Brinkmanship And Theater

After yesterday’s wild gyrations, the foreign exchange market calm. US dollar losses seen as the tariffs on Mexico and Canada were postponed with what many observers see as minor concessions, though Canada is going to have a fentanyl czar have not been extended and a consolidative tone has emerged. The 10% tariffs om China were implemented but Beijing’s response has been sufficiently restrained that it still appears to leave room for a deal down the road. Aside from the politics, the US quarterly refunding announcement is tomorrow and the market-sensitive jobs report, with the annual benchmark revisions, is Friday. The greenback is mostly firmer against the G10 currencies and more mixed against the emerging market currencies. Asia Pacific currencies are mostly firmer, while several central European currencies, the South African rand, and Mexican peso are slightly softer. Asia Pacific equity markets bounced back today after yesterday’s losses. Hong Kong’ was up 2.8%, while the index of Chinese stocks that trade there was up 3.5%. India and South Korea are up more than 1%. Australia was an exception and slipped fractionally. Europe’s Stoxx 600 is sporting a softer tone, as are US index futures. Benchmark 10-year yields in Europe are 2-5 bp higher and the US 10-year Treasury yield is up nearly two basis points to almost 4.58%. Gold is hovering slightly below the record set yesterday of almost $2831. March WTI is heavy, approaching last month’s low (~$71.30). It is trading below the 200-day moving average (~$72.05), which it has not closed below since the end of December. USD: The opening gap was closed yesterday after the US tariffs on Mexico and Canada were postponed a month. Still, the Dollar Index settled above the pre-weekend high (~108.55). Today, it has been confined to the lower half of yesterday’s range and is hovering near the low (~108.35) in the European morning. Below there, nearby support is seen around 108.00. Given that the initial GDP estimate has been released, and the tariffs will likely change the economic dynamics, today’s December JOLTS, factory orders, and final durable goods orders are unlikely to attract more than passing interest. The futures market continues to discount the next rate cut around the middle of the year. A little more than 80% chance on June 18 is priced in and it is near 100% for the next meeting that concludes on July 30. That said, the market is less of another cut this year. The odds have fallen from almost 100% a week ago to about 67% now. Fed Governor Jefferson, and regional presidents, Daly and Bostic speak today but there does seem to be a strong consensus to stand pat. EURO:  The euro gapped lower yesterday and fell to around $1.0140, according to Bloomberg. It pared those knee-jerk markdowns recorded in illiquid markets to almost $1.0290 in early North American turnover. It took another leg up to a $1.0350 on news that the US tariffs may be delayed and close the gap. The euro fell to almost $1.0270 today as the US tariffs on China went into effect. It recovered to retest $1.0350. While a marginal new high is possible, we look for sellers to re-emerge in North America. The daily momentum indicators have turned down, and the five-day moving average looks set to fall through the 20-day moving average today and tomorrow. The French government faces a confidence vote tomorrow. The Socialists play the pivotal role this time and do not appear set yet to support the government. CNY: China responded to America’s 10% tariff increase with a bevy of modest measures that look sufficiently restrained to possibly promote negotiations. China singled out a few companies, imposed a 15% tariff on almost $5 bln of US energy and 10% tax on US oil and agriculture equipment. The tariffs are to be effective February 10, which also gives the sense of negotiating space. The dollar gapped higher against the offshore Chinese yuan yesterday and reached almost CNH7.3735. The pre-weekend high was slightly above CNH7.33. However, news of the tariff delay saw the dollar fall to almost CNH7.30, closing the gap. Today, the dollar reached CNH7.3365 but reversed and is trading near CNH7.29 in Europe. Mainland markets re-open tomorrow and Caixin services and composite PMI are due. JPY: The Japanese yen was the strongest G10 currency to gain against the dollar yesterday, rising by about 0.3%. There may be some unwinding of short yen carry trades, but we suspect that the decline in the US 10-year yield may have been a more important consideration. The intraday co-movement especially in the European and North American sessions seems clearer. The US 10-year yield, which peaked before the weekend near 4.58% frayed the 4.50% level. The near-term risk is for higher US rates. Yesterday’s January manufacturing ISM came in stronger than expected, which spurred the Atlanta’s Fed’s GDP tracker move above 3% for the current quarter, and tomorrow, Treasury announces the size of the quarterly refunding. Several officials in the new administration were critical of the Yellen for relying on bills. It is not clear whether it is ready to boost the supply of coupons. The dollar broke the uptrend line drawn off the September and December lows last week. It came in near JPY155.65 yesterday and the dollar briefly traded above it, before recording session lows in early North American turnover near JPY154.00. The dollar is firm but trading quietly in a mostly JPY155.00-JPY155.50 range. First thing tomorrow, Japan reports December labor earnings. and the final December services and composite PMI. GBP: Despite the volatility, the market remains convinced (~98%) that the Bank of England will cut rates later this week. The swaps market is pricing in three cuts this year and a small chance of a fourth move. Unlike most of the currencies we focus on here, sterling did not gap lower yesterday but fell to about $1.2250, in any event, which was a nine-session low. It recovered to reach about $1.2455 after tariff delay was announced. It has held below there today but held above $1.2380. Nearby resistance now is seen near $1.2475. Note that even though US and UK officials have been working in it for several years, the US data shows, it runs a small trade surplus with the UK, while the UK data shows it runs a small trade surplus with the US. CAD:  The US dollar reached almost CAD1.48 yesterday in the Asia Pacific session saw the gains gradually pared until it lurched lower following Mexico’s President Sheinbaum’s announcement that the US tariffs will be delayed a month. The greenback was sold to CAD1.4390, which was frayed today before it recovered to CAD1.45 as the tariffs on China came into effect. Still, the US dollar has pulled back to around CAD1.4420 in the European morning. The CAD1.4380-CAD1.4400 area looks to be formidable support. The US two-year premium over Canada settled last week near 155 bp. It is near 158 bp now. The 10-year premium settled at a record 148 bp yesterday and is pushing above 150 bp today. AUD: The Australian dollar recovered after briefly penetrating $0.6090 to $0.6235 on the back of the delay in US tariffs on Mexico. It has held below yesterday’s high so far today and is struggling to sustain a perch above $0.6200. The daily momentum indicators have turned down and the five-day moving average has crossed back below the 20-day moving average. Australia reported a 0.4% rise household spending in December, a little firmer than expected. The futures market remains confident (~93%) of the beginning of the easing cycle later this month. The swaps market has about 85 bp over the next 12 months. MXN: After tanking initially, the Mexican peso came screaming back yesterday after President Sheinbaum announced that the US would suspend the tariff decision for a month. Sheinbaum’s main concession was to bring more national guard to the US southern border. After rising through MXN21.29 initially the dollar reversed to MXN 20.3080 and settled below the pre-weekend low (~MXN20.4580). The greenback’s drop stalled. Consolidation has ensued. It remains above MXN20.3165 today and has not risen above MXN20.50. The swaps market has nearly a quarter-point cut discounted for the end of this week. All but two of the economists in Bloomberg’s survey expect a 50 bp cut. Today’s data, includes December remittances (could these be threatened?) and the January IMEF surveys. Recall that the Mexican economy ended last year on a disappointing note (contracting 0.6% quarter-over-quarter in Q4) and the IMEF surveys will likely warn the economy is still struggling to get traction. More By This Author:Tariffs Roil MarketsFebruary 2025 Monthly Report And ForecastRenewed US Tariff Threat Doesn’t Stop Equities From Marching Higher