FX market calm on the surface, angst below

Overview: The US dollar is consolidating its recent gains against the G10 currencies in quiet and relatively uneventful turnover. There continue to be mixed signals about the US tariffs threatened for next week. President Trump himself said that auto tariffs were coming soon as in days, while suggesting that there may be "a lot" of carve-outs from the reciprocal tariffs. EU's trade representative Sefcovic is meeting with US Commerce Secretary Lutnick today and a US delegation is in India today to talk trade. The greenback mixed against emerging market currencies. The Mexican peso was the strongest yesterday, gaining 1% against the greenback and is marginally stronger today. Of note, the offshore yuan is lower for the sixth consecutive session, its longest losing streak in about 2 1/2 years and the PBOC set the dollar's reference rate higher for the fourth consecutive session. It seems to be signaling an acceptance of a weaker yuan, perhaps given the tariff threats, which were extended yesterday to include buying Venezuelan oil and gas. 

While most of the bourses in the Asia Pacific region rose, including Indonesia, where the weakness of the rupiah spurred central bank intervention today, the Hang Seng and mainland shares that trade there, tumbled more than 2%. The Stoxx 600 in Europe is trying to snap a three-day decline, while US index futures are paring yesterday's strong gains. Benchmark 10-year rates are 2-5 bp higher in Europe, while the 10-year US Treasury yield is edging higher for the third consecutive session. If sustained, it would be the longest advance this month and at 4.35%, it is the highest level since late February. Gold is firm, holding above $3000, but below yesterday's high ($3033). May WTI is extending yesterday's 1.2% advance at near $69.50 is at its best level since March 3 as it extends the rally into the fifth consecutive session. 

USD: The Dollar Index held last Friday's low in the yesterday's pullback and was better bid in North America. After falling from a peak near 110.20 on January 13, DXY has carved out a bottom this month near 103.20. It reached almost 104.45 yesterday and posted its highest close since March 3. It is trading firmly but quietly today between about 104.25-and 104.45. The 104.90-105.00 area still looks like a reasonable target in the coming days. Today's high frequency data includes house prices, new home sales, and the Philadelphia's Fed's non-manufacturing survey. Recall that the Philly Fed's business outlook reported last week pulled back to 12.5 from 18.1, its lowest reading in Q1. The optimism of January (44.30) has faded. The Conference Board's measure of consumer for March will be reported, but the question is not so much the direction (down) as magnitude. The University of Michigan's preliminary March measure saw sentiment fall sharply and in percentage terms, dropped the most since mid-2022. The US threat to impose 25% tariff on all imports of any country that imports Venezuelan oil or gas. In addition to the US, China India and a few Latam countries are noted buyers of Venezuelan oil and gas. The US imported 25.4 mln barrels of oil from Venezuela in Q4 25, almost a 73% increase from Q4 24. US policy is often (mis-)characterized as "isolationist," but this underscores its unilateral thrust. 

EURO: The euro was sold to a two-week low in North America yesterday near $1.0780 and made a marginal new low today. A convincing break could target $1.0700-25. The persistent dollar selling from Europe seen earlier this month, ostensibly as its record purchases of US equities last year was unwound, has eased in recent sessions. It appears to be a better two-way market in Europe. Speculators in the futures market were net long euros for the second consecutive week (in the CFTC reporting week ending March 18). They had been net short from the middle of last October. The net long position of 59.4k contracts is the most since mid-September 2024. It is a light week for eurozone data, but Germany's IFO reported a small improvement sentiment among the 9000 companies it surveyed, which echoes the improvement seen in other surveys, including yesterday's preliminary PMI. It was the third consecutive monthly increase and at 86.7, the assessment of the overall business climate is the best since last July. 

CNY: The dollar rose to a two-week high against the offshore yuan (~CNH7.2680) yesterday and is consolidating today. If sustained, it would be the sixth consecutive daily advance. This matches the longest advance since October 2022. It has approached the next key chart area is around today seen near CNH7.2725. The PBOC set the dollar's reference rate at CNY7.1788 (CNY7.1780 yesterday). It is the fourth consecutive session that fix has been raised and its highest level in a couple of months. This gives the dollar more a little more scope to appreciate. One cannot help but suspect the PBOC is signaling a change. Also, coming out of its first meeting of the year, the PBOC renewed its commitment to cut rates and reserve requirements but does not seem to be in a hurry to do so.

