Overview: The United States fulfilled its pledges to impose 10% tariffs on China and 25% tariffs on Canada and Mexico. The market is still sceptical, with many people believing that the tariffs on Canada and Mexico won't be in place for the entire week. According to reports, Trump will speak with Sheinbaum and Trudeau today. The dollar was marked significantly higher in initial activity, but it did not trade high. It is not surprising that the Canadian dollar and Mexican peso took the brunt of the blow, but the decline in the euro, Australian dollar, and Swedish krona has been almost as large as the Canadian dollar's. Following the US threat to stop all funding to South Africa for a law passed last month that gave the government the authority to purchase land from private parties if it serves the public interest (eminent domain? ), the South African rand has also been singled out.
Despite the impending tariffs, stocks appeared to perform well last week, although North American markets saw a decline in pre-weekend activity. Today, reality set in. Amid severe regional losses of up to 3.5% in Taiwan and more than 2.5% in Japan and South Korea, Hong Kong remained a stable island. The Stoxx 600 in Europe is down 1.5% after a four-day rally. It is the biggest drop in more than a month. US index futures predict losses of 1.3% to 1.6%. The 10-year US Treasury yield is barely moving at 4.55%, while the benchmark 10-year yield in Europe is down 4-5 basis points. While European two-year yields are down 4-6 basis points and Canada's is down 8 basis points, the US two-year yield is up almost 8 basis points to 4.27%. Gold has bounced back from its initial sell-off (to about $2772) and is now trading around $2800. Prior to the weekend, the record high was just over $2817. Before stalling, the March WTI gapped higher and approached $75.20. Right now, it is circling around $74.
USD: In reaction to the tariff announcements, the Dollar Index spiked higher. The pre-weekend peak was close to the 20-day moving average, just above 108.55. The low for today is roughly 109.16. So far, the peak was close to 109.90. The mid-January high came just short of 110.20. President Trump said he will speak with Sheinbaum of Mexico and Trudeau of Canada today. The January auto sales and the ISM manufacturing survey are more significant of today's reports than the December construction spending and the final manufacturing PMI.The ISM manufacturing reading has not been above 50 since October 2022, but the preliminary manufacturing PMI exceeded the 50 boom/bust level for the first time since last June. In an attempt to evade the threatened tariffs, US auto sales in Q4 24 were comparatively strong, averaging 16.45 million units annually, the highest since Q2 21. January is predicted to see a slight decline toward a pace of 16.2 million units, which would impact retail sales and overall consumption.
EURO: The US tariffs and threats outweigh any new trading incentives that might be offered by today's manufacturing PMI and the preliminary January CPI. The crucial signal was present in the preliminary manufacturing PMI (46.1 from 45.1), and today's final estimate was even better at 46.6. Similarly, last week the larger members of the eurozone released their harmonized CPI figures. It doesn't mean much that today's aggregate report shows a 0.3% monthly decline and a slight increase in the year-over-year rate to 2.5% from 2.4%. With a 10% chance of a 50 bp move being discounted, the swaps market views a March cut as finalized.Since late December, the US two-premium over Germany has been getting smaller, but last week it hit 190 basis points, the lowest level since the US election. Last week's second half saw a recovery, and it settled close to 209 bp, the highest level in almost three weeks. Today, it jumped to nearly 225 bp, the highest level since late December. For the first time since last October, the euro declined daily last week, ending the week around 1.35% weaker. Today, it fell, and the gap is visible on the weekly charts, which is significant. Today's high is nearly $1.0310, while Friday's high was around $1.0350. In late European morning turnover, it is close to $1.0250.
CNY: Following the Lunar New Year holiday, mainland markets reopen on Wednesday. Against the offshore yuan, the dollar increased in four of the five sessions last week. The dollar was trading at about CNH7.24 on January 27, the day the onshore market closed. The greenback rose above the 20-day moving average (~CN7.3115) before settling slightly below CNH7.32 ahead of the weekend. It opened today close to CNH7.35, and it reached its highest level since October 2022 at CNH7.3735. In Europe, it is trading close to CNH7.34. There was news of the Caixin manufacturing PMI. It decreased from 50.5 to 50.1. Remember how the official manufacturing PMI dropped from 50.1 to 49.1?
