Dollar Consolidates, Bonds Rally, Stocks Recover, And Gold Extends Gains Ahead Of Tomorrow’s U.S. Tariff Announcement

Overview

Ahead of tomorrow’s US tariff announcement, which reports suggest the administration is still debating key elements, the US dollar is mostly consolidating inside yesterday’s ranges. The news stream has been limited to the largely-as-expected Japanese Tankan survey, which did not appear to impact BOJ expectations and the unsurprising decision by the Reserve Bank of Australia to stand pat after initiating an easing cycle at its last meeting. The futures market continues to discount a May cut. The eurozone’s aggregate CPI was in line with expectations, but of note, the unemployment rate slipped to a new EMU-era low (6.1%). The US reports the JOLTS report, for which the market seems less sensitive to than earlier in the cycle. The ISM manufacturing index is seen falling back below the 50 boom/bust level. Auto sales may be flattered by an attempt to get ahead of the tariffs.

The impressive recovery in US equity indices yesterday, where opening gaps were filled, may have helped lift Asia and European equities today. All the large bourses, but India rallied in the Asia Pacific region today. Taiwan, South Korea, and Australia rose more than 1%. Europe’s Stoxx 600 (STOXX) is also up more than 1%, leaving it poised to a four-day slide. US index futures are steady to slightly firmer. The rally in equities did not sap the strength of the bond market. Benchmark yields in Europe are mostly 6-7 bps lower. The 10-year US Treasury yield (US10Y) is almost three basis points lower, slightly below 4.18%. The five-month low recorded last month was near 4.10%. Gold‘s surge has continued. It reached $3149 before consolidating. May WTI jumped 3% yesterday to almost $72, its highest level in about six weeks. It remains firm today, consolidating on the $71-handle.

USD: The Dollar Index (DXY) held 103.75 yesterday, which is the (61.8%) retracement of the bounce from March low (~103.20). That was its lowest level since last October. It reached almost 104.40 in the North American afternoon yesterday. It is consolidating today, roughly between 104.00 and 104.30. Last week’s high was near 104.70 and the 104.90 area hosts the 200-day moving average and the (38.2%) retracement of last month’s slide. With a full slate of economic reports today, the highlight is the JOLTS report and ISM manufacturing. Job openings have nearly completely unwound the post-pandemic surge. Meanwhile, some economic data suggests businesses and households may be trying to get ahead of the tariffs, and this appears to be bringing activity forward. Still, the ISM is seen returning to below 50, where it had been since November 2022 before jumping back above the boom/bust level in January and February. Auto sales are expected to have remained near 16.0 mln annual sales, it saw in February. The key events still lie ahead: tomorrow’s reciprocal tariff announcement, Friday’s jobs report, and Fed Chair’s Powell’s speech on the economic outlook. It is not simply that the US is showing disregard for the international comity that it was instrumental in building, but it shows a disregard for the health of its own citizens, as reflected by the measles outbreak in several states. The World Health Organization, of which the US is no longer a member, warned last week that cases have now been reported in Mexico.

Euro: The euro retraced half of its loss from March 18 high (~$1.0955) to last week’s low (~$1.0735) yesterday near $1.0845. It fell back to $1.0785 before recovering to settle near $1.0815. It is trading quietly today between about $1.0790 and $1.0830. There are still hefty options that expire this week at $1.08, including around 820 mln euros and 4.6 bln euros Thursday-Friday. European investors bought a record $108 bln of US equities last year. Anecdotal reports suggest an unwinding of some those purchases, and the price action is broadly consistent with it. There is a suggestion that something larger could be taking place. Just as European tourists and consumers seem to be boycotting the US, could investors do the same thing? Maybe, and a weekend column in the Financial Times (gifted; no paywall), suggested that Europe’s $9 trillion of US equity investment could be at stake. While possible, it seems unlikely, and in any event, Occam’s Razor would imply that that ought not be the first take. Assume cyclical forces until proved otherwise. The eurozone preliminary March CPI did not surprise after the four largest members have reported in recent days. The headline slipped to 2.2% (from 2.3%) and the core eased to 2.4%. (from 2.6%). The final March manufacturing PMI stands at 48.6 (48.7 flash). February unemployment slipped to a new record low 6.1%. It had been stuck at 6.2% for the previous four months. In February 2024, it stood at 6.5%.

CNY: The dollar found support yesterday near CNH7.2530 and is trading with a firmer bias today. The move above CNH7.2650 spurred an advance today toward CNH7.2810, to approach last week’s high close to CNH7.2825. Meanwhile, the PBOC has introduced slightly more volatility into the daily dollar fix. Consider that throughout February, the fix was set 0.01%-0.02% of the previous day’s fix. There was one exception (0.03%). In March, there were 21 sessions and in a dozen sessions, the fix deviated from the previous fix by 0.3% or more. Today’s reference rate was set at CNY7.1775 (CNY7.1782 yesterday). The Caixin manufacturing PMI has been stronger than the Chinese Federation of Logistics and Purchasing and this continues to be the case. It stands at 51.2 vs. 50.4. Last March, the Caixin manufacturing reading was 51.1 and the other was at 50.8.

