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Overview: The capital markets are continuing to digest the implications of the US-China 90-day cooling off period. There were dramatic moves yesterday, and with a few exceptions, a consolidative tone has emerged today. The domestic US political focus is shifting to the budget, while the May CPI is due today, and it is expected to be little changed. The dollar is softer against the G10 currencies but the Canadian dollar. While there was no follow-through dollar buying after yesterday's surge, the pullback has been rather shallow. Against emerging market currencies, the dollar is mixed. Most of the Asian currencies weakened, though not the Chinese yuan, central European currencies and the Mexican peso. Asia Pacific equities advanced, but there were two notable exceptions: Hong Kong and mainland shares that trade there were off around 2%. The other exception is India, where its main indices are around1.5% lower in late trade. Europe's Stoxx 600 is up about 0.2% after yesterday's 1.2% surge. US index futures are pulling back by 0.3%-0.5%. European benchmark 10-year yields are 2-3 bp higher, while the 10-year US Treasury yield is off a couple of basis points to around 4.45%. Gold has stabilized. After holding $3200 yesterday, it recovered to almost $3266 today and is hovering above $3250 in late morning turnover in Europe. June WTI reached $63.60 yesterday and recorded a low near $61.65 today. It has recovered and is near $62.40. USD: After yesterday’s outsized move, the Dollar Index is consolidating today in the upper end of yesterday's range. It reached nearly 102.00. The 102.10 area is the (61.8%) retracement of the leg lower from late March (that began near 104.70). The 102.60 area is the (38.2%) of this year's decline, and the 103.00 area is the measuring objective of the possible head and shoulders bottom that was forged in recent weeks. Beijing had appeared to demand the end of the so-called reciprocal tariffs as a precondition for talks and that seems to be what has happened, more or less. The US kept the 10% "universal tariff" and the tariff as punishment for fentanyl and China backtracked on its retaliatory tariffs, for 90 days. The US reports April CPI today. The median forecast in Bloomberg's survey anticipates a 0.3% rise in both the headline and core rates. Given the base effect, the year-over-year rates are expected to be steady at 2.4% and 2.8%, respectively. A 0.3% increase in the headline rate puts the annual rate through April at about 2.7%, down from 3.9% in the first four months of 2024. A 0.3% rise in the core rate translates into 3% annualized rate, down from 4.5% in the first four months of last year. The market has already pushed the next Fed fund into September. Lastly, today the US Court on International Trade hears a case challenging the presidential authority to impose tariffs under the International Emergency Economic Powers Act (1970), which does not explicitly grant the president tariff authority. EURO: The euro retraced nearly (61.8%) of its advance since late March (~$1.1055). The $1.1025 area is the (38.2%) retracement of this year's rally. It is consolidating in quiet turnover. It reached $1.1125 but the upside momentum faded. The odds of June ECB rate cut have been trimmed to about 85% from nearly 93% before the weekend. The swaps market is now discounting about 45 bp of easing in the remainder of the year, down from almost 62 bp ahead of the weekend. The possible head and shoulders topping pattern has an initial measuring objective that would bring the euro to around $1.0950. Germany reported improvement in the ZEW survey. The expectations component collapsed in April (-14.0 March and 51.6 in February) but bounced back in May to 25.2. Although the assessment of current conditions weakened for first time this year (-82.0 vs. -81.2). CNY: The US dollar peaked before the weekend near CNH7.2530 and slipped below CNH7.20 yesterday. Last week's low, which was its lowest since last November was near CNH7.1845. It took out briefly today, with the dollar slipping below CNH7.18. The PBOC set the dollar's reference rate at CNY7.1991 (CNY7.2066 yesterday). With the exception of the first two days back from the extended May Day holidays, the PBOC has continued to change the dollar's daily reference rate by slightly more than it had been previously. Today's adjustment of 0.1% is the largest change since April 7. It is still small, and perhaps too small for many observers, but we suspect it is a signal of slightly more flexibility. The only concession China seemed to have made in the weekend talks was to promise (again) to stem the flow of fentanyl and lifted its ban on Boeing planes, JPY: The dollar reached almost JPY148.65 yesterday. It has eased to JPY147.65 today and is knocking on JPY148 in the European morning. The next important chart area is in the JPY149.40-70 area, which houses the (50%) retracement of this year's decline and the 200-day moving average. Tomorrow's PPI is not typically a market mover. The highlight of the week is the first estimate of Q1 GDP. The median forecast in Bloomberg's survey anticipates a small contraction. The swaps market has about 18 bp of tightening discounted for this year, which is around twice as much as a week ago. GBP: Sterling was sold to $1.3140 yesterday. It slightly overshot the (38.2%) retracement of its rally from the April 7 low (~$1.2710) to the April 28 high (~$1.3445) that was found near $1.3165. It is bid near $1.3220 in Europe. The UK reported average weekly earnings slowed slightly to 5.5% in March (from 5.7%), while the measure excluding bonuses moderated to 5.6% from 5.9%. The ILO measure of unemployment ticked up to 4.5% from 4.4%. The number of payrolled employees fell (-33k) for the third consecutive month (and the fifth month in the past six). CAD: The US posted a bullish outside up day against the Canadian dollar yesterday by trading on both sides of last Friday's range and settling above its high. The greenback approached CAD1.4020 to toy with the 200-day moving average. By rising above CAD1.4005, the US dollar took out the (38.2%) retracement of the leg down from the April 1 high (~CAD1.4415) to the last week's low (~CAD1.3750). The greenback remains firm today, having pulled back to only CAD1.3960 before recovering. The (50%) retracement is closer to CAD1.4085. The odds of another rate cut next month have eased to around 62% from almost 67% after the employment report at the end of last week. The unemployment rate r0se to 6.9% from 6.7%, a new post-pandemic high, and a whopping 31k loss of manufacturing employment. AUD: The Australian dollar was turned back from $0.6460 yesterday and frayed $0.6360 and posted an outside down day. However, there was no follow-through selling today. The $0.6360 level held, and it recovered to almost $0.6420. The $0.6435 area may offer a sufficient cap. A break of $0.6350 to strengthen the corrective forces. The five-day moving average slipped below the 20-day moving average, and the momentum indicators have only recently turned lower. The futures market remains confident that the Reserve Bank of Australia will cut the overnight cash rate by a quarter-point when it meets next week. However, the market trimmed the extent of the cuts this year to about 83 bp from 106 bp a week ago. MXN: The US dollar traded on both sides of its pre-weekend range yesterday and settled above last Friday's high (~MXN19.5480). This is potentially a bullish key reversal for the dollar. Last week's position adjustment that lifted the greenback to around MXN19.78, stalled in front of the 20-day moving average. Yesterday, it frayed the 20-day moving average, which is found a little below MXN19.63 today. It is consolidating and the dollar eased to MXN19.5650 so far today. Yesterday, Mexico reported a 0.9% decline in March industrial output. While it was not as large of a decline as expected (median forecast in Bloomberg's survey was -1.4%), it was third decline in four months. The weakness of the economy now seems to be more salient for policymakers than inflation, which is slightly inside the target range. Banxico meets Thursday and is widely expected to deliver the third half-point cut of the year. Disclaimer

Overview: The US and China struck an agreement that would lower tariffs for a 90-day cooling off period. The US tariff on China falls to 30% from 145%, while China's tariff on the US falls to 10% from 125%. A new forum was established to allow recurring discussions on economics and trade. The dollar spiked sharply higher on the news but was quickly sold into the rally, and while it remains sharply higher on the day, it is well off its peak. The Japanese yen is weakest of the G10 currencies, and it is off about in late European morning turnover. The Australian dollar, sometimes treated as a G10 proxy for China, is down the least, less than 0.15%. Most emerging markets in Asia and Europe are weaker. The China yuan and Russian ruble are notable exceptions. Equity markets have rallied on the news, but some markets in the Asia Pacific region closed, like Japan and Taiwan closed before the news was announced. The index of mainland shares that trade in Hong Kong rose by 3%. The calming of hostilities between India and Pakistan lifted local markets by around 3.7% and nearly 9%, respectively. Europe's Stoxx 600 is up around 1%, It is the 13th rising session in the past 15 sessions. US index futures are up sharply, with the Nasdaq up near 3.8% and the S&P 500 up around 2.8%. Bonds have been sold. Benchmark 10-year yields jumped seven basis points int Japan and Australia and are up 6-7 bp in Europe. The 10-year US Treasury yield is up five basis points to 4.43%. Before the weekend, the Fed funds futures were discounting nearly 66 bp of easing this year and are now pricing in 57 bp. The rising dollar and yields have sapped demand