JPY: Today, the dollar has not changed much in relation to the yen. Although there was some initial volatility, we observe that the exchange rate stabilized along with the US 10-year yield. Additionally, the US 10-year yield has not changed much since late Friday. Last week, the dollar seems to have established a shelf at JPY153.70–80. Before hitting a four-day high of nearly JPY156 today, it had been at lower highs for six straight sessions. The JPY is close to 156.25 on the 20-day moving average. In contrast to the initial estimate of 48.8, the final manufacturing PMI was 48.7. Except for the fluke print of 50.6 in May 2023, it has not been above 50 since October 2022 and is at its lowest since March 2024.
GBP: After nearly reaching $1.2525 last Monday, sterling's two-week recovery from the test on $1.21 on January 13 stalled. Before the weekend, it retreated and hit the weekly low of about $1.2385. The high for today is nearly $1.2385. The sale price was $1.2250. In the morning in Europe, it is attempting to regain a foothold above $1.23. Little new information is added by the last examination of the UK manufacturing PMI.The preliminary reading of 48.2 improved to 48.3 in the final iteration. This is the first increase since August of last year. It was at 46.2 last January. The Bank of England meeting on Thursday is the week's high point. Many people discount a cut of a quarter point. In 2024, there were two quarter-point rate cuts (in August and November). A little over three cuts are priced in for this year on the swaps market.
CAD: On January 30, the threat of US tariffs will cause the dollar to rise to almost CAD1.4595. When the White House announced it was still pursuing the tariffs, it rebounded to nearly CAD1.4560 after reversing lower to nearly CAD1.4370 following news that it would be delayed until March 1. It was the highest settlement for the greenback since 2003. However, the US dollar gap remained high after the actual tariff announcement. It opened at CAD1.4630, which is still the day's low. The peak was nearly CAD1.48. Canadian yields weakened as a result of a dismal 0.2% contraction in November and fears that US tariffs would worsen the economic slowdown. The US 10-year premium over Canada hit a record high of 147 basis points. The widest US two-year premium since 1997 was 156 basis points. Other factors, such as today's manufacturing PMI, will probably be overshadowed by the positioning and policy response to US tariffs. Parliament has been prorogued (not in session) due to the Liberal leadership contest, which could delay the fiscal response to the economic shock and increase interest rate pressure. The January employment report, which is released on Friday, is the week's data highlight. It is anticipated that overall job growth will slow and that the unemployment rate will slightly increase to 6.8% from 6.7%. In January 2024, it was 5.7%.
AUD: The Australian dollar settled close to its lows, but support around $0.6200 held last week. Today, the Aussie hit a new low since April 2020, trading just below $0.6090. Although it seems to be stalling, it has recovered to roughly $0.6150. It was the first time since February 2023 that the final manufacturing PMI jumped back above 50. 49.8 was the initial reading. This week's high frequency reports include figures, household spending, and retail sales. However, the central bank is anticipated to (belatedly?) start its easing cycle on February 18 unless there is a major surprise. Over the next 12 months, the swaps market has discounted easing by roughly 90 basis points.
MXN: Despite the impending tariffs, the peso appeared to be more resilient than anticipated. Indeed, it was the worst-performing emerging market currency last week, dropping by slightly over 2%. Prior to the weekend, the dollar was trading just below MXN20.68, and it is currently trading close to MXN21.07. It hit its highest level since March 2022, just above MXN21.29. The greenback might find support above MXN21.00, but the upward momentum stalled.Today, President Sheinbaum will make an official announcement regarding Mexico's response to the US tariffs. The likelihood of a 50 basis point cut at Banxico's meeting on Thursday would seem to be increased by the Q4 GDP's lower-than-expected growth (-0.6% compared to the median forecast of a 0.2% contraction in Bloomberg's survey). Mexico's economy would undoubtedly face new challenges as a result of a 25% tariff on exports to the US. Officials will probably consider that, though, in light of the possible inflationary effects of a declining peso.
