# United States
The recent turbulence in the capital markets, driven by last week’s tariff announcements from the US and countermeasures by China, has subsided somewhat today. However, the calm remains fragile, potentially disrupted by any sudden comment or social media post from the US President. Japan has expressed skepticism about some of the US tariff-related claims, specifically the tariffs on US autos. Unlike other nations that have either removed tariffs on US goods or proposed doing so, Japan seems to be leading in trade discussions. This has reinforced the idea that the US tariffs might primarily be a negotiating leverage, with the administration willing to sacrifice other goals, such as revenue and onshoring, for a favorable deal. Market sentiment has eased, yet the unpredictable nature of US policy decisions continues to make traders cautious.
In the currency market, the US dollar is consolidating with a slight downward bias against the G10 currencies, led by the recovery in the Australian and New Zealand dollars. Among emerging markets, currencies are showing a mixed performance. Notably, the People’s Bank of China (PBOC) set the dollar’s exchange rate above CNY7.20, speculating that Beijing might prefer a weaker yuan to cushion the tariff impact. Meanwhile, Asia Pacific equities have rallied, with Japan’s Topix soaring 6.25% and the composite index of mainland shares in Hong Kong and Australia increasing over 2%. In Europe, Stoxx 600 has bounced back from a four-day drop of around 13%, gaining nearly 1.5%. US index futures have also risen, between 1.2% and 2.0%.
The recovery in US Treasury yields and local equities has pushed yields in Japan, Australia, and New Zealand up by 14-17 basis points. In contrast, European bond performance is mixed, with slight tightening in peripheral premiums. The 10-year US Treasury yield, meanwhile, has dipped slightly to around 4.17%.
Gold remains strong, climbing back to almost $3016 after nearly reaching $2957 yesterday, and is trading near $3004 in late European trading. May West Texas Intermediate oil prices dropped slightly below $59 yesterday but have rebounded to around $61.75. However, they have since slipped by about a dollar from their peak. US-Iran negotiations are set to commence, as the US strengthens its military presence in the region.
The US Dollar Index, after fluctuating significantly, re-entered last Wednesday’s range, rising to approximately 103.50 yesterday and settling near its peak. It reached the 61.8% retracement of the decline from the March 26 high (~104.70). Despite a softer bias, it remains within yesterday’s range. Bilateral trade talks between the US and Japan, notably involving Treasury Secretary Bessent and Trade Representative Greer, suggest that tariffs are likely a negotiating tool, with deal-making taking precedence over revenue and onshoring aims. Potential export tax credits might substitute tariffs if implemented.
Despite the dominance of equity market performance and tariff developments, high-frequency economic data is under scrutiny. This week’s main focus is on Thursday’s Consumer Price Index (CPI). Today’s highlights include a small business confidence survey, while tomorrow ushers in MBS mortgage applications, wholesale inventories, and minutes from the last Federal Open Market Committee meeting. These releases are unlikely to significantly impact the market, given Fed Chair Powell’s recent remarks that have made an interest rate cut less plausible for the upcoming FOMC meeting. Nevertheless, the sharp equity downturn suggests some market participants still expect the Fed to ease policy in response to tightening financial conditions. Futures markets priced in a roughly 40% chance of a May rate cut and over a 25% chance of a 50-basis-point June cut. Today’s market stability has reduced the odds of a May cut to 33% and a 50-basis-point June cut to below 20%.
# Eurozone
The Euro had a challenging session yesterday, as it fell to nearly $1.0880, testing its 61.8% retracement objective from its March 27 rally, which was located near $1.0890. The currency is now consolidating above $1.09 while remaining below $1.0990. The drop in Germany’s February industrial production by 1%, coupled with a staggering 18% decline in Europe’s Stoxx 600 over just a month, and the adverse impact of US tariffs, have fueled expectations that the European Central Bank (ECB) will cut rates again next week – with an 85% chance priced in by swaps markets.
Meanwhile, the US-German two-year interest rate differential, which had been narrowing, shifted with a nine basis point jump on Friday and an additional 18 basis points yesterday, reaching above 200 basis points—the highest since February’s end. Today’s calmer markets have seen it ease by 7-8 basis points, now hovering just above 190 basis points.
# United Kingdom
The British Pound experienced significant pressure, declining nearly 1.3% yesterday following a 1.65% cut before the weekend. It fell to approximately $1.2710, marking the lowest point in a month. It is currently consolidating at the lower end of yesterday’s range and has been unable to breach the $1.2800 level. The 200-day moving average stands near $1.2815. After settling above its upper Bollinger Band last Thursday, Sterling closed below it yesterday (~$1.2805), and the lower Bollinger Band today is near $1.2765, with Sterling trading below it in late European sessions.
The UK economic calendar is relatively light until the monthly GDP for February is released at the week’s end. Swaps markets are confident in a Bank of England rate cut next month through a quarter-point reduction. By year-end, nearly three rate cuts are priced in. Just recently in late March, markets were factoring in one full cut and nearly 60% likelihood of a second move.
