United States
Last week, the capital markets were somewhat calmer than the previous week, but the ongoing uncertainty from Washington remains intense. Apart from tariffs on Mexican tomatoes, the U.S. did not extend other tariffs, though new investigations could lead to future tariffs. President Trump suggested the possibility of delaying the 25% auto tariffs that are scheduled for next month. The administration did announce that starting in October, foreign-owned ships, particularly Chinese ships, will be charged a fee per tonnage, with the fee increasing every year for the next three years. While there’s a semblance of stability, it remains fragile. Apart from the preliminary April PMI and Tokyo’s April CPI, the economic calendar has little market-moving high-frequency data. Two key events are capturing attention. First, the US-Japan bilateral trade negotiations are entering a new phase with US Treasury Secretary Bessent meeting Japan’s Finance Minister Kato. The tariff difference last year was negligible, at less than 0.5%. Japan is not actively pursuing a weak yen; it’s raising interest rates while many high-income countries are reducing theirs. Last year, Japan spent around $100 billion to strengthen the yen. Both the US and Japan seem eager for a quick deal, which could ease market risks. Second, the World Bank and IMF spring meetings might serve as a stage for the US to withdraw support for missions misaligned with its values, such as environmentally focused or diversity-promoting projects. While Congress limits the US’s ability to fully withdraw from the IMF and World Bank, funding adjustments are more feasible. Sentiment toward the US is deteriorating. Even with postponed reciprocal tariffs, the average tariff has climbed to 14.5%, a significant increase from 2.5% at the start of the year, marking the highest level since 1938. Another disruption looms over the labor market, as federal layoffs and immigration curbs could have downstream effects, even if not yet visible in the data. We’ve consistently recommended that dollar-based investors diversify outside the US due to overvaluation of the dollar and US stocks, and record European buying of US equities in 2024 hints at a market peak. Data-wise, the US has a busy economic week. Reports like durable goods orders will help refine Q1 GDP forecasts. The Atlanta Fed’s GDP tracker anticipates a 2.2% contraction, with minimal decline when excluding gold imports. Bloomberg’s survey median forecast suggests a 1.1% expansion. Regional Fed surveys and the preliminary Q2 PMI, including the Fed’s Beige Book, are also in focus. The weekly jobless claims, aligned with the April nonfarm payroll survey week, are significant. The Dollar Index hovered within the April 11 range (~99.00-100.75) last week without surpassing 100.30 and ended near its lows. The key question is whether it’s preparing to recover or decline further; we suspect the latter. In 2022, the Dollar Index peaked and then fell by nearly 12.2% over four months. A similar move now could see it dip below 97.00 soon.
Eurozone
The depth and breadth of European capital markets support the euro as the US rebrands its economic approach. While the US offers an interest rate premium over the EMU, investors are demanding a larger premium to hold dollars due to doubts about US commitments, including swap line access during emergencies. Last week, the ECB cut rates, placing the deposit rate at 2.25%. Upcoming data, including February trade figures, construction spending, and the preliminary April PMI, will not influence the June meeting outlook. March new car registrations, a sales proxy, attracted some attention with year-over-year declines in January and February. Despite efforts to preempt US tariffs, underlying weaknesses might be masked. Germany’s industrial output dropped by 1.3% in March; Italy’s by 0.9%, while France and Spain saw a 0.7% increase. These are the EMU’s four largest economies. Overall, the eurozone reported a 1.1% industrial production rise, indicating significant jumps in other countries like Ireland and Belgium, linked to US pharma and tech industries. The euro consolidated within the April 11 range (~$1.1190-$1.1475) last week. The price action suggests bullish consolidation, with momentum indicators not imminently turning lower. The euro briefly dipped below $1.1275 last week, a resistance level since 2023. The next resistance band is $1.15-$1.17.
United Kingdom
Sterling’s rolling 30-day correlation with the euro has been decreasing since peaking near 0.90 in April and is now below 0.70, the weakest since last November. For most of Q1, the euro-sterling correlation surpassed the euro-Swiss franc correlation, which has now trended higher, currently slightly above 0.85. Sterling’s inverse correlation with the Dollar Index has diminished from almost 0.90 in early April to a little over -0.75 now. The UK anticipates the preliminary April PMI. The composite was at 51.5 in March, the highest since October. It closed 2024 at 50.4 and peaked last April at 54.1. While the manufacturing sector’s slump deepened with a March PMI of 44.9, the lowest since October 2023, the services PMI hit 52.5 in March, its best since August. March retail sales, reported at week’s end, showed UK consumers on a spending spree in January and February with 1.4% and 1.0% rises, respectively, marking the best two-month performance since early 2021. UK retail sales, reported on a volume basis, fell in the last four months of 2024. Sterling has experienced a nine-day rally, the longest since July 2020, appreciating about 4.5% to nearly $1.3300. Last year’s high near $1.3435 is the next target. Although momentum indicators are stretched, a corrective turn doesn’t seem imminent. Initial support is around $1.3200, but breaking $1.3150 might signal the start of a correction.