for gold. The yellow metal is off more than $100 and is approaching last week; slow near $3200. A break targets $3164. June WTI is extending last week's recovery. A week ago, it approached $55 and today it has pushed above $63.00. Resistance is seen near $65. USD: News of the 90-day cooling off period between the US and China on the trade war helped extend the dollar's upside correction we have been anticipating. The Dollar Index rose to almost 101.80 today. We thought potential existed to 102.00-50. Initial support now may be in100.80-101.00. Attention turns to the CPI and the year-over-year rate is expected to be steady. That is not until Wednesday. On tap today is the federal deficit in the first month of the new fiscal year. Due to tax revenues, the budget is in surplus in April, with the exceptions in 2020 and 2021 due to the pandemic. In April 2024, the surplus stood at almost $210 bln. In Q1 25, the deficit was about $596 bln compared with nearly $555 bln. Ideas that DOGE cuts were going to be substantial and lead to a check to American households always seemed like fantasy and even more so now. Rather than the initial promise of $2 trillion in savings, independent auditors put it at around $2 bln and that does not appear to include the loss of tax revenue from the cuts in the IRS auditors. News reports suggest 280k federal workers and contractors have been laid off, but it has yet to be seen in the data. EURO: The euro has been sold to about $1.1085 before stabilizing. We have been looking at a target near $1.1050. It recovered to almost $1.1150. Resistance may be in the $1.1180-$1.1200 area. With a 3% jump in German industrial production in March and a 0.9% rise in Spain's the risk in on the upside for the aggregate figure due on Thursday. Ahead of it is tomorrow's German ZEW survey. The expectations component collapsed in April (-14 vs. 51.6), and we will see if it was a fluke. The current assessment rose in each of the first four months of the year but remains in the trough. CNY: The dollar briefly poked above CNH7.25 ahead of the weekend and was repulsed and sent to new session lows near CNH7.2340. It briefly traded below CNH7.20 today. Last week's low was near CNH7.1845. After setting the dollar's reference rate lower for seven consecutive sessions, the PBOC set it higher in the last two sessions but lowered its again today (CNY7.2066 compared to CNY7.2095 before the weekend) China reported continued deflationary pressures. The April CPI was -0.1% year-over-year, the same as in March, though core prices rose 0.5%, also the same as in March. Producer price deflation deepened to -2.7% from -2.5%. China cut rates last week and the deflation will boost calls for fiscal measures. Separately, China reported a record current account surplus of $165.6 bln in Q1. It reported a $424 bln surplus in 2024 and $263.4 bln surplus in 2023. JPY: The greenback was turned around JPY146.20 before the weekend, its best level since April 10. It was sold to about JPY144.85 before buyers emerged. It overshot out technical objective (~JPY148) to reached nearly JPY148.25, perhaps encouraged by the jump in US rates and the tougher trade stance by Prime Minister Ishiba indicating that Japan will not accept a trade deal that excludes autos, and that it won't sacrifice is agriculture sector to protect autos. Japan reported another large current account surplus for March. The JPY3.7 trillion surplus follows the record JPY4.06 trillion in February. Two-thirds of the decline can be accounted for by the smaller trade surplus (JPY516.5 bln vs. JPY713 bln). GBP: Sterling held support in front of $1.32, a three-week low, before the weekend and recovered to nearly $1.3320. It was sold to $1.3160 today, which meets the (38.2%) correction of the leg up from the April low (~$1.2710). The 50% retracement is near $1.3075. A message the swaps market took from last week's Bank of England meeting is that there was less a chance of a cut at next month's meeting. At the start of last week, the market had about a 70% chance of four cuts this year and now it is discounting about a 10% chance of three more after the BOE's rate cut. This week's data--March/April UK employment report and the first estimate of Q1 GDP, with March details. CAD: The 0.2% rise in the April unemployment rate (to 6.9%) and the 31k loss of manufacturing jobs, concentrated in the auto industry, weighed on the Canadian dollar. It was the only G10 currency that was unable to gain against the greenback before the weekend. The odds of a June rate cut rose to about 60% from less than 50% the previous day. Now it is around. 55%. The US dollar set a new low for the year last Tuesday near CAD1.3750 and approached CAD1.3945 at the end of last week. It is recording an outside day today, having traded on both sides of the pre-weekend range. It reached CAD1.3980 today. The next important chart area is CAD1.4000-20. Above there, the next hurdle is near CAD1.4080. AUD: The week begins slowly with confidence surveys, while the highlight, April's employment report is due Thursday. Last week's high was set on Wednesday near $0.6515, the high for the year. However, it reversed lower and fell to almost $0.6370 ahead of the weekend. It caught a bid and briefly traded above $0.6430 in North America. It spiked to $0.6460 on the details of the US-China deal but was quickly sold to nearly $0.6390 before steadying. Initial resistance may be in the $0.6420 area. Options for A$425 mln at $0.6350 expire today. MXN: With last week's CPI report showing inflation remains within the targeted range even if barely the weakness of the economy justifies a half-point cut at this week's central bank meeting. The resilience of the peso should also give the officials some comfort. The dollar fell to its lowest level in seven months against the peso ahead of the weekend. Initially, the dollar's losses were extended to almost MXN19.42 before the broad demand lifted it to almost MXN19.58. It has traded on both sides of the pre-weekend range and a close above Friday's high (~MXN19.5480) would lift the technical tone. The MXN19.60 area marks the halfway point of the leg down from last week's high near MXN19.7820. Disclaimer

Many seemed optimistic that the weekend trade talks between the US and China will de-escalate the tension. We are less sanguine. Even if the tariffs on both sides were halved, there would still be an effective bilateral embargo. In the larger picture we are concerned that blocking PRC's exports and denying it a direct investment strategy as an alternative will ultimately not lead to significant reforms in Beijing but will strengthen nationalism and create a more determined and aggressive adversary. It was not out of affection for Berlin that Keynes warned against the bleeding of Germany after WWI. It is in a similar realpolitik vein that we encourage caution of what could be a more powerful containment than the more than 60 distinct military bases that the US has in the area. Although the dollar made 3–4-week highs against most of the G10 currencies, the lack of follow-through leaves it within the broader consolidative ranges that have dominated. The Federal Reserve noted that risks had increased on both of its mandates. It clearly and firmly reiterated there was no urgency to adjust policy given the profound uncertainty continuing to arise from US policy. Other central banks, including the ECB, the Bank of England, the Swiss National Bank, the Bank of Canada, the Antipodean central banks, and Sweden's Riksbank are expected to cut rates at least once before the Federal Reserve. The week ahead highlights include what is expected to little changed US CPI readings, Japan and the UK's first estimates of Q1 25 GDP, the UK and Australia's latest employment report, and a 50 bp rate cut by the central bank of Mexico. Meanwhile, leaders in both India and Pakistan appear to prepared to pause hostilities even as they further mobilize. US Drivers: Both macro-economic and technical considerations appear to favor greenback. The resilience of the US labor market means that most of the other G10 central banks, leaving aside the Bank of Japan, will likely cut rates again before the Fed's easing cycle resumes. The dollar sold off from mid-January through late April/early May. A corrective phase appears to have begun. We remain concerned about the a confluence of negative developments in the coming weeks, including the supply shock coming from the effective embargo of Chinese goods with prohibitive tariffs, the boycott of US brands in Canada and Europe, the dramatic reduction in forward booking by tourists, the coming crunch from government layoffs and cooling of immigration, the resumptions of student loan servicing, and the cooling effect of the economic uncertainty amid a precipitous drop in consumer confidence. Yet this may only be evident in the data that is reported in July, and more likely, August. Data: The week ahead features what is expected to be little change in the year-over-year rate of April CPI (2.4%) and firm retail sales, helped by effects to avoid the tariff, and firmer industrial output after the 0.3% decline in March. Housing starts are also expected to rebound after the heady 11.4% drop in March. Between the end of the FOMC meeting and when Fed Chair Powell speaks on Thursday, May 15, nearly half of his colleagues would have already spoken. Prices: The Dollar Index reached a four-week high before the weekend but was unable to sustain the upside momentum. Still, it settled above 100.00 on a weekly basis for the second consecutive week and rose for the third straight week. A move above 101.30-40 signals a continued correction with a 102.00-20 area target. The momentum indicators continue to recover. A break of last week's low (~99.15) would undermine the corrective tone. EMU Drivers: The 14.25-cent euro rally from early February through April 21 is over. The