# China
As the US dollar gained against most G10 currencies, it also appreciated against the Chinese yuan, settling close to session highs just under CNH7.35. The People’s Bank of China (PBOC) set the dollar’s reference rate at CNY7.2038, an elevation from CNY7.1980 yesterday, marking the highest fixing in over six months. This move encouraged selling in the offshore yuan, with the dollar reaching CNH7.3650. The PBOC has become more lenient with exchange rate volatility, altering the fix more significantly than before mid-March.
Despite the US threatening to increase tariffs on China by 50% if China retaliates, the impact may be muted since Chinese goods are already priced out of US markets. China, grappling with disinflationary forces, might ironically find the tariffs addressing those issues. Unmentioned by many, the PBOC announced the full integration of the digital yuan cross-border settlement system with 10 ASEAN nations and 6 Middle Eastern countries—representing over a third of global trade, potentially reducing SWIFT’s activity. While some view this as a challenge to the dollar’s global dominance, it’s the dollar’s deep liquidity and the US Treasury market’s depth as a store of value, not just transactional use, that are crucial.
# Japan
Benefitting from a recovery in the US 10-year yield (from around 3.87% to 4.22%), the dollar climbed from nearly JPY144.80 to JPY148.15, settling near its peaks. It has regained over half of what it lost since March 28’s high around JPY151.20 and last Friday’s low near JPY144.55. As equity markets stabilized, pressure on US Treasury yields eased, allowing the greenback to consolidate mostly in the JPY147-JPY148 range today. If the 10-year yield recovery continues, the dollar might advance toward JPY148.50.
Japan’s trade and current account balance exhibit distinct seasonality, consistently improving sequentially in February from January over the past 30 years. The pattern remained unchanged, with the goods and services trade swinging into a surplus (~JPY713 bln) from a JPY2.94 trillion deficit in January, marking the largest trade surplus under balance-of-payments accounting since March 2021. This was likely bolstered by efforts to outpace US tariffs. The broader current account surplus was JPY4.06 trillion, after a January deficit of just under JPY260 billion. In February 2024, Japan reported a JPY310 billion trade deficit and a JPY2.8 trillion current account surplus.
# Canada
The US dollar extended its gains to nearly CAD1.4300 yesterday and stayed slightly below the 20-day moving average (~CAD1.4310) while closing around the pre-weekend peak (~CAD1.4260). Last Thursday’s trading range, between approximately CAD1.4090-CAD1.4320, remains influential. Today, the dollar is oscillating within a CAD1.4150-CAD1.4250 range, centering around the median in late European trading.
The US trade war poses recession risks for the Canadian economy, according to several economists. Reports such as yesterday’s Bank of Canada business survey and last week’s subdued job data have increased speculation of a potential rate cut next week. Markets are now more likely to react to a subdued IVEY survey rather than a strong one, which might be dismissed as outdated given the US tariff context. Swaps markets price in slightly below a 60% chance of a cut at next week’s meeting—almost double the likelihood compared to late March.
# Australia
Confidence has yet to be fully restored in the Antipodean currencies post the mini-flash crash at last week’s end, where the Australian and New Zealand dollars plummeted over 5%. The Aussie dollar decreased by roughly 0.85% and the Kiwi dipped slightly over 1% yesterday. However, both are rebounding, leading the G10 currencies today with 0.8%-0.9% gains. Before the collapse last week, the Aussie’s lowest for the year was just below $0.6090 in early February. The January low was near $0.6130, and it bottomed just short of that yesterday. Today, it has improved to about $0.6075.
The New Zealand dollar, unable to establish a new low last week, finally fell to a fresh year low yesterday, just below $0.5510. The “Covid low” was around $0.5470, and it has bounced back to approximately $0.5625 today. Following a combined 175-basis-point rate cut in Q4 2024 and February, the Reserve Bank of New Zealand may execute a quarter-point cut tomorrow, with under a 15% chance of another 50-basis-point reduction priced in. A quarter-point move would bring the new target to 3.50%. The swaps market anticipates the year-end rate to be near 2.75%.
# Mexico
The US dollar approached MXN20.81 yesterday, marking its strongest position in a month. The greenback settled slightly above the downward trendline connecting the spikes from February to March. Presently, it is trading in the MXN20.5450-MXN20.72 range, having settled above its upper Bollinger Band (~MXN20.5950).
After February’s vehicle production and export data, focus shifts to tomorrow’s March CPI. In March, Mexico exported over 80% of its vehicle output, primarily to the US. This isn’t predominantly Mexican companies, but foreign automakers maximizing NAFTA and USMCA benefits. The potential risk is a stall in headline and core CPI improvements, which may have become evident in the second half of last month. Yet with inflation within the target range and given the downturn in industrial production seen in January (-0.4%, the fourth consecutive monthly decline and fifth contraction in six months), and little expected February improvement (due at the week’s end), the central bank retains the scope for another 50-basis-point cut at its mid-month meeting.
