### United States
A few hours prior to the U.S. announcing the postponement of reciprocal tariffs on all countries except China, President Trump took to social media urging the public to invest in stocks. This postponement sent U.S. equities soaring, although it’s a move that hasn’t sat well with many observers. Despite the postponement, tariffs on China were further increased, situating the average effective tariff in the U.S. at 24% instead of the anticipated 27% had the reciprocal tariffs been enacted. This decision continues to pose risks to economic growth and price stability. Consequently, the dollar has seen a significant drop today. The euro, Swiss franc, and Japanese yen have all increased by over 1%. The euro is testing the $1.1050 area, slightly above yesterday’s settlement, while sterling is trading above yesterday’s high near $1.2865. Despite the PBOC setting a higher reference rate for the dollar for the sixth consecutive session, the onshore yuan is somewhat firmer today. In Asia Pacific and European markets, stocks have seen a robust rally, but U.S. index futures are trending lower. The S&P 500 and Nasdaq futures are down approximately 2%, pulling back from yesterday’s impressive gains. European bond benchmark 10-year yields are mixed, with the yield on the 10-year Gilt dropping 12 basis points (to 4.65%), while the 10-year Bund yield has risen 4 basis points (to 2.63%). U.S. 10-year Treasury yields have decreased nearly six basis points, to approximately 4.27%. Gold continues to rally, extending yesterday’s nearly $100 an ounce increase by an additional $30, now trading near $3113 late in the European morning. Crude oil prices, indicated by May WTI, reached about $63.35 before retreating below $61.
President Trump’s 90-day postponement of reciprocal tariffs against countries other than China sparked a rally in stocks and mitigated bond losses. The 10-year yield dropped from 4.51% to slightly below 4.30% during the session. The Dollar Index hit a three-day high around 103.55 on Monday but was sold off below 102.00 yesterday following the trade war escalation with China. Although it briefly regained ground near the session’s highs after Trump’s announcement, climbing close to 103.35, these gains have not been sustained today as the equity rally encounters sellers and U.S. yields soften. As some Americans continue to blame foreigners for various domestic issues, China is often cited as a driver of higher rates. Though data reports have a time lag and sometimes lack clarity, the increase in long-term yields might reflect the unwinding of basis trades. Typically, today’s U.S. CPI would be a focal point, but due to the trade war, this data is less critical for determining policy trajectory. Bloomberg’s survey forecasts the headline pace slowing to 2.5% from 2.8%, and the core slipping to 3.0% from 3.1%. However, tariffs are expected to lift prices, with some of the 20% increase in tariffs on China, steel, and aluminum potentially affecting today’s CPI and tomorrow’s PPI. While employment risks are biased lower, price risks are biased higher. Despite this, the likelihood of a Fed rate cut in May fell sharply after the tariff postponement, with odds dropping from slightly over 50% to about 20%.
### Eurozone
Yesterday, the euro reached a three-day high near $1.1095, with last week’s peak at approximately $1.1145. The U.S.’s decision to step back from reciprocal tariffs drove the euro down to session lows near $1.0915 yesterday, with earlier support around $1.0880. This morning, in European trading, the euro is being bid near $1.1070, while intraday momentum indicators are becoming stretched. The U.S. two-year premium over Germany surged more than 30 basis points yesterday to a little over 230 bp before ending the day below 220 bp, settling under 174 bp a week ago, and now hovering near 200 bp.
### United Kingdom
Tomorrow, the UK will release February’s GDP data, with forecasts expecting a 0.1% increase following a similar decline in January. The ongoing trade war is a threat to UK economic growth and could influence the Bank of England’s policy decisions. Sterling rose for the second consecutive session yesterday, gaining nearly 0.75% over two days and climbing an additional 0.5% today. It has almost completely regained the 1.25% it lost on Monday, peaking above $1.32 last Thursday and hitting a low of just above $1.2700 on Monday. The 38.2% retracement of this decline is near $1.2900, with today’s high slightly exceeding $1.2880. The 20-day moving average is approximately $1.2925, while the 50% retracement is closer to $1.2960.