question now is whether it consolidates--moving broadly sideways that alleviates the overbought technical condition or whether it needs a proper correction. Fundamentally, the resilience of the US jobs market means that the ECB will cut again before the FOMC resumes its easing cycle. The widening US two-year premium over Germany often offers the dollar support. It has risen by about 20 bp since the end of April. Data: The US economy contracted by 0.3% in Q1 at an annualized clip, while the eurozone economy grew by about 1.6% annualized. The update this week will provide more details of European growth. Economists project growth in Q2 will be about half of the Q1 pace. The German ZEW survey may draw some attention. The assessment of the current situation has improved in each of the first four months of the year, but at -81.2 in April, it is still dismal. The expectations component collapsed in April, falling from 51.6 to -14.0; from the high since January 2022 to the low since July 2023. Prices: The euro found support ahead of the weekend slightly below $1.12, a four-week low. The five-day moving average fell below the 20-day moving average last week for the first time since early April. The $1.1150 area is the halfway point of the rally since the late March low near $1.0735. The next retracement (61.8%) is near $1.1050. A move above the $1.1300 area would suggest continued consolidation rather than a downside correction. China Drivers: Officials seem to be willing to accept some paring of the yuan's recent gains against the dollar. The US practical embargo against Chinese goods will act as headwind on the economy, even though Beijing is rolling back or selectively not enforcing the tariffs previously announced on some US goods. The point is not to signal a retreat as much as to minimize the self-inflicted harm. Without more stimulus so domestic demand can make up from some of the loss US demand, China risks antagonizing its other trading partners by shifting exports from the US. Data: China's April inflation reports were in line with expectations. Consumer prices fell 0.1% year-over-year, the same as in March. Consumer goods (-0.3% vs. -0.4% in March) and food prices (-0.2% vs. -1.4%) fell for the third month year-over-year. Non-food prices were flat and core (excluding food and energy) rose by 0.5% (that same as in March). It is difficult to see how China will achieve its 2% inflation target this year. It was 0.2% in 2023 and 2024. Still, we note that Switzerland reported April CPI last week and its was zero month-over-month and year-over-year. The core rate was 0.6%. China's producer prices fell 2.7% year-over-year after a 2.5% decline in March. It is the most deflation in six-months. China has been experiencing deflation in producer producer prices since September 2022. China may provide April lending figures and foreign direct investment flows. Aggregate lending in Q1 was about 18.5% higher than Q1 24. Another way to look at it is that through March, the combination of lending from the formal banking system and from the shadow banks, surpassed what was lend through May 2024. Given the tariffs one may not be surprised by news the foreign direct investment into China is weak. Yet, the last time it rose on a cumulative year-over-year basis was in May 2023. The de-risking had already begun but also note that retained earnings count as direct investment. There may be several considerations for handling retained earnings. Cyclical factors, like low interest rates, may influence the decision. Prices: The dollar's high for the week was set ahead of the weekend near CNH7.2530. The upside momentum was not sustained and the dollar pulled back to CNH7.2340. Chart support may be in the CNH7.2225-50 area. On the other hand, push above CNH7.26 could spur a move toward CNH7.30. Japan Drivers: The correlation between changes in the exchange rates and changes in the US 10-year yield remains near the weakest since Nov 2023. On a rolling 30-day basis, it is below 0.20, having spent Q1 between 0.50 and 0.70. The rolling 60-day correlation is below 0.30. It was above 0.60 as recently as early April. The yen is trading a bit more like a risk currency in the sense that the 30-day correlation with the S&P 500 is a little above 0.40, the strongest since mid-2023. Most notable is that the yen's movement has become increasing a function of the dollar's broader changes. The 30-day correlation of the changes in the exchange rate and the Dollar Index is near 0.88, the highest since 2016. Data: Japan reports Q1 25 GDP. It likely slowed considerably after a 2.2% annualized pace in Q4 24. The median forecast in Bloomberg's survey is for a 0.2% annualized pace in Q1 25. Net exports may have been a drag, while private investment and public consumption probably slowed. Industrial output was virtually flat. Japan will also report the March current account, alongside which is a country breakdown of its foreign bond purchases and sales. but the report will not shed light on what some thought was foreign-led selling of US assets in early April. Weekly MOF data showed large bond sales in the week ending April 4 (~JPY2.6 trillion, ~$17.5 bln). The rest of April was nearly flat. In the week ending April 4, Japanese investors were substantial buyers of foreign equities (~JPY1.8 trillion) and were modest net buyers through April 25 (~JPY980 bln). Prices: The dollar reached four-week highs against the yen ahead of the weekend near JPY146.20. It was turned back and fell to almost JPY144.80 in the waning hours of the week's activity. We had thought the bottoming pattern projected toward JPY148, but for the past two weeks the JPY146 area contained the greenback. We are also monitoring a down trendline connecting the January and March highs, which is found near JPY146.90 on Monday and around JPY146.35 at the end of the week. UK Drivers: Sterling and the euro tend to move in the same direction against the dollar. The 30-day correlation of the changes in the two exchange rates is around 0.75. The 60-day correlation is closer 0.80. It has not been below 0.75 this year. After last week's rate cut and official comments, the market discounted a more gradual easing path. It is now pricing in a year end rate around 3.65%, about 10 bp higher on the week (now: 4.25%). The US-UK trade deal does not seem to impact either economy very much, but the consequences seem to be at least two-fold. First, it further pulls the UK from the EU, and second, it may make trade talks with others, who object to the range of tariffs, including the so-called reciprocal tariffs, which the UK was not subject. Data: The key to next month's BOE decision is unlikely to rest on the upcoming data. The highlights are the jobs report and Q1 GDP and real sector data for March. The economy is expected to have grown by 0.3% in the Jan-Mar period after practically stagnating in H2 24. Consumption and business investment look weaker. Manufacturing output may have continued to contract. However, the BOE's forecast was considerably more optimistic with a 0.6% quarterly expansion projected, though nearly stagnating this quarter. Prices: Sterling approached $1.3200 ahead of the weekend, its lowest level since April 17, and recovered to nearly $1.3325. The momentum indicators are falling, and the five-day moving average is now below the 20-day moving average. However, the price action is still consistent with a consolidative phase rather than a correction. Sterling did not trade above $1.3400 last week, and the high was set in late April near $1.3440. Canada Drivers: The Canadian dollar also continues to seem to be more a function of the broader movement of the US dollar. The rolling 30-day correlation with changes in the Dollar Index is above 0.70 for the first time in six months. Sometimes, the Canadian dollar is more of a risk currency with a stronger correlation with changes in the S&P 500, but the 30-day correlation is below 0.30. Data: With the April jobs data behind us and the CPI due later in the month, real sector data this week is mostly from the housing sector (starts and permits, and existing home sales). At the end of the week, Canada reports March portfolio flows. Canada enjoyed net inflows that averaged C$16.0 bln a month in 2024, which was more than the monthly average of 2022 and 2023 combined. That said, net inflows slowed to a trickle in the first two months of 2025 and are the weakest since Jan-Feb 2004. Prices: The 0.2% rise in Canada's April unemployment rate to 6.9% and a loss of 31k manufacturing jobs, the most since January 2009, outside the pandemic, weighed on the Canadian dollar. It was the only G10 currency not to have risen against the US dollar ahead of the weekend. The greenback held above CAD1.3900. The momentum indicators are still favorable and the CAD1.4000-30 area remains a reasonable near-term target. Support is seen in the CAD1.3850-70 area. Australia Drivers: The Australian dollar seemed to benefit from the US dollar's broad weakness and optimism that US-China trade war has reached some sort of extreme tantamount to an embargo. But the push above $0.6500 was repulsed, what seemed like an exhaustive move with a bearish technical sign warned short-term trend followers and moment traders to begin moving to the sidelines. The 30-day correlation between changes in the Australian dollar and the offshore yuan is near 0.50 only slightly higher than with the Dollar Index. Still, the correlations with the dollar-bloc (Australia, New Zealand, Canada) are above 0.75. Data: The last important high-frequency data points before next week's central meeting are the May consumer inflation expectation survey and the April employment report. The Melbourne Institute's consumer survey showed a jump in March to 4.2%, the highest for the year and matching the most elevated reading since last September. Nevertheless, over the past month, the