Tokyo inflation on the upside, France and Spain on the downside, stronger UK Retail Sales

Overview: The US dollar, which struggled yesterday, is trading higher against most currencies today. The Japanese yen an exception among the G10 currencies. The higher-than-expected March Tokyo CPI had little impact on BOJ expectations, the pullback in the US 10-year yield, around seven basis points from yesterday's high, has helped underpin the yen. The UK reported stronger than expected retail sales and its first trade surplus, excluding precious metals, in almost four years has helped sterling. Among emerging market currencies, those from central Europe have been weighed down by the heavier euro. The Russian ruble, South African rand, and Indian rupee are the best performers. 

The US auto tariffs this week and more coming next week have roiled equity markets. Tokyo, Taiwan, and South Korean markets fell by more than 1% today. Among the large bourses, only Australia settled higher. India is struggled. The most powerful earthquake in a 100-years hit Myanmar, with reverberations in Thailand and Vietnam. Europe's Stoxx 600 is off for the third consecutive session and the sixth in the past seven. US index futures are softer. Bond markets have rallied. European benchmark 10-year yields are mostly around four basis points lower, with the 10-year Gilt off a little more than five basis points, despite the strong retail sales. Gold is extending yesterday's 1.25% gain to reach a new record high near $3086. It finished last week near $3022. May WTI is hovering near $70, which puts it up almost 2.6% on the week, which will be the third consecutive weekly advance. It settled near $68.30 last week. 

USD: The Dollar Index did not benefit from the market's initial reaction to the US auto tariffs. DXY held below Wednesday's high slightly under 104.70 and successful tested the 104.00 area. It is consolidating in about a fifth of a cent above 104.20 today. Provided generally holds, the price action looks constructive, and the five-day moving average is crossing above the 20-day moving average today for the first time in a couple of months. Even before the US auto tariffs and escalating threats to Greenland, we suggested that today's data was not so important. Yes, it includes the PCE deflator, which the Fed targets, but economists’ ability to forecast it is greatly improved after the CPI and PPI reports. While they can surprise the market, the PCE deflator rarely does. Both the headline and core rates are seen rising by 0.3% in February. Barring a rounding adjustment, which will keep the year-over-year headline pace at 2.5%, while the core rate may tick up to 2.7% from 2.6%. The issue going forward is the impact of the tariffs and whether the Fed can look through it after previously claiming pandemic-related shocks were going to have a transitory impact on prices. At the end of last week, the Fed funds futures were discounting 70 bp of cuts this year and now almost 65 bp. Separately, after falling by 0.2% in January, personal spending likely jumped back in February (0.5% vs. -0.2%). Note that although the Atlanta Fed's GDP Now tracker sees the economy contracting by 1.8% in Q1 25, its alternative model, which adjusts for gold trade, shows a 0.2% expansion. That is still well below economists’ projections. The University of Michigan's final March read is unlikely to have much impact. Market participants are well aware of the deterioration of consumer confidence and elevated inflation expectations. 

EURO: The euro stalled posted an outside day yesterday and pushed through $1.08, after the expiry of 2 bln euros of expired. It did not quite settle above Wednesday's high but did settle back above the 20-daty moving average ($1.0790). It is trading quietly today but encountered selling pressure above $1.0800 where 2.9 bln euro options expire today. The ECB survey found little change in the February inflation survey. France and Spain reported March CPI figures today. In France, the EU harmonized measure rose 0.2%, half of what economists in Bloomberg's survey expected, and the year-over-year rate was steady at 0.9%. Spain's harmonized CPI rose 0.7%, which was also less than expected, and given the base effect (+1.4% in March 2024), saw the year-over-year rate fall to 2.2% from 2.9%. Ahead of US reciprocal tariff announcement on April 2, the eurozone's preliminary March CPI will be reported on April 1. The base effect (CPI rose by 0.8% in March 2024) and the median forecast in Bloomberg's survey is for a 0.6% increase this month. That suggests there is scope for the year-over-year rate to ease close to 2.1% (2.3% in February). The odds of an ECB rate cut next month is near 85%, up from a little less than 60% at the end of last week. 