### China
From last Friday’s low (~CNH7.24) to Tuesday’s high (~CNH7.43), the dollar appreciated about 2.6%. Since March 20, there’s been greater flexibility in the PBOC’s setting of the dollar’s reference rate. Some suggest China may be engineering a large yuan devaluation to counteract U.S. tariffs, although observing the fix does not necessarily indicate a significant devaluation is imminent. Given the current U.S. tariffs, a 5%-10% devaluation often suggested would have minimal impact. In light of market volatility, Beijing might allow more exchange rate flexibility. Shifting away from a broadly stable yuan strategy may appear as a win for the U.S. Chinese authorities seem to be moving towards more monetary and fiscal economic support. The PBOC raised the dollar’s fix again today to CNY7.2092 from yesterday’s CNY7.2066, yet the dollar is slightly down against the onshore yuan, potentially breaking a four-day increasing streak. Yesterday, the dollar rested below Tuesday’s offshore yuan high (~CNH7.4290), marking a high not seen since 2007. It settled at CNH7.3460, trading today between CNH7.3425-CNH7-3715. Despite a slightly softer than expected CPI report from China, showing a 0.1% drop year-over-year in March post-0.7% February decline, core measures excluding food and energy rose 0.5% after a 0.1% February decrease. Producer price deflation came in at -2.5% from -2.2%, marking 30 consecutive months of annual declines, with a monthly drop of 0.4%.
### Japan
The yen is typically sensitive to changes in the 10-year yield, but this isn’t always a direct one-to-one relationship. The U.S. 10-year yield climbed from about 3.85% last Friday to above 4.50% yesterday, yet as it receded towards 4.35%, the dollar rallied against the yen, surpassing JPY148.25, reaching a four-day high. Despite portfolio flows showing a lag and stories about foreign trade actions often being inaccurately blamed for American issues like wealth and income disparities, it appears the recent shifts might be more related to unwinding basis trades (like cash-futures arbitrage strategies). In February, Japanese investors purchased JPY1.4 trillion in U.S. bonds. However, according to the MOF’s weekly portfolio flow report, Japanese investors have offloaded foreign bonds over the past five data weeks after February’s end. As of April 4, Japanese investors sold a staggering JPY2.57 trillion in foreign bonds—the largest since June 2024. However, during the week ending April 4, the 10-year U.S. yield decreased nearly 25 basis points.
### Canada
The U.S. dollar has been consolidating against the Canadian dollar for five sessions within last Thursday’s trading range (~CAD1.4030-CAD1.4320). Momentum indicators appear mixed. The rolling 30-day correlation between the U.S. dollar against the Canadian dollar and the Dollar Index stands at 0.66, the highest of the year. The Bank of Canada will meet next week (April 16). Currently, the likelihood of a cut stands slightly below 50%, adjusting from 25% yesterday and approximately 35% from the end of March.
### Australia
The Australian dollar dropped to $0.5915 yesterday, marking a five-year low. The intensifying trade war and the consequential slower global growth are weighing heavily on the Aussie. The U.S.’s postponement of reciprocal tariffs has driven the Australian dollar upwards, reaching $0.6175. At around $0.6150, the Aussie recovered half of its losses since the April 3 high of a little under $0.6400. Follow-through buying initially elevated the Aussie to almost $0.6205, nearing the 61.8% retracement at $0.6210. It pulled back to about $0.6135 in the European morning, encountering fresh bids. Intraday momentum indicators propose another attempt at the highs, with the 20-day moving average around $0.6250.
### Mexico
The dollar experienced a key downside reversal yesterday initially hitting a two-month high slightly above MXN21.08 before reversing to a three-day low just below MXN20.21. Today, the greenback has maintained yesterday’s lows and rebounded to nearly MXN20.4450. Banxico released minutes from its recent meeting where it implemented a second consecutive 50 basis point cut, leaving open the possibility of a similar cut at next month’s meeting. Also, the dollar saw a key downside reversal against the Brazilian real. The U.S. dollar rose almost 9% against the Brazilian real from last Friday’s six-month low near BRL5.5930, before reversing downward after touching BRL6.0960 yesterday, settling below Tuesday’s low (BRL5.8615). It has retracted more than half of its gains, with the next retracement (61.8%) near BRL5.7855. The 20- and 200-day moving averages converge between BRL5.7360-BRL5.7475. Brazil will report the IPCA inflation measure tomorrow, which is expected to see a slight uptick. The central bank is set to meet on May 7, having increased rates by 100 basis points in its last three meetings, with the next adjustment potentially being 50 basis points. The Selic rate stands at 14.25%, with projections indicating a peak a little above 15%.
