Overview: The next phase of the evolving trade war that is both a cause and effect of strain in the traditional US alliance, in North America, Europe, and Asia Pacific has begun. The US has imposed 25% tariffs on imported steel and aluminum. Despite lobbying form various countries, no exemptions were announced. The EU quickly announced retaliation, but the measures do not go into effect for a month, which allows time for negotiations. The dollar is a little firmer against most foreign currencies today, but is mostly consolidating ahead of the North American session, which features a likely rate cut by the Bank of Canada and the US February CPI.
Benchmark 10-year yields, which leaving aside Australia and New Zealand, where the 6-7 bp rise was a bit of catch-up, the major bond markets are quiet. Most European yields are +/- less than a basis point and the US 10-year Treasury is slipping below 4.27%. Yesterday’s $58 bln three-year note sale produced a small tail but firm demand. The Treasury Dept is back today looking to sell $39 bln 10-year notes, with no rate concession and a soft dollar environment. Leaving aside China and Hong Kong, and Australia, many of the large Asia Pacific equity markets rose today and the MSCI regional index looks to have snapped a three-day slide. Europe’s Stoxx 600 is rising for the first time in five sessions, and US index futures are enjoying a firmer tone. Gold settled above $2900 yesterday and rose to $2925, a little above yesterday’s high before consolidating. April WTI is holding above $66 after falling to about $65.30 yesterday.
USD: The Dollar Index remains pinned near yesterday’s low (~103.20) and has not been above 103.70. It has fallen nearly 4% this month so far to reach its lowest level since the middle of last October. A move above 104.00 is necessary to stabilize the technical tone. The focus today is on the US CPI, where a small softening on a year-over-year basis is expected, and the US steel and aluminum tariffs. Unlike in Trump’s first term, the levy on aluminum is 25% vs 10% and the rhetoric suggests less exemptions may be granted this time. On one hand, the high price will reduce demand or shift the demand to other providers. On the other hand, since the US has more steel and aluminum consumers than producers, the added cost of imported steel and aluminum would seem to go counter to boosting domestic production of manufactured goods and pipes (for oil) and construction. Many who expect the Fed to cut in June, and it is fully discounted in the futures and swap markets, anticipate the deterioration of the labor market more than a sharp easing of price pressures will prompt the Fed to reduce the restrictiveness of monetary policy.
EURO: The intensifying US trade war with Canada is ultimately understood as weakening the US growth outlook and with the coming fiscal changes in Europe, have helped lift the euro to almost $1.0950 yesterday. Options for about 825 mln euros expire there today. It is consolidating between roughly $1.0890 and $1.0925 so far today. The next important technical area is $1.10, while last year’s high was set last September near $1.1215. A break of $1.0880 could push some late longs out. The economic calendar in the euro area is quiet. We note little market impact from the news that the Portuguese government collapsed. Elections, the third in nearly three years, will likely be held in the first part of May. The EU has retaliated against US metals tariffs with higher duties on 26 bln euro of US goods (steel, aluminum, textiles, some agriculture products, and home appliances), effective mid-April. The aggregate industrial output figures for January are due tomorrow. France and Spain disappointed with a 0.6% and 1.0% decline respectively, while German surprised to the upside with a 2.0% rise. Italy’s will be reported Friday. The German yield curve (2-10-years) has steepened nearly 30 bp this month to 70 bp. It took nearly three months for the curve to have steepened the previous 30 bp (mid-December through late February). It was inverted from around mid-November 2022 until late last September.
CNY: The broad US dollar weakness saw it trade to a marginal new low for the year near CNH7.2155 today, before rebounding to CNH7.25. Chinese officials continue to maintain a fairly steady yuan against the US dollar. The onshore yuan has risen almost 0.8% against the US dollar so far this year while the offshore yuan has risen almost 1.3% this year. Many observers had expected officials to allow the yuan to weaken to offset or blunt US tariffs. After rising for the past three sessions, the PBOC set the dollar’s reference rate lower today at CNY7.1696. Last week’s low fix was CNY7.1692. The US raised the tariff on Chinese and Hong Kong imports by 20% this year and both the Hang Seng and mainland shares that trade in HK have easily outperformed the US indices. The US 10-year premium over China has narrowed by a little more than 50 bp since the end of last year.