Australian yield has fallen sharply, and the yield curve has steepened (bullish steepening). Meanwhile, overall job growth practically stalled in Q1 (<7k), the weakest quarter since Q3 21. Full-time employment grew by 9k in Q1 25, after 31k in Q4 24 and nearly 132k in Q1 24. Prices: After rising to $0.6515 in the middle of last week, the Australian dollar posted a key downside reversal and fell to almost $0.6370 ahead of the weekend. It recovered smartly and reach almost $0.6435 in the North American session, perhaps encouraged by speculation that the weekend US-China trade talks mark the beginning of the de-escalation. Initial resistance may be found in the $0.6440-60 area. Disappointment with the outcome, of the weekend trade talks, especially if the effective embargo is not lifted, the Aussie can be sold in disappointment with support extending into the $0.6350-$0.6370 area. Mexico Drivers: The peso often trades like a risk currency (30-day correlation of ~0.65 with the changes in the S&P 500) that is also somewhat protected by a still wide interest rate premium. The peso is one of the few emerging market currencies that trade 24 hours a day. It is sometimes used as a proxy for less liquid emerging market currencies. Data: The central bank meeting is on May 15. It cut rates five times last year in quarter-point steps to 10.0%. It has cut another 100 bp this year in two half-point steps (9.0%). The weakness of the economy and the resilience of the peso may give the central bank scope for another 50 bp move. The swaps market is pricing in a terminal rate around 7.25% by this time next year. Prices: After being turned back from almost a three-week high on Tuesday (~19.7820), the greenback was sold to nearly MXN19.4350 ahead of the weekend and it closed below MXN19.50 for the first time since last October. . The next important chart area is near MXN19.37, which corresponds to the (38.2%) retracement of the rally that began last April (~MXN16.26) to the February high (~MXN19.29). A break of that could target the MXN19.00-5 area. Disclaimer

Overview: After recovering impressively yesterday, the US dollar saw some follow-through buying initially but has reversed lower and is paring yesterday's gains against the G10 and most emerging market currencies. East Asian emerging market currencies that had surged have now traded lower for the past three sessions. The main talking point today is tomorrow's trade talk between the US and China. The mutual tariffs are so high that even if they were halved, they would still be prohibitive. China's April trade figures show it was able to more than replace the loss of exports to the US and overall Chinese exports rose. While China has replaced US demand, at least initially, now attention may turn to whether the US can replace Chinese supply. The drying up of container shipments suggests not so quickly. The US economic calendar features nine Federal Reserve officials, but there is little that will be said that would encourage investors to bring forward a rate cut to next month. Asia Pacific equities are mixed, with China, South Korea, and India among the losers, while Japan, Taiwan and New Zealand, the Philippines, and Pakistan markets rising by at least 1%. Europe's Stoxx 600 is up almost 0.5% and is poised to settle higher on the week. US index futures are firm after yesterday's strong gains. The sharp sell-off in US Treasuries yesterday helped drag yields higher today. In Japan and among the Antipodeans, the 10-year yields rose 4-5 bp, and in Europe, they are up mostly 4-6 bp. The 10-year US Treasury yield is little changed near 4.37%. Gold is trading firmer after falling by $125 in the past two sessions after rallying $190 in the first two sessions of the week. June WTI has fully recovered from the drop to nearly $55 on Monday. It is pushing above the 20-day moving average near $60.80 for the first time in a couple of weeks. USD: The Dollar Index reached its best level in nearly four weeks yesterday around 100.75 and settled close to the session high. The gains were marginally extended today to around 100.85 before being knocked back to 100.35 by early European turnover, where it stabilized. A close below 100.00 would be disappointing. There are nine Fed officials that will be speaking throughout the day in a session devoid of economic reports. Still, there seems to be little that can be said that will substantially boost the odds of a cut at the next FOMC meeting in June. Attention next week turns to inflation and both the headline and core CPI look fairly steady. The weekend sees US-China trade talks. Expectations seem to be for de-escalation, but we are less sanguine. Even if the tariffs are cut in half, wouldn't it still be tantamount to an embargo? Even talks with Japan, which have been fast-tracked, are not expected to result in an agreement until next month at the earliest. Japan wants to all the tariffs to be on the table, but the US seems to only want to discuss the so-called "reciprocal tariff." Note that around the time that the postponed tariffs come into effect will coincide with Japan's upper house election in July. Meanwhile, China wants a broad agreement, and its red lines respected. Trump administration officials are still playing down the impact of the effective trade embargo. Treasury Secretary Bessent has suggested China is playing poker with a "pair of twos," i.e., a weak hand, which may risk violating a cardinal principle to not under-estimate a rival. EURO: The euro has broken down, out of what was a choppy consolidation. It slipped briefly through $1.12 today for the first time since April 11 but found bids to lift it back to $1.1260. This former support should act as resistance and a close above there would leave it apparently still rangebound. Still, the euro settled slightly below $1.13 last week, and barring a stronger recovery, it will finish lower for the third consecutive week. In terms of macro data, outside of Germany's ZEW survey next week, the economic calendar is limited to Q1 data in the coming days. CNY: The dollar's broad recovery saw it rise to about CNH7.2470 yesterday and to almost CNH7.2530 today. The next technical hurdle ahead of CNH7.30 may be around CNH7.26. For the second consecutive session, the PBOC set the dollar's fix a little higher (CNY7.2095 vs. CNY7.0273 yesterday), which would seem to be a potential signal of willingness to accept a stronger dollar/weaker yuan. China has shown in the first instance that it was in fact able to replace the drop in US demand. China's exports fell by 21% to the US in April but rose overall by 8.1%, with stronger exports to India, Southeast Asia, and the European Union. Imports from the US fell by nearly 14% but fell only 2% overall. China will report April CPI and PPI early Saturday. According to the median forecasts in Bloomberg's survey the CPI should be steady at -0.1% and the deflation in producer prices may deepen (-2.8% vs. -2.5%). JPY: The dollar posted its highest close in nearly a month yesterday around JPY145.90. The trendline from the mid-January high (~JPY158.90) and late March high (~JPY151.20) comes in today at about JPY147. It has not been able to rise through yesterday's high near JPY146.20 and has retreated to almost JPY145.00. A close below JPY145 would weaken the technical tone. Japan reported slower growth in labor cash earnings (2.1% in March from 2.7% in February). When adjusted for inflation real cash earnings fell 2.1% year-over-year. Last March, they had also fallen by 2.1% year-over-year and in March 2023, they were 2.3% lower. Household spending jumped 2.1% in real terms year-over-year, considerably stronger than expected. It contracted by 0.5% in February. Japan reports its first estimate of Q1 GDP next week. The median forecast in Bloomberg's survey is for a 0.1% contraction, with net exports a drag on growth and offset slightly by a contribution of inventories. Private consumption looks a little better after today's report. It was flat in Q4 24. GBP: Sterling broke down yesterday, lending credence to the topping pattern that appears to have formed. It fell to about $1.3210 today before recovering a little through $1.3270. A close above $1.3260 would suggest further consolidation is likely. As widely expected, the Bank of England delivered a quarter-point cut yesterday (to 4.25%). The market's takeaway is that the easing will be more gradual. The market sees the year-end base rate around 3.64% (from 4.25% now). It settled last week near 3.53%. Next week, the UK reports on jobs data and Q1 GDP and details. The economy is expected to have expanded by about 0.3% after nearly stagnating in H2 24. CAD: The US dollar rose to nearly CAD1.3935 yesterday, its best level since mid-April. It reached a marginal new high today in front of CAD1.3945 before it lost its mojo and was pushed back to CAD1.3910 in European turnover. The next technical area is around CAD1.40. The area houses the 200-day moving average and the (38,2%) retracement of the early April high (~CAD1.4415). The greenback is up around 0.75% this week, which is sustained, would be the best weekly performance since the end of February. April employment data will be released today. Some stabilization is expected after Canada's employment shrank by 32.6k in March. The participation rate may tick up and this may lift the unemployment rate to 6.8%, which would be the highest since 6.9% last November. Canada lost about 46k full-time in Q1 25, which is nearly as many as it had gained in Q1 24. The swaps market straddles the fence on the outlook for the June 4 central bank meeting ahead of today's report. AUD: After posting the key reversal on Wednesday, follow-through selling yesterday saw it hover in the $0.6400 area. Options for A$1 bln expire there today. It fell to almost $0.6370 today before returning to the $0.6400 area. The 20-day moving average, which it has not