## United States
The US dollar is exhibiting slight softness today against the G10 currencies, yet it largely remains within Wednesday’s range. The yen stands as a notable exception as it reached a new weekly high despite Japan’s Q1 25 GDP contraction. Emerging market currencies are mostly stronger. The statement from President Trump indicating the administration’s incapacity to negotiate with all parties, leading to a potential unilateral decision on tariff rates in the next 2-3 weeks, has not stirred major market reactions. In the equity markets, Asia Pacific concluded the week on a mixed note, while Europe’s Stoxx 600 rose by about 0.6%, marking the fourth consecutive daily gain this week. US index futures advanced approximately 0.25%. In the bond market, there is a rally in European bonds with the benchmark 10-year yields declining by 4-5 basis points today. The US 10-year Treasury yield decreased by nearly four basis points, dipping below 4.40%. ECB’s pressure on its member banks to reduce dollar funding needs might instigate the sale of USD assets; however, this impact is mitigated by signals that suggest the US will lower the Supplemental Leverage Ratio, encouraging banks to hold more Treasuries.
Gold exhibited a remarkable recovery yesterday, rallying from $3120 to $3240. The follow-through buying prompted it to $3252 before sellers moved it below $3200. Late European morning turnover sees it hovering near there. July WTI is in consolidation mode within yesterday’s broad range, trading mostly between $60.80 and $61.80 today.
The Dollar Index is staying in a tight range (~100.50-80), holding inside Wednesday’s range (~100.25-101.15) for the second session in a row. Today’s data, including housing starts and permits, NY Fed services survey, and March portfolio capital report (TIC), lack significant market-moving impact. Following an 11.2% decline in March housing starts, a modest recovery is anticipated. Markets are likely most sensitive to the preliminary May University of Michigan consumer confidence survey and inflation expectations, with consumer expectations possibly showing slight improvement. The inflation outlook for one year stood exaggeratedly high at 6.5% in March, while the 5-10 year inflation expectation was at 4.4%. By contrast, the two-year breakeven (difference between the inflation-protected security and the conventional note) is roughly 2.65%, while breakevens for 5-10 years range around 2.35%-2.40%.
The April CPI month-over-month increase was marginally less than anticipated, and the PPI actually decreased. In nine out of the ten sessions through Wednesday, the market downgraded the likelihood of a September rate cut, though odds rose following yesterday’s tepid retail sales (notably the decline in the control measure, which excludes autos, gasoline, building materials, and food services) and contraction in manufacturing output. A week ago, the Fed funds futures market priced in nearly 66 basis points of cuts this year, but now it’s slightly less than 57 basis points. Markets have once again aligned with the Fed’s guidance, rather than leading the way. Regarding TIC data, discourse on capital flight from the US has been extensive this year; however, the Jan-Feb period displayed a net inflow of about $338 billion versus a net outflow of roughly $59 billion. In March 2024, the US recorded a net inflow nearing $98 billion. Concerns grew acute in April, with TIC data due for release in mid-June.
## Eurozone
This week, the euro has been restrained to a range of about two cents, from roughly $1.1065 to $1.1265. Today, it trades in about a 20-tick range on each side of $1.12, coinciding with the expiration of options for nearly 4 billion euros. The eurozone reported a March trade surplus of 36.8 billion euros, expanding from February’s 24 billion euro surplus. This sets the Q1 surplus at approximately 61.6 billion euros, compared to the Q1 24 surplus of around 58.2 billion euros. While some analysts identify a seasonal pattern of surplus widening in March, the surplus has only expanded during 13 of the last 20 Marches. Nevertheless, the surplus has indeed widened in eight of the past ten Marches.
## United Kingdom
Sterling remains entrenched within Wednesday’s range (~$1.3255-$1.3360). Today’s trendline drawn from recent highs stands near $1.3360. A breach above this line would reset targets toward the $1.3400-45 region. Conversely, falling below the $1.3225-50 range could hint at a retreat to the $1.3140 mark. Although Q1 GDP’s initial reading exceeded expectations with 0.7% growth—the strongest since Q1 24’s 0.9%—momentum might have diminished as the quarter drew to a close. Focus turns to Q2 data next week, including April’s CPI, retail sales, and the preliminary May PMI. The swaps market assigns a low probability of consecutive rate cuts, almost ruling out one next month. The cut likelihood in August slipped to about 72% from nearly 97% late last week.
