding the derision targeted at leaders like Canada’s Trudeau, with Trump expressing relatively respectful tones regarding her. While it’s still early days and Mexico remains in the US administration’s spotlight, there is little action on this front currently. This week’s economic calendar appears sparse, with January’s industrial output figures due Thursday. Another 50 basis point rate cut by Mexico’s central bank, lowering the overnight target rate to 9%, when it next meets on March 27, remains the most likely outcome.