CNY: Beijing has rebuffed President Trump's offer to reduce tariffs in exchange for agreeing to selling TikTok. Meanwhile, Chinese officials do not appear to be formally blocking the sales CK Hutchison's extensive port holdings, but no doubt will seek retribution. Reports suggest Beijing has told state-owned firms not to enter new collaboration with Li Ka-shing and his family. CK Hutchison is registered in the Cayman Islands and estimates suggest only about an eighth of its revenue is derived from Hong Kong and the mainland. The US dollar consolidated against the offshore yuan yesterday and continues to do so today, consistent with the greenback's broader consolidative tone. A small shelf is near CNH7.2650. The move below it, could signal a test on CNH7.25. The high this week is around CNH7.2820. The PBOC set the dollar's reference rate at CNY7.1752, a new low fix in a week-and-a-half. (CNY7.1763 yesterday). 

JPY: The dollar reached JPY151.15 in the North American afternoon yesterday, its best level since March 3. Not coincidentally, we argue, the US 10-year yield rose as well and approached 4.40% for the first time since late February. Yesterday was the first session the greenback traded entirely above JPY150, which it had not managed since February 18. The dollar is trading heavier today, following the firmer than expected Tokyo CPI and softer US 10-year yield which is now around 4.33%. Today's low is near JPY150.35 and there are options for $860 mln at JPY150.40 that expire today. Tokyo's March headline unexpectedly rose to 2.9% from a revised 2.8% in February (initially 2.9%). The median in Bloomberg's survey was for a 2.7% year-over-year pace. The core measure, which excludes fresh food, rose to 2.4% from 2.2%. Non-fresh food prices rose 5.6%, and rice prices have almost doubled over the past 12 months (prompting the government to tap its strategic reserves earlier this month). The inflation measure that excludes fresh food and energy rose to 2.2% from 1.9%. Despite the firmer Tokyo CPI, the swaps market shows little change in BOJ expectations and the 10-year yield fell for the first time today since March 18. At about 1.54%, it is up about two basis points this week. 

GBP: Sterling slipped initially yesterday to a new two-and-a-half week low near $1.2870 before recovering and settled at Wednesday's high, just shy of $1.2950. The price action was constructive, but no important resistance levels were taken out. The $1.3000-15 area capped it last week. The final read of Q4 GDP is inconsequential, but the new information today was two-fold. First, February retail sales surprised on the upside. After the heady 1.7% rise in January, which was revised to 1.4%, rather than pullback as economists expected, retail sales jumped another 1%. And remember, unlike many countries, the UK reports retail sales om a volume basis, not value. Even excluding gasoline, retail sales rose 1%. Second, after a delay, the January trade balance was reported today that showed that excluding precious metals, the UK reported a GBP537 mln trade surplus, the first since June 2021. 

CAD: The US dollar made a marginal new low for the month on Wednesday near CAD1.4235 before the US auto tariff announcement. It ran up to CAD1.4330 yesterday, with some help possibly from the $400 mln in options that expired at CAD1.4300. It has made a marginal new three-day high today. A move above CAD1.4350-60 could signal a recovery toward CAD1.4550, this month's high, with intermittent resistance near CAD1.4400 and CAD1.4450. Canada reports January GDP today. The median forecast in Bloomberg's survey is for 0.3% growth, which would match the best monthly performance since last April. Nevertheless, given the recent developments and the likelihood of more US tariffs, it may be nearly irrelevant to traders and policymakers. 

AUD: Amid much uncertainty, the Australian dollar has been consolidating over the past three sessions, mostly between about $0.6280 and $0.6330 and remains in the range today. The average this month is a little less than $0.6310. Only a move outside the slightly broader range of $0.6265-$0.6345 will be meaningful from a technical perspective. The momentum indicators are not generating a strong signal. The economic calendar picks up next week with February retail sales, trade, and household spending. However, the big event is the central bank meeting on April 1. There is virtually no chance of a change in policy, but with the fiscal support having been announced ahead of the election, which was formally set today for May 3. The futures market discounting almost a 70% chance of a cut at the May 20 meeting, the market will likely be sensitive to the forward guidance.

MXN: The dollar slipped below MXN20.00 Monday and reached almost MN20.37 yesterday before central bank announced a 50 bp rate cut, which was largely expected. However, while we had expected Banxico to indicate that while there was scope for further cuts, they would probably moderate pace, it instead signaled scope for additional half-point cuts. The rate cut bring the overnight target to 9.00%. The swaps market has discounted about another 100 bp of cut this year. The greenback settled above its 20-day moving average (~MXN20.22) for the first time since March 4. The next technical barrier is seen in the MN20.40-42 area. The momentum indicators have turned higher and the US push for reshoring puts at risk Mexico's modernization strategy. This leaves the peso vulnerable; we suspect potential in the next week or two may extend toward MXN20.70 or higher. The March high was near MXN21.00.