## China
The US dollar’s comeback from the year’s lowest point set Tuesday near CNH7.1790 has encountered resistance near CNH7.2160. The currency remains within Wednesday’s range (~CNH7.19-CNH7.2160). The People’s Bank of China set the dollar’s reference rate at CNY7.1938 (CNY7.1963 yesterday and CNY7.2095 a week ago), marking the fourth consecutive day of a lower setting this week. Many observers, ourselves included, believe China fared well in last week’s trade discussions. Despite the US’s temporary 90-day suspension of the reciprocal tariffs announced in early April—a condition set by Beijing for talks—the sectoral tariffs, the reduced de minimis tariffs (54% from 120% with a $100 fee), and planned port charges remain active. The 90-day moratorium has triggered a surge in container bookings from China to the US, inflating shipping costs. Walmart suggested that despite reduced tariffs, a price hike is imminent. Meanwhile, US efforts to prevent Huawei chip purchases by other nations have intensified. Emboldened by China’s stance, India is threatening retaliation against what it claims are not genuinely national security protections but rather “safeguard” tariffs in steel and aluminum. Meanwhile, the US administration suggests a potential trade agreement with India is approaching. Brazil and China inked over 30 sectoral and investment agreements this week, and China reportedly signed an MOU with Colombia regarding the Belt Road Initiative. In the region, Venezuela, Ecuador, Chile, Peru, Bolivia, and Panama have officially joined the BRI.
## Japan
After ascending to JPY148.65 on Monday—the highest since April 3—the dollar has retreated, setting a new weekly low slightly below JPY145.00 today. Options for $735 million are expiring today. The four-day decline resulted in the greenback retracing 38.2% of its gains since the eight-month low near JPY139.90 recorded on April 22. The 50% retracement aligns near JPY144.25. Intriguingly, the yen’s strength emerged despite disappointing Q1 GDP results; Japan reported a 0.2% GDP contraction in Q1 following a Q4 24 expansion at 0.6%. Consumption remained steady after Q4’s revision from zero to 0.1%. Business spending surged by 1.4% after Q4’s 0.8% increase (originally 0.6%). Inventories contributed 0.3% after detracting 0.3% from Q4 GDP. Net exports sliced growth by 0.8% after a 0.7% contribution in Q4 24. On a positive note, March industrial production was revised from an initial 1.1% decline to a 0.2% increase. The swaps market anticipates about 16 basis points of tightening this year, down a few points from this week’s peak.
## Canada
For the third instance this week, the greenback encountered sellers upon crossing CAD1.40 threshold. Resistance is evident in the CAD1.4015-20 range. Closing yesterday near CAD1.3960, the greenback was sold down to nearly CAD1.3935 before attracting fresh bids. However, momentum indicators remain bullish, suggesting the possibility of another upward attempt. A breach of CAD1.3890-CAD1.3900 support would dampen the technical outlook. Canada also reports March portfolio flows today. During the first two months of the year, Canada disclosed a net inflow of C$1.5 billion. In the Jan-Feb 2024 interval, Canada noted net inflows of C$9.2 billion. March 2024 saw C$14.7 billion in capital inflows.
## Australia
After a modest push above $0.6500 on Wednesday, the Australian dollar declined just below $0.6390 yesterday. This level held today, and the Aussie rebounded to approximately $0.6435. Though momentum indicators have recently turned downwards, supporting a potential for further declines, the downside adjustment could target the $0.6300 area. Market consensus is firm that the Reserve Bank of Australia will cut its cash target rate by 25 basis points to 3.85% next week. Additionally, market sentiment strongly anticipates another rate cut in Q3 and Q4.
## Mexico
As predicted, Mexico’s central bank trimmed the overnight target rate by another 50 basis points to 8.50%, marking the third reduction this year and the seventh consecutive cut. The central bank signaled the possibility of “more adjustments of a similar magnitude,” a more dovish stance than anticipated by both us and the market. The US dollar made new session highs upon the announcement, nearing MXN19.52, but later returned to being offered around the MXN19.4500 area during the European morning. The swaps market anticipates nearly another 125 basis points of Banxico cuts over the upcoming 12 months. The peso has appreciated about 7% this year, with more than 5% of that appreciation occurring this quarter.