JPY: President Trump expressed displeasure at displeasure of the yen’s weakness and seemed to accuse Japan are doing it intentionally. There is not much merit to claim, as the BOJ has been engaged in raising rates and its intervention last year was aimed at strengthening the yen. Similarly, Trump’s criticism of Japan’s pacificism seems off insofar as Japan has been boosting defense spending and part of the obstacle has been the pacificist constitution imposed by the US at the end of WWII. Still, Japanese officials responded, and the yen reached its best level since last October. yesterday, with the dollar reaching JPY146.55. It recovered settle near JPY147.80 and has recovered further today to JPY148.65. Nearby resistance is seen in front of JPY149 and then JPY149.50. Since the January 10 high near JPY158.90, the dollar has fallen by around 7.75% against the yen.
GBP: The light news stream has helped facility a consolidative phase for sterling. The down move that began at the end of last September ended on January 13 near $1.2100. It reached $1.2965 yesterday. At $1.2925, it met the (61.8%) retracement of Q4 24-mid-January decline. The momentum indicators are stretched as one would expect given the eight-cent, two-month rally. It is consolidating in quiet turnover today between about $1.2915 and $1.2955. The next important chart area is $1.3000-$1.3050 and there are options for almost GBP450 mln struck at $1.30 that expire today. Support is seen in the $1.2865 area. The Bank of England meets on March 20, and there is practically no chance of a change in policy. However, the swaps market has about an 80% chance of a cut at the May 8 meeting. The market is discounted two more cuts this year and a little more than a 30% chance of another.
CAD: The intensifying trade conflict between the US and Canada helped lift the greenback to CAD1.4520 yesterday. Last week’s high was near CAD1.4540. The US responded to Ontario’s 25% surcharge on its electricity sales to the by doubling the intended tariff on Canadian steel and aluminum to 50%. This was reversed after Ontario rescinded it surcharge. The US dollar is trading firmly above CAD1.4420 today but has held below CAD1.45. There are options for about $645 mln at CAD1.4380 that roll-off today. Trump’s threat to destroy Canada’s auto industry seems like another example of America shooting itself in the foot. US companies dominate the market, with 40% of vehicles sold in Canada being US brands. Additionally, the US accounts for approximately 62% of Canada’s automotive imports. The Bank of Canada meets today, and a cut is nearly a foregone conclusion. The Bank of Canada was aggressive in late 2024 with 125 bp of cuts delivered between September and December. It delivered another 25 bp cut in January. Canadian inflation is running near zero on a six-seven-month view. The US tariff threats appear to be having a detrimental effect to the economy. Given the lag times for monetary policy to be effective and the risk that the uncertainty emanating from the US persists, the risk of a rate cut seems less than standing pat. After today’s move, the swaps market has another 50 bp of cuts priced in for the remainder of the year. The US two-year premium over Canada reached its highest level (163 bp) since 1997 in early February and has pulled back to around 135 bp.
AUD: The Aussie has been confined to about a two-cent range since early February and it continues hovering around $0.6300, the middle of range. It fell to a four-day low yesterday near $0.6260 but it recovered to record session highs in North American afternoon dealings to reach $0.6310. Australia sees the Melbourne Institute measure of consumer inflation expectations first thing tomorrow, and they likely remain elevated in March after rising to 4.6% in February from 4.0% in January and matching the 2024 high. It may reinforce the central banks signal that it is in no hurry to cut rates again. That means no cut at its next meeting, April 1, but the futures market has around an 80% chance of a hike at the next meeting (May 20).
MXN: The Mexican peso continues to trade firmly. Despite the looming US tariff threats and soft economy, the peso has appreciated by about 2.80% against the greenback this year. The dollar frayed MXN20.20 Monday, but only for the second time this year. The year’s low was set on January 24 near MXN20.1345. The peso has outperformed the Canadian dollar, which is off around 0.35%. The Canadian dollar is flirting with the lows of the year against near MXN14.00. The low last year was seen in April, slightly below MXN12.00. Tomorrow, Mexico reports January industrial production. It is expected to have stabilized after falling a heady 1.4% in December. The losses in December were widespread. Manufacturing output fell 1.2%, mining -1.0%, utilities -1.9%, and construction contracted by 2.1%.