China
Beijing has managed to maintain the yuan’s broad stability, though with increased volatility. This approach seems prudent, considering the broader economic landscape and the volatility from the world’s largest capital markets. China’s policymakers appear to believe they have more to gain by staying the course, at least for now, as the US dollar’s broader decline buys them time. China’s one and five-year loan prime rates are expected to remain steady at 3.10% and 3.60%, respectively. Subtle changes in the PBOC’s daily dollar fixing have been noted, with the average daily change increasing from about 0.01% to over 0.05%. This small, yet noticeable shift reflects official efforts to allow more flexibility. Contrary to expectations of a US dollar rally amidst the tariff war, the dollar has depreciated against all G10 currencies since Trump’s second inauguration, with over half appreciating by more than 9%.
Japan
The swaps market has scaled back expectations for BOJ hikes this year. After the BOJ hiked rates in January, another was fully priced in until recently. Currently, the market reflects just over a 50% likelihood of a rate hike this year. Meanwhile, the 30-day rolling correlation between the US 10-year yield changes and the exchange rate has dropped to below 0.30, the lowest in about a year. In contrast, the correlation with the US two-year yield is now near 0.70, having reached a four-year low below 0.15 in January. Japan anticipates the preliminary April PMI and the February tertiary industry index, although these typically aren’t market movers. At week’s end, Tokyo reports April CPI. Government household subsidies have added volatility; in March, CPI ticked up to 2.9% from 2.8%, with core CPI (excluding fresh food) rising to 2.4% from 2.2%. Processed foods are absorbing fresh food price rises. In April 2024, Tokyo CPI was 1.8% and core CPI 1.6%. The dollar reached new lows against the yen last week near JPY141.60, with a break targeting the JPY140 area. The 2024 low was near JPY139.60. If unwinding the post-Covid rally, JPY139.25 corresponds to the (38.2%) retracement, with the 200-day moving average just below JPY138.00. Bilateral trade talks, critical for a swift US agreement, are expected to focus on foreign exchange in talks between the US Treasury Secretary and Japan’s Finance Minister, noting Japan’s $100 billion yen-strengthening efforts last year.
Canada
The rolling 30-day correlation between changes in the Canadian dollar and the Dollar Index is approximately 0.60, near the upper end of its range in recent months. Despite apparent exceptions, the Canadian dollar retains a risk-off bias, with a 0.40 correlation with the S&P 500, nearly double its oil correlation. Also, changes in the Canadian dollar and gold prices are highly correlated, nearing 0.60 this year. February retail sales data is due April 25. Recent sales tax holidays skewed December and January figures, with a 2.6% December jump followed by a January 0.6% drop, only partially offset by the tax break. Anecdotal reports suggest a consumer boycott of US brands, potentially affecting data. A decline in Canadian holiday bookings has been noted. The US dollar fell to five-month lows below CAD1.3830 last week, though downside momentum stalled, resulting in a trough. Nevertheless, lower highs in recent sessions may indicate further declines. Momentum indicators suggest a possible push towards CAD1.3800, providing stronger US dollar support; failure to maintain might lead to testing around CAD1.3730.
Australia
Over the past 30 sessions, the Australian dollar has become a more robust risk currency than the Canadian dollar, with a rolling 30-day correlation with the S&P 500 exceeding 0.65. Last year it peaked around 0.75, though it was inversely correlated for much of late 2024. Its rolling 30-day correlation with gold hit a 10-month high below 0.70 early this month, now around 0.60. In a broader context, recent reports indicate the US might leverage trade negotiations to force reduced China trade, posing dilemmas for Australia, aligned with US security yet reliant on China as a major trading partner. Data-wise, there’s a lull aside from the preliminary April PMI due Wednesday. March’s composite PMI was 51.6, the highest since last August. While it dipped to 49.6 in September, it recovered but remained subdued at 50.2 in Q4. Last year peaked in March at 53.3. The Australian dollar’s seven-day pre-weekend rally reversed a decline to a five-year low (~$0.5915) on April 9, approaching $0.6400, a cap for much of the year. Nearby support is $0.6325-35, with a break potentially forcing momentum traders out within the $0.6250-80 range.
Mexico
The inverse correlation between peso changes and the S&P 500 is slightly lower than with the Aussie, hovering around ~0.65, the highest in two years. Peso’s gold correlation is below 0.40, and its exchange rate is similarly correlated with US two-year yield changes at approximately 0.30 over 30 sessions. Mexico releases two real sector reports: February retail sales and the IGAE economic activity report, similar to a monthly GDP estimate. Retail sales rose 0.6% in January, the most since July, but did not boost the IGAE indicator, which declined for a second month. The economy contracted by 0.6% in Q4 2024 and had a slow start this year, with January’s IGAE indicator down 0.16%. US tariff uncertainty compounds challenges. April 24 data will show the first half April CPI; progress on inflation barely aligns with the 3% +/- 1.0% target. Policymakers must heed US tariff policy’s cooling effect on investment and hiring, worsening Mexican economic conditions. Despite reshoring rhetoric—challenging Mexico’s developmental strategy— the peso remains resilient, hitting a six-month high on April 17, past a closed local market, and surpassing the 200-day moving average for the first time since June (now slightly below MXN19.93). The dollar’s fall from April 9’s MXN21.08 spike high to last week’s MXN19.6550 low saw a significant 6.5% pullback—not seen since last August. Short-term consolidation appears likely, with initial resistance near MXN19.90.