Despite the impending tariffs, stocks appeared to perform well last week, although North American markets saw a decline in pre-weekend activity. Today, reality set in. Amid severe regional losses of up to 3.5% in Taiwan and more than 2.5% in Japan and South Korea, Hong Kong remained a stable island. The Stoxx 600 in Europe is down 1.5% after a four-day rally. It is the biggest drop in more than a month. US index futures predict losses of 1.3% to 1.6%. The 10-year US Treasury yield is barely moving at 4.55%, while the benchmark 10-year yield in Europe is down 4-5 basis points. While European two-year yields are down 4-6 basis points and Canada's is down 8 basis points, the US two-year yield is up almost 8 basis points to 4.27%. Gold has bounced back from its initial sell-off (to about $2772) and is now trading around $2800. Prior to the weekend, the record high was just over $2817. Before stalling, the March WTI gapped higher and approached $75.20. Right now, it is circling around $74.
USD: In reaction to the tariff announcements, the Dollar Index spiked higher. The pre-weekend peak was close to the 20-day moving average, just above 108.55. The low for today is roughly 109.16. So far, the peak was close to 109.90. The mid-January high came just short of 110.20. President Trump said he will speak with Sheinbaum of Mexico and Trudeau of Canada today. The January auto sales and the ISM manufacturing survey are more significant of today's reports than the December construction spending and the final manufacturing PMI.The ISM manufacturing reading has not been above 50 since October 2022, but the preliminary manufacturing PMI exceeded the 50 boom/bust level for the first time since last June. In an attempt to evade the threatened tariffs, US auto sales in Q4 24 were comparatively strong, averaging 16.45 million units annually, the highest since Q2 21. January is predicted to see a slight decline toward a pace of 16.2 million units, which would impact retail sales and overall consumption.
EURO: The US tariffs and threats outweigh any new trading incentives that might be offered by today's manufacturing PMI and the preliminary January CPI. The crucial signal was present in the preliminary manufacturing PMI (46.1 from 45.1), and today's final estimate was even better at 46.6. Similarly, last week the larger members of the eurozone released their harmonized CPI figures. It doesn't mean much that today's aggregate report shows a 0.3% monthly decline and a slight increase in the year-over-year rate to 2.5% from 2.4%. With a 10% chance of a 50 bp move being discounted, the swaps market views a March cut as finalized.Since late December, the US two-premium over Germany has been getting smaller, but last week it hit 190 basis points, the lowest level since the US election. Last week's second half saw a recovery, and it settled close to 209 bp, the highest level in almost three weeks. Today, it jumped to nearly 225 bp, the highest level since late December. For the first time since last October, the euro declined daily last week, ending the week around 1.35% weaker. Today, it fell, and the gap is visible on the weekly charts, which is significant. Today's high is nearly $1.0310, while Friday's high was around $1.0350. In late European morning turnover, it is close to $1.0250.
CNY: Following the Lunar New Year holiday, mainland markets reopen on Wednesday. Against the offshore yuan, the dollar increased in four of the five sessions last week. The dollar was trading at about CNH7.24 on January 27, the day the onshore market closed. The greenback rose above the 20-day moving average (~CN7.3115) before settling slightly below CNH7.32 ahead of the weekend. It opened today close to CNH7.35, and it reached its highest level since October 2022 at CNH7.3735. In Europe, it is trading close to CNH7.34. There was news of the Caixin manufacturing PMI. It decreased from 50.5 to 50.1. Remember how the official manufacturing PMI dropped from 50.1 to 49.1?