traded below since mid-April, is there today.. Still, some may not become convinced that a high is in place until the $0.6350 area yields. Although some confidence surveys and the index of wages, labor costs, and productivity are due next week, the highlight is the April employment report next Thursday. Full-time employment grew by 9k in Q1 25 after rising nearly 132k in Q1 24. The unemployment rate stood at 4.1% in March 2025, up from 3.9% in March 2024, which can largely be accounted for by the increase in the participation rate (from 66.5% to 66.8%). MXN: The peso remains resilient, perhaps encouraged by the risk-on environment. The peso rises and falls with the S&P 500. The rolling 30-day correlation of the changes is nearly 0.65, the most since late 2023. Given the carry, it looks as if some large positions that were using maybe the offshore yuan, or other Asian currencies to fund long Latam positions like the peso. And the dollar did rise a bit through MXN19.78 on Tuesday but there were no follow-through gains. Instead, the greenback returned to almost MXN19.51 yesterday and edged a little closer to MXN19.50 today. Despite fraying the area on an intraday basis last month, the dollar has not closed below there since last October. Mexico reported a rise in both the headline and core CPI measures for last month yesterday, but it is unlikely to deter the central bank for delivering another 50 bp rate cut next week. Today's data is limited to April vehicle production and exports. In March, Mexico exports almost 88% of the autos its produced. In March 2024, Mexico exported nearly 95% of its auto production. Disclaimer

Overview: A couple days away from the US-China talks, the two are sitting disputing who sought out the talks. Given the egos, the risk is that the talks are downgraded if not canceled. Expectations ought to be low in any event. On the other hand, the first US trade agreement is expected to be announced with the UK today, though it has not prevented sterling from falling ahead of the Bank of England meeting, which will most likely result in a dovish quarter-point cut. For its part, the greenback is building on yesterday's gains, encouraged by the Federal Reserve's hawkish hold. It is higher against the G10 currencies, and most emerging market currencies. Equities are mostly firmer. Taiwan's Taiex saw a minor loss, but several bourses in Asia including India (~-0.5%) and Pakistan (~-6.8%) and a few smaller ones are under pressure. After falling for past two sessions, Europe's Stoxx 600 is recovering, led by the 1%+ rally in the DAX following a 3% surge in Germain industrial production. The S&P and Nasdaq futures are up by over 1%. Bonds are selling off. European benchmark 10-year yields are around three basis points higher though ahead of the BOE meeting and trade deal announcement, Gilts are flat. The 10-year US Treasury yield is up a little more than four basis points to 4.31%. Gold is falling for the second consecutive session. After dropping almost 2% yesterday, the yellow metal is off nearly 0.8% today to about $3340 in Europe. June WTI is up a little more than 1% today to approach $59. A five-day high was set yesterday, a little above $60. USD: After stopping shy of 100.00 yesterday, the Dollar Index is pushing above it today. A close above 100.00 would discourage the bears, while a move above 100.40 would lend credence to our idea of an upside correction. Reports suggest that the US and UK will announce a trade deal at 10:00 AM ET today. Meanwhile, after President Trump announced on his social media platform yesterday that he will not reduce tariffs on China to ensure successful talks this weekend, China seems to have implied that these are not negotiations but an "engagement." It insists that it is doing so after the US sought it through various channels. Judging from the president's social media posts, this does not set well there. We suspect that the meeting will either be canceled or amount to practically nothing. Meanwhile, US data is of little consequence today. Nonfarm productivity and unit labor costs are not observed directly but derived from the GDP figures. The contraction in Q1 GDP will translate to a decline in productivity and a rise in unit labor costs. Weekly initial jobless claims are expected to have softened after rising in back-to-back weeks for the first time in a couple of months. In any event, the April employment report eased fears that the deterioration of the labor market was accelerating. As widely expected, the Federal Reserve stood pat yesterday and despite pressure from the White House, gave no hint that it was preparing to cut rates at the next month's meeting either. The element of hawkishness came from the seeming move away from the possibility that price increases from tariffs might be transitory. The Fed recognized that there are risks on both sides of its mandate, but this does not mean stagflation as some observers claim. Stagflation might be an appropriate label if both risks materialized. EURO: The euro remained in the upper end of its recent range yesterday but made session lows following the Fed's press conference to almost $1.1290 after it held below $1.1380 earlier. The broader range is about $1.1265-$1.1425. It reached $1.1270 today and is consolidating mostly below $1.1300 in European turnover. The daily momentum indicators are trending lower, but the euro has moved broadly sideways. A convincing break of $1.1260 could signal a two-cent downside correction. Germany reported the first back-to-back increase in industrial production since Jan-Feb 2024. It jumped 3% in March, well above the 1.0% median forecast in Bloomberg's survey, and the most since October 2021. It is not clear how much German factory orders and industrial output was impacted by activity ahead of US tariffs. Moreover, the first estimate of German growth in Q1 was 0.2% after a contraction of the same magnitude in Q4 24. CNY: The dollar settled higher for the second consecutive session against the offshore yuan and appears to have put in a low. Follow-through buying today lifted it a little above CNH7.24. The next technical target is in the CNH7.25-CNH7.26 area. Since around the middle of March, the PBOC has moved the daily reference rate slightly more than it had been but since returning from the extended holiday on Tuesday, the PBOC has returned to the smallest of changes in the fix. However, today's fix was set at CNY7.2073 (CNY7.2005 yesterday), the first higher dollar fix in eight sessions, and the largest change in a month. Meanwhile, most Asian currencies fell today, led by the nearly 0.9% pullback in the Malaysian ringgit. JPY: The decoupling of the exchange rate from the US 10-year yield was underscored by yesterday's price action. The US 10-year yield slipped while the greenback rose by nearly 1.0% against the yen. It recorded session highs in late dealings yesterday at JPY144.00. The dollar is making session highs in the European session slightly below JPY145. The daily momentum indicators are still trending up despite the dollar's pullback from JPY146 last week. Although last week's high is the next immediate target, there may be potential toward JPY148. GBP: Sterling was sold to $1.3280 yesterday after being turned back from $1.3400 on Tuesday and this is still consistent with a top being carved. It posted an inside day yesterday. Reports about the US trade agreement, after striking one earlier this week with India, helped lift sterling initially to about $1.3355, but it has succumbed to selling pressure and tested key support near $1.3260 in the early European turnover. A break of $1.3260 would lend credence to the bearish take. The 20-day moving average is near $1.3295 and sterling has traded below it for the first time since April 10. The measuring objective of the potential topping pattern could bring it toward $1.3050, which is around the halfway mark of the rally from the April 7 low a little above $1.27. The swaps market has no doubt that the Bank of England will announce a 25 bp rate cut shortly. Ahead of today's announcement, the market has about a 60% chance of another cut next month. After today's cut, the market has two more cuts fully discounted and almost a 90% chance of another. The weaker economic performance will pose a formidable challenge to Chancellor Reeves’ fiscal plans. The dismal showing of Labour in the recent local elections warns of the public's impatience. CAD: The greenback recovered against the Canadian dollar yesterday. After setting a new low for the year on Tuesday (~CAD1.3750), the US dollar reached almost CAD1.3840 yesterday. Today, it has reached almost CAD1.3885 and is above the 20-day moving average (~CAD1.3850) for the first time since April 2. We suspect corrective potential may extend toward CAD1.40. It is a quiet session for Canadian data today, but the focus is on tomorrow's job report. After losing 32.6k jobs in March, Canada is expected to have added about 5k jobs last month according to the median in Bloomberg survey. However, the 13 projections ranged from a loss of 40k jobs to a gain of 51k. The Bank of Canada meets on June 4 and the swap market looks split about the outlook. Still, another cut is fully discounted by the end of July when it meets next. AUD: The Australian dollar recorded a bearish key reversal yesterday by making a new high ($0.6515) and then falling through and settling below Tuesday's low (slightly below $0.6440). It is hard to separate the greenback's advance in response to the hawkish hold by the Fed and President Trump's announcement that there would be not pulling back from the 145% tariff on China. Initial support near $0.6400 is holding so far today, but if a larger correction is underway, a move toward $0.6285 initially seems reasonable. The 20-day moving average, which the Aussie has not traded below since April 14 is nearly $0.6395 today. MXN: The peso was unexpectedly resilient yesterday. On Tuesday, the dollar looked like it was breaking out of the extended consolidation. It traded above MXN19.78, its highest level in nearly three weeks. Yesterday, the greenback fell a little below MXN19.56. It is trading in a narrow range between roughly MXN19.56 and MXN19.6230. President Sheinbaum seemed optimistic about her relationship with Trump. Yet Trump's endorsement Tuesday of the USMCA he negotiated in is firm term is a bit disingenuous. The tariffs he has announced appear to violate the treaty. Maybe his comments were misunderstood. The USMCA treaty is to be re-examined next year. Trump said might be unnecessary but that is because of US unilateralism. We suspect that the US might be more interested in two bilateral agreements rather than North American Free-Trade Agreement. Ironically, the peso fared better than the Brazilian real, which fell by about 0.50% yesterday ahead of the central bank's decision to hike the Selic rate by 50 bp to 14.75%. The Deputy Governor of Banxico played up the scope for rate cuts. Mexico's central bank is expected to deliver another 50 bp rate cut next week. Disclaimer