JPY: The dollar slightly overshot the (50%) retracement of its bounce from the March 11 low near JPY146.55 yesterday. As US equities recovered from the gap lower opening, US yields climbed back, and so did the dollar. The US 10-year yield fell to almost 4.18% and recovered to last week’s settlement near 4.25%. The dollar recovered to new session highs near JPY150.25. The 10-year Treasury yield fell to 4.17% and the dollar has held below JPY150.15 today. Note that at JPY150.00 and JPY150.03, there are $2.2 bln in options that expire today. Japan’s Q1 Tankan survey showed a little bit of softness among large manufacturers will non-manufacturers was steady. That makes sense given the US tariffs and threats. The capex plans by large companies fell back to 3.1%, matching the low from Q1 23, which was the lowest since Q1 22. It is often conservative at the start of new fiscal years. In GDP terms, the business investment has been in a sawtooth pattern over the past six quarters, alternating between increases and declines. In Q4 24, capex rose by 2.3% (quarter-over-quarter, seasonally adjusted). It is expected to have slowed to 1.2% in Q1 25. Inflation is seen averaging 2.3% a year over the next five years. The previous survey had it at 2.2%. Separately, February’s unemployment slipped to 2.4% from 2.5% and the job-to-applicant ratio slipped to 1.24 (from 1.26), matching last year’s low.

GBP: Sterling traded in a wide range of roughly $1.2870-$1.2990 last Thursday, and has remained within that range. A convincing break of the $1.2860 area is needed to confirm a broad topping pattern. On the upside, the four-month high was recorded on March 20 near $1.3015. The momentum indicators are trending down. The five-day moving average slipped through the 20-day moving average for the first time in three months. The economic calendar is light, with an unchanged in Nationwide’s house price index at 3.9% year-over-year. The 4.7% year-over-year increase in December was the strongest since October 2022. The final manufacturing PMI was revised to 44.9 from a preliminary reading of 44.6, and 46.9 in February. The March reading was the weakest since the end of 2023. It was at 50.3 last March.

CAD: Between the US tariff threat and the risk-off reflected in the continued sell-off in US equities, the Canadian dollar weakened for the third consecutive session. The greenback pushed to almost CAD1.4400 and settled above the 20-day moving average for the first time since March 14. It poked slightly above CAD1.4400 today but has not sustained it, and is back near support around CAD1.4365 in late morning turnover in Europe. A convincing push above CAD1.4400 targets CAD1.4450-70. The weekend call between Trump and Carney ostensibly went well, and Trump did not refer to Carney as “governor” as he did Trudeau. Nevertheless, there was no indication that there was any tariff relief for Canada being considered. Canada’s March manufacturing PMI is likely to have fallen for the third consecutive month. Recall that it had moved above the 50 boom/bust level last September for the first time since April 2023. Tomorrow sees the US reciprocal tariff announcement, and in terms of economic data, Friday’s employment report stands out. Risks are to the downside for job creation and upside for unemployment.

AUD: The Australian dollar fell through the shelf it forged last week, a little below $0.6280 and tumbled to $0.6220. It has not traded below $0.6200 since March 4 and has not closed below it since January 17. Options for A$1.5 bln are struck there that expire Friday. It is trading inside yesterday’s range today between roughly $0.6230 and $0.6270. The momentum indicators are falling. Surprising no one, the Reserve Bank of Australia stood pay with the overnight cash rate target at 4.10%. A cut at next month’s meeting (May 20) remains fully discounted in the futures market, which is now pricing in three cuts for the remainder of the year. The year-end target rate is seen slightly below 3.40%, the lowest in five months, down seven basis points in the past week. Separately, Australia reported a 0.2% increase in February retail sales. In the first two months of the year, they have averaged about 0.25%. In the first two months of 2024, the average was about 0.65%.

MXN: The peso looks vulnerable to the US challenge that strike the heart of Mexico’s modernization strategy since the signing of the NAFTA treaty in 1992. It validated and strengthened the integration of the continental economy. With inflation within target (+/- 1% around 3%), Banxico is moving to support the economy through more aggressive easing. The dollar rose to almost MXN20.52 today, and the band of resistance may extend to MXN20.55. The risk, though, is toward last month’s high near MXN21.00. Initial support is seen near MXN20.40. The manufacturing PMI and IMEF surveys due today are expected to remain weak. A key element of Mexico’s external balance is worker remittances, which will also be reported today. They averaged almost $5.4 bln a month in 2024 and a little less than $5.3 bln average in 2023. In recent years (seven of the past nine) remittances in February slow from January. They were $4.66 bln in January.