JPY: Today, the dollar has not changed much in relation to the yen. Although there was some initial volatility, we observe that the exchange rate stabilized along with the US 10-year yield. Additionally, the US 10-year yield has not changed much since late Friday. Last week, the dollar seems to have established a shelf at JPY153.70–80. Before hitting a four-day high of nearly JPY156 today, it had been at lower highs for six straight sessions. The JPY is close to 156.25 on the 20-day moving average. In contrast to the initial estimate of 48.8, the final manufacturing PMI was 48.7. Except for the fluke print of 50.6 in May 2023, it has not been above 50 since October 2022 and is at its lowest since March 2024.
GBP: After nearly reaching $1.2525 last Monday, sterling's two-week recovery from the test on $1.21 on January 13 stalled. Before the weekend, it retreated and hit the weekly low of about $1.2385. The high for today is nearly $1.2385. The sale price was $1.2250. In the morning in Europe, it is attempting to regain a foothold above $1.23. Little new information is added by the last examination of the UK manufacturing PMI.The preliminary reading of 48.2 improved to 48.3 in the final iteration. This is the first increase since August of last year. It was at 46.2 last January. The Bank of England meeting on Thursday is the week's high point. Many people discount a cut of a quarter point. In 2024, there were two quarter-point rate cuts (in August and November). A little over three cuts are priced in for this year on the swaps market.
CAD: On January 30, the threat of US tariffs will cause the dollar to rise to almost CAD1.4595. When the White House announced it was still pursuing the tariffs, it rebounded to nearly CAD1.4560 after reversing lower to nearly CAD1.4370 following news that it would be delayed until March 1. It was the highest settlement for the greenback since 2003. However, the US dollar gap remained high after the actual tariff announcement. It opened at CAD1.4630, which is still the day's low. The peak was nearly CAD1.48. Canadian yields weakened as a result of a dismal 0.2% contraction in November and fears that US tariffs would worsen the economic slowdown. The US 10-year premium over Canada hit a record high of 147 basis points. The widest US two-year premium since 1997 was 156 basis points. Other factors, such as today's manufacturing PMI, will probably be overshadowed by the positioning and policy response to US tariffs. Parliament has been prorogued (not in session) due to the Liberal leadership contest, which could delay the fiscal response to the economic shock and increase interest rate pressure. The January employment report, which is released on Friday, is the week's data highlight. It is anticipated that overall job growth will slow and that the unemployment rate will slightly increase to 6.8% from 6.7%. In January 2024, it was 5.7%.
AUD: The Australian dollar settled close to its lows, but support around $0.6200 held last week. Today, the Aussie hit a new low since April 2020, trading just below $0.6090. Although it seems to be stalling, it has recovered to roughly $0.6150. It was the first time since February 2023 that the final manufacturing PMI jumped back above 50. 49.8 was the initial reading. This week's high frequency reports include figures, household spending, and retail sales. However, the central bank is anticipated to (belatedly?) start its easing cycle on February 18 unless there is a major surprise. Over the next 12 months, the swaps market has discounted easing by roughly 90 basis points.
MXN: Despite the impending tariffs, the peso appeared to be more resilient than anticipated. Indeed, it was the worst-performing emerging market currency last week, dropping by slightly over 2%. Prior to the weekend, the dollar was trading just below MXN20.68, and it is currently trading close to MXN21.07. It hit its highest level since March 2022, just above MXN21.29. The greenback might find support above MXN21.00, but the upward momentum stalled.Today, President Sheinbaum will make an official announcement regarding Mexico's response to the US tariffs. The likelihood of a 50 basis point cut at Banxico's meeting on Thursday would seem to be increased by the Q4 GDP's lower-than-expected growth (-0.6% compared to the median forecast of a 0.2% contraction in Bloomberg's survey). Mexico's economy would undoubtedly face new challenges as a result of a 25% tariff on exports to the US. Officials will probably consider that, though, in light of the possible inflationary effects of a declining peso.