If trade imbalances truly drive protectionist backlash, as many claim, we should have witnessed comparable anti-trade sentiment during the 1980s when America's deficit with Japan reached historic proportions. Yet history reveals a critical distinction: Japan was offered—and wisely seized—an economic escape valve that today's geopolitical climate threatens to deny China. This asymmetry not only betrays a fundamental misunderstanding of how global trade evolved but risks triggering an unprecedented economic disruption. Japan's solution came through a direct investment revolution. Faced with mounting trade barriers and the Plaza Accord's dramatic yen appreciation, Japanese manufacturers transformed themselves from exporters into local producers. Toyota, Honda, and Sony didn't retreat from American markets—they embedded themselves within them. This "build locally, sell locally" approach defused trade tensions while preserving market access and protecting against currency volatility. This strategy wasn't revolutionary but evolutionary, following a path American corporations had blazed decades earlier. By the early 1960s—long before "globalization" entered our lexicon—sales from U.S. companies' foreign affiliates already exceeded traditional exports. American businesses recognized that direct investment offered a strategy to cope with both protectionist impulses and the persistent strength of the dollar. When countries adopted protectionist measures for one reason or another or currency valuations made exports uncompetitive, embedded local production provided strategic immunity. Today's conventional wisdom portrays China as an export-dependent economy whose growth model must inevitably clash with Western interests. This fundamentally misrepresents economic reality. China's exports constitute less than 20% of GDP—lower than Germany (47%), South Korea (43%), and even Canada (32%). The notion that China's prosperity depends primarily on flooding Western markets with goods is simply unsupportable by the data. What's more, Chinese domestic consumption has risen dramatically since the 2008 financial crisis. That consumption hasn't claimed a larger share of GDP reflects not consumption weakness but rather China's continued robust investment—precisely the economic activity that would fuel a direct investment strategy if permitted to deploy internationally. Chinese households are buying more than ever, but investment continues to outpace even this impressive consumption growth. We stand at a critical inflection point. If China is denied the same evolutionary path that Japan followed—and that America pioneered—we will intensify global trade frictions beyond anything witnessed in modern economic history. The stakes extend far beyond tariff rates or trade balances; they encompass the fundamental architecture of the global economy. The narrative linking American inequality to global trade represents perhaps the most pernicious economic misconception of our time. If trade openness caused wealth disparity, we would observe the most "open" economies suffering the greatest inequality. Reality demonstrates precisely the opposite. Denmark, Sweden, the Netherlands, and Germany all maintain significantly higher trade-to-GDP ratios than the United States while simultaneously achieving far more equitable wealth distributions. These countries engage more intensively with global markets yet maintain stronger social cohesion and less extreme inequality. The American paradox—rising GDP alongside widening inequality—stems not from Beijing's policies but from decisions made in American corporate boardrooms and legislative chambers. The United States has never been wealthier than at the end of 2025, with GDP and household net worth at historic highs. The failure to distribute this prosperity equitably represents a domestic policy failure, not an inevitable consequence of global engagement. Other nations have demonstrated that robust international trade and equitable wealth distribution can coexist—indeed, the former often enables the latter through productivity gains and expanded economic opportunity. Two imperatives emerge from this analysis: First, Western economies must permit China to pursue the same direct investment strategy that defused previous trade tensions with Japan. Blocking this evolutionary path won't restore manufacturing jobs or revitalize declining regions—it will simply accelerate economic fragmentation while denying both sides the benefits of continued engagement. The choice isn't between competing economic models but between adaptation and unnecessary conflict. Second, addressing America's wealth and income disparities requires domestic policy solutions rather than trade restrictions. The evidence conclusively demonstrates that inequality stems from internal power relationships, tax structures, labor market institutions, and corporate governance—not from trade agreements or import competition. Blaming foreign competition for domestic policy failures merely distracts from the real work of institutional reform. History offers clear lessons for those willing to learn. The direct investment revolution that transformed Japanese-American economic relations provides a template for defusing today's tensions with China. Similarly, the varied distributional outcomes among trade-oriented economies demonstrate that domestic policy choices—not trade itself—determine who benefits from prosperity. The question isn't whether global economic integration will continue, but whether we'll manage this evolution intelligently or sabotage it through misdiagnosis and misguided remedies. The stakes—for economic prosperity and geopolitical stability alike—could hardly be higher. Disclaimer

Overview: There are five developments to note. First, the US and China will have initial trade talks this weekend in Switzerland. Second, the PBOC cut its key rate by 10 bp and cut reserve requirements by 0.5%. It also announced several other measures to boost lending/relending. Third, German factory orders were stronger than expected, perhaps bolstered by attempts to move ahead of US tariffs. Fourth, after last week’s ruction, most Asian emerging market currencies continued to pullback. The exceptions today were the South Korean won and Philippine peso. Fifth, there has been little market impact from India and Pakistan exchanging strikes. The Indian rupee is weaker (~0.5%). Indian equities are slightly firmer, but Pakistan market slumped more than 2%. It was the third consecutive loss for the Karachi 100 and the largest loss since April 30. The US dollar is mostly firmer against the G10 currencies and most emerging market currencies today. Most Asia Pacific equities posted minor gains today, but Thailand stands out with a nearly 2.5% gain. Europe's Stoxx 600 snapped a 10-day advance yesterday and is trading heavier today. US index futures are up about 0.5%. The highlight of the remainder of the session are the likely rate cuts by Poland and the Czech Republic, while the FOMC will leave policy unchanged, and the central bank of Brazil is expected to hike by 50 bp. European benchmark 10- year yields are 2-3 bp lower, while the 10-year US Treasury yield is a little firmer at 4.32%. Gold is pulling back nearly $200 an ounce over the past three sessions. June WTI is extending its recovery off the $55 area seen at the start of the week and is now near $60. USD: The FOMC meeting is the event of the day. There is no doubt that the central bank will stand pat. Its statement will be adjusted to recognize the contraction in Q1 GDP. Still, Fed Chair Powell's overall assessment is unlikely to be changed much from "the economy is in a good place" and the Federal Reserve has the capacity and will to move as needed. When the Fed met in mid-March, the market had a June cut fully discounted and had two cuts discounted this year and almost a 75% chance of a third cut. It has subsequently pushed out the first cut until July (~93% chance) and has nearly three cuts fully discounted this year. The median Fed projection in March was for two cuts this year. Given the uncertainty still stemming from the administration's policies, look for sparse forward guidance, but no word cues that would suggest a June cut. The Dollar Index posted a bearish outside down day yesterday, setting new four-day lows near 99.20 late yesterday. News that US and China will begin trade talks later this week failed to impact the Dollar Index much and it is trading in a narrow range mostly between 99.30 and 99.60. The (50%) retracement objective of the bounce off the April 21 low (~97.90) is near 99.15 and the (61.8%) retracement is closer to 98.85. EURO: The euro traded on both sides of Monday's range yesterday and it settled