JPY: Firmer US Treasury yields and a slightly wider US 10-year premium over Japan helped lift keep the dollar bid against the yen yesterday and settled above JPY150 for the first time this month. The gains were extended those gains today to about JPY150.95, its best level since March 3. It stalled but held above JPY150.40 on the pullback. Provided the JPY150 area holds, the next technical target is the month's high near JPY151.30. The five-day moving average crossed above the 20-day moving average in the middle of last week, for the first time since mid-January. Expectations for the BOJ have not changed much despite the softer real sector data. The market may be more sensitive to the March Tokyo CPI at the end of the week. The headline is expected to soften for the second consecutive month. The core measures look flat.

GBP: Sterling traded on both sides of last Friday's range yesterday by a couple hundredths of a cent and settled little changed and within pre-weekend range. Still, it was rebuffed last week after poking above $1.30 and looks to be rolling over. It is consolidating quietly today in less than a third-of-a-cent range today above $1.29. The next support area is seen in the $1.2840-$1.2860 area. Tomorrow is an important day for the UK, rates, and sterling. February CPI is due and is expected to jump 0.5%. However, given the base effect, the year-over-year rate may be steady at 3.0%, while the core and services inflation may slow slightly. The focus is also on fiscal policy. The Office for Budget Responsibility will update its forecasts. It will likely recognize that the economy is weaker than it previously projected. This translates into a larger budget deficit and requires a response from Chancellor Reeves. The Labour government seems more inclined to cut welfare than boost taxes or embrace a larger shortfall.

CAD: The US dollar was sold to a three-day low yesterday, slightly below CAD1.4300. Last week's low was near CAD1.4270 and that is roughly where the lower end of the triangle pattern is seen. This month's low was closer to CAD1.4240. The greenback is in a narrow range today (~CAD1.4310-CAD1.4335). Carney is taking the Liberal Party in a more pro-business direction. To outflank his call to reduce the lowest income bracket by one percentage point to 14%, the Conservative leader Poilievre has promised a 2.35 percentage point cut. Both candidates are advocating more defense and infrastructure spending. Both candidates will likely generate a larger budget deficit, but this is not as pressing an issue as it may be in some other G10 countries. Last year's fiscal shortfall was 2% of GDP and was anticipated to fall to around 1.3% this year. Tensions with the US and housing and health care affordability seem more salient.

AUD: While sterling had an outside day, the Australian dollar recorded an inside day yesterday as it was confined to the pre-weekend range. It is trading inside yesterday's range so far today (~$0.6280-$0.6295). It had been turned back from $0.6400 last week and encountered selling pressure in the past two sessions a little above $0.6300. A break of the $0.6260 area could see a return to the month's low, slightly below $0.6200. The first thing tomorrow, Australia reports February CPI. It looks flat at 2.5% year-over-year. It is possible that the trimmed mean measure ticks down. Regardless of the details, a cut next week (April 1) remains unlikely. The central bank puts more weight on the quarterly reading, and the Q1 report is due at the end of April. The futures market is discounting a little more than a 70% chance of a cut at the May 20 meeting, the last one in H1 25. 

MXN: The Mexican peso was the strongest emerging market currency yesterday, gaining about 1%. This recouped 2/3 of last week loss, which was the largest weekly decline in two months. The peso edged a little higher today, but the greenback has held (barely) above MXN20.00. The peso's gains were impressive not only because of the US dollar's broader strength, but also in the context of (slightly) softer than expected CPI for the first half of March and the continued weakness in January's IGAE monthly indicator (similar to a monthly GDP). It has fallen for three of the past four months. The combination of the peso's resilience and the data makes a 50 bp rate cut later this week less debatable. Meanwhile, the dollar recorded the lows for Q1 25 last week near BRL5.6320. It brings a three day-advance into today. It settled slightly below BRL5.7650 yesterday to resurface above the 20-day moving average (~BRL5.7640) for the first time since March 13. Nearby resistance extended from BRL5.7750 to BRL5.8100.