above Monday's high, constituting a bullish outside up day. It approached the pre-weekend high to $1.1380 in late turnover. A move above there targets the $1.1420 area. Options for 1 bln euros at $1.1400 expires today. The news of US/China trade talks saw the euro ease to almost $1.1325 but it recovered to nearly $1.1380, helped by stronger than expected Germany factory orders. The 3.6% increase contrasted with the median forecast of a 1.3% gain. The increase in orders was widespread and appears to have been due to efforts to front-run US tariffs. The optimistic camp says the Germany industrial sector is stabilizing, but the pessimists note that the manufacturing PMI, despite not falling this year, remains below the 50 boom/bust level, consistent with continued slowing. Industrial production is due tomorrow. It is expected to rise by 1% after falling 1.3% in February. The market remains confident that the ECB will cut rates at the early June meeting. The swaps market has slightly less than a 50% chance of another cut in July. Note that Poland and Czech central banks are expected to cut rates today. Poland is seen cutting 50 bp to 5.25%. It will be the first since October 2023 and comes as the presidential election on May 18 draws near. The swaps market sees a terminal rate between 3.75% and 4.0%. Since October 2023, Poland's CPI has fallen from 6.6% to 4.2%. The Czech central bank is seen cutting the repo rate by 25 bp to 3.50%. It would be the second cut of the year. The easing cycle began in December 2023 with a 7.0% repo rate. The preliminary April CPI reported yesterday stands at 1.8%. The swaps market sees a terminal rate between 3.00% and 3.25%. CNY: In addition to trade talks with the US, China announced it was easing monetary policy. Specifically, the PBOC cut the key seven-day repo rate by 10 bp to 1.4% and lowered required reserves by 0.5%, which frees up about CNY1 trillion. Several other measures were announced that are aimed at boosting lending/re-lending. The dollar fell by almost 1.1% against the offshore yuan last Friday and Monday. It stabilized yesterday, helped by the little change in the PBOC fix as it returned from the extended holiday. The dollar bounced from about CNH7.20 to CNH7.2350 yesterday but settled in the lower end of the range; below the 200-day moving average (CNH7.2220).and beneath CNH7.21. Today, the dollar fell slightly below CNH7.19 before rebounding and to nearly CNH7.23. The fact that the dollar is trading weaker against the offshore than onshore yuan would suggest limited dollar bullish/yuan bearish speculation. Amid the uncertainty and volatility among Asian currencies in recent days, the PBOC set yesterday's reference rate for the dollar 0.01% from the last fix on April 30. Prior to the holiday, we had been tracking a subtle change in the PBOC's daily fix. It had widened starting in early March and it is possible that PBOC reverts to the narrower adjustments to promote stability. Today's reference rate was set at CNY7.2005 (CNY7.2008 yesterday). Although it was little changed, it is the seventh consecutive session that the PBOC lowered the dollar's fix, which essentially limited the dollar's upside. JPY: The dollar’s rally from its dip below JPY140 on April 22 to a high at the end of last week, a little shy of JPY146.00. With yesterday's pullback to JPY142.35, the greenback has nearly retraced (61.8%) of its rally. A break of the JPY142.00-20 area could spur a retest on the JPY140 area. It held above JPY142.40 today and recovered to JPY143.45, setting the high in the European morning. Nearby resistance is seen around JPY144.00 Japanese markets re-opened today after a long holiday weekend. The market paid little attention to the final services and composite PMI. Recall that the composite PMI slipped to 48.9 in March, matching the lowest reading since the pandemic but it rebounded to 51.2 (51.1 flash estimate). The Japanese economy appears to have nearly stagnated in Q1 The first estimate of Q1 GDP is due on May 16. Whatever gets the BOJ to raise rates, it will most certainly not be the April PMI reading. GBP: Sterling has forged a base in recent days around $1.3260. Yesterday, it jumped higher and briefly poked above $1.34. It may have been helped by reports suggesting that the US and UK may sign a deal this week that includes quotas but also spares the UK the full brunt of the 25% tariffs on autos and steel. Sterling was greeted with sellers that pushed it back to around $1.3350. It held around $1.3380 today before slipping back to almost $1.3320 in the European morning. A break of $1.3300 could re-target the $1.3260 support area. The euro recorded this year's high against sterling on April 11 near GBP0.8740. Yesterday, it traded near its lowest level in a month, around GBP0.8460, and recovered to GBP0.8500. Near-term potential may extend to the GBP0.8500-30 area. The Bank of England meets tomorrow. The swaps market has been discounting with at least 84% confidence of a cut since April 2. The market is pricing in three cuts fully for the remainder of the year and about 80% chance of a fourth. The BOE will update its economic forecasts. Previously, the BOE had the economy slowing to 0.8% from 1.1% in 2024 and anticipated CPI to rise to 3.5% from 2.5% last year. It had projected 2026 growth at 1.5% and CPI at 2.5%. CAD: The US dollar recorded a bearish outside down day against the Canadian dollar by trading on both sides of Monday's narrow range and settling below its low. In fact, the greenback settled below CAD1.38 for the second time this year. It was sold to nearly CAD1.3750 yesterday, its lowest since last October. It is trading firmer today and is poking back above CAD1.3800 in European turnover. Only a move above CAD1.3850 today would be meaningful. Yesterday's goods trade figures are showed a sharp 6.6% drop in Canadian exports to the US the most since the pandemic. Imports from the US fell by almost 3%. Canada's exports to the rest of the world were flattered by gold and oil and jumped by nearly 25%. The net result was Canada reported a smaller than expected goods deficit. An eve of yesterday's Trump-Carney meeting, US Commerce Secretary Lutnick could not resist. He called Canada "a socialist regime" and that been "basically feeding off America." While Trump's bravado says the US does not need anything from Canada, almost 25% of the oil the US consumes comes from Alberta. Trump was clear: the US does not want Canadian-made steel or autos. As it became clear that despite saying he will pursue a better relationship with Carney than Trudeau, Trump had not intentions on easing the tariff burden on Canada, the Canadian dollar pared its earlier gains. AUD: Like the Canadian dollar, the Australian dollar recorded new highs for the move yesterday, edging slighted above $0.6500. It is a new five month high, and the Aussie settled above its 200-day moving average (~$0.6460) for the second consecutive session. A convincing move above $0.6500 targets the $0.6550 area, which is the (61.8%) retracement of the Australian dollar's decline from last October's high (~$0.6940). The Aussie reached $0.6515 before being sold back to $.6465. A close below $0.6440 today would suggest a near-term high is in place. For its part, the New Zealand dollar pushed above $0.6000 but stopped short of the six-month high set last month near $0.6030. The $0.6040 area corresponds to the (61.8%) retracement of the Kiwi's slide since last October's high (~$0.6380). It was stopped ahead of $0.6025 today and has been sold back to the $0.5980 area. MXN: The dollar reached nearly MXN19.7820 in the North American session, its best showing since April 17, but the buying dried up and the greenback returned to almost MXN19.62 before stabilizing. Today's range is about MXN19.61-MXN19.68. The greenback fared better against the Brazilian real. After gapping higher at the open, the dollar reached nearly BRL5.7380. Although it retreated too, it did not enter the opening gap and found support ahead of BRL5.70. Brazil's central bank is widely expected to hike the Selic rate by 50 bp today to 14.75%. The swaps market sees the Selic rate peaking near 15% and falling back below 14% within a year. Mexico reports April CPI tomorrow. The headline and core rate are expected to tick up but still be below 4%, the upper end of the target range. The central bank is more concerned about growth than inflation. It had previously halved this year's growth forecast to 0.6%. The median forecast in Bloomberg's survey puts it at 0.2%. Mexico's modernization has been predicated on direct investment in the off-shore, near-shore, and friend-shore regime. The Trump administration says that will no longer suffice and seeks to impose re-shoring on US and foreign companies. Disclaimer

Overview: China's mainland markets re-opened after the extended holiday, and the by setting the dollar's reference rate little changed from its last fix helped inject a note of stability into the local Asian currencies. Indeed, most of them pulled back today, including the Taiwan dollar and the Malaysian ringgit. The yuan and yen are firmer. In fact, the yen's roughly 0.35% gain puts it atop the G10 scoreboard today, though more broadly, the greenback is mixed. There has been much speculation that the US could announce tariffs on semiconductors as early as tomorrow. While they are coming, we are skeptical about tomorrow. As we note below, the period for public commentary ends tomorrow at midnight. Can there really be a tariff announcement ahead of it? Chinese and Hong Kong equities as did Singapore. Japanese and South Korean markets were still closed today for holidays and re-open tomorrow. Many of the other bourses in the region fell. Europe's Stoxx 600 is snapping a 10-day rally and is off around 0.8% in late European morning turnover. US index futures are under pressure and the Nasdaq futures are off around 1% with the S&P 500 down about 0.7%. Benchmark 10-year bonds are selling off, and yields jumped 6-7 bp in Australia and New Zealand. They are mostly 2-3 bp higher in Europe and the US 10-year Treasury yield is up almost two basis points to 4.36%. Gold, which fell in the past two weeks, is extending yesterday's nearly 3% recovery with another 1.3% gain. The yellow metal bottomed last week near $3200 and has approached $3390 today. June WTI held $55 yesterday and settled near session highs after gapping lower. It is building on yesterday's recovery and is near $58.75 in Europe. USD: For the fifth consecutive session yesterday, the Dollar Index recovered in the North American session and settled near session highs. For the third session, it settled near the 20-day moving average. The consolidation looks constructive from a technical point of view, even if not particularly inspiring provided the 99.40 area holds. The daily momentum indicators are still trending higher, and the five-day moving average has crossed above the 20-day moving average for the first time since the whipsaw in late March/early April. The US reports March trade figures today. We already know from the advanced goods balance that as companies and individuals moved to avoid the tax hike tariffs, imports surged, and we know from the GDP estimate that some the imports into inventory. The trade shortfall stood at $68.55 bln in March 2024 and is expected to be near $137 bln in March 2025. There continues to be speculation about the semiconductor tariff announcement on Wednesday, and over the weekend, President Trump ordered 100% tariffs on movies produced abroad under his emergency powers for which Congress has yet moved to curtail. An effort last week was defeated in the Senate. In the ever-expanding national security umbrella, Trump is claiming movies are covered, though precisely how it is to be implemented is unclear. EURO: The long upper wicks of the euro's candlesticks in the last two sessions appear to reflect that North American trader faded the gains scored intrasession. The five-day moving average is slipping below the 20-day moving average for the first time since early April when it was establishing a foothold above $1.09. Key support is in the $1.1260-65 area. A break would lend credence to the topping pattern, which on conservative assumptions, could project toward $1.1050. The final services and composite April PMI were reported today, but the preliminary estimate is so good that the final reading is of little market significance. Still, both services and the composite PMI were better than initially reported. The services PMI stands at 50.1 (vs. 49.7 initially and 51.0 in March). The composite (production) is at 50.4 (vs 50.1 initially and 50.9 in March). It was 51.7 in April 2024. Recall that last week, the manufacturing PMI was revised to 49.0 from 48.7 initially and 48.6 in March. Separately, Germany's Merz failed to secure a majority in the first vote in the Bundestag, falling six votes shy in a secret ballot even though his coalition has 328 seats. It was a stunning (unprecedented) setback, but ultimately meaningless. If an absolute majority is not achieved in three consecutive votes, a relative majority is sufficient on the fourth vote. And this may explain the limited market impact. CNY: Mainland markets re-opened for the first time this month. In its absence, the offshore yuan has surged as have several currencies in the region. The Taiwanese dollar may have had the largest move but that does not mean it was the epicenter or cause. With the US perceived to be on high alert for the slightest action against its perceived interests, it is understandable why Taiwanese officials have not intervened more robustly. Hong Kong, which is rightfully less concerned, reported intervened in record size before the weekend and yesterday's holiday. Rather, we suggest the outsized move of the Taiwanese dollar reflects a large imbalance of positions. Taiwan's government indicated that in tariff talks with the US, exchange rates were not discussed, contrary to speculation. The dollar settled April slightly below CNH7.27 and traded slightly below CNH7.1850 yesterday, its lowest level since last November. Yet with the mainland back, more stable price action is likely. The PBOC set the dollar's reference rate at CNY7.2008 (CNY7.2014 on April 30). While it was the sixth consecutive low fix, the PBOC did not validate the sharp yuan advance seen in the offshore market. The dollar rose to CNH7.2352 before pulling back. Other currencies in the region have pulled back, but the Thai baht. There was additional intervention today, and Taiwan's central bank confirmed that it was buying dollars in April. The spark may have been speculation of US-China trade talks, wariness ahead of what some expect to be an announcement US semiconductor tariffs tomorrow. We are skeptical. The period for public commentary on the investigation of semiconductor imports expires at midnight tomorrow. JPY: The dollar recorded session lows yesterday in early North American turnover near JPY143.55. It had turned down after approaching JPY146 before the weekend. It reached nearly JPY144.30 in Asia Pacific turnover before it slipped through JPY143 in early European trade. A break of last Thursday's low, slightly below JPY142.90 would sour the technical tone. Japan's market remains closed today for a national holiday. A move back above JPY143.50 would help stabilize the tone. The final services and composite PMI will be released tomorrow. The highlight of the week is March labor earnings and household spending reports at the end of the week. GBP: Sterling traded on both sides of the pre-weekend range yesterday, but the settlement was neutral. Sterling is trading inside yesterday's range. A move above $1.3350 could spur a move toward $1.3375-$1.3400, but the market may be cautious ahead of Thursday's Bank of England meeting. A convincing break of $1.3235 would bolster the technical case that a top is in place. The BOE is widely expected to cut its base rate. The swaps market has about 92 bp of easing discounted between now and the end of the year. A quarter-point cut this week brings the base rate to 4.25%. The terminal rate is seen around 3.50%. CAD: The US dollar has straddled CAD1.38 for the past four sessions. Bloomberg shows it settling once below there and that was at CAD1.3799 on April 30. It is holding above CAD1.3800 so far today. Nearby resistance is around CAD1.3860. Above there, a band of resistance is in the CAD1.3875-CAD1.3900. Canada reports March goods trade balance today. Another monthly shortfall on par with February's C$1.5 bln deficit would offset January's C$3.1 bln surplus. Canada recorded a goods deficit of C$7.15 bln last year and a $612 mln deficit in 2023. Note that Canadian Prime Minister Carney will meet President Trump today. The humiliation of former Prime Minister Trudeau, with references to him being a governor, and allusions to Canada being the 51st state is unlikely to be repeated, but the damage is done. Reports suggest Canadians are boycotting US brands and have dramatically reduced summer vacation plans to the US. AUD: The Australian dollar went into the weekend election with a four-week rally in tow. Indeed, since the end of January, the Aussie has fallen only in three of the 13 weeks. The election results were not particularly surprising, but the Australian dollar rose to a new high for the year yesterday, slightly shy of $0.6500. A break above there could see $0.6550, which is also the (61.8%) retracement of decline since last October near $0.6940. On the other hand, the upward momentum has stalled and a close below $0.6435 today would suggest a topping pattern is still being formed. March building approvals fell for the second consecutive month in March and the 8.8% drop was well more than economists expected (~-1.5%). It is the first back-to-back decline since June-July 2023. March household spending unexpectedly fell by 0.3% to offset in full the February gains. It was the first decline since last September. MXN: The dollar appears to be breaking out of the consolidative phase against the Mexican peso. Last week's range was about MXN19.48-MXN19.70. Yesterday, greenback posted its highest close in two weeks (~MXN19.69), and set session highs list in the session. The dollar has risen to almost MXN19.75 today, its highest level since April 21. A close above MXN19.80 would lift the tone and target the MXN20.00-MXN20.05 area. Mexico's President Sheinbaum revealed that she rebuffed US efforts to use its military to chase cartel members in Mexico. The March CPI will be reported Thursday. The moderation of prices has stalled with both the headline and core inflation reading slightly inside the upper end of the target range (3% +/- 1%), but the central bank’s greater concern appears to have shifted toward weak growth prospects. The central bank meets on May 15 and there is much speculation about another 50 bp cut, matching the size of the two cuts earlier this year. Disclaimer

Overview: The dollar has begun the new week under pressure, though many financial centers are closed today. The upside pressure on Asia Pacific currencies remains notable. The offshore yuan, the Taiwanese dollar, and Malaysian ringgit, the Japanese yen, and Australian dollar are among the strongest currencies today. The ostensible trigger is speculation of US semiconductor tariffs to be announced Wednesday and continued speculation of a "Mar-a-Lago" currency agreement modeled as it were on the 1985 Plaza Accord that drove the dollar lower. Less fanciful is the idea that the US will seek local currency revaluation in trade talks. Many local markets will re-open tomorrow. The Australian dollar is a new five-month highs following a sharp victory for the ruling Labor Party. The equity markets that were open in the Asia Pacific region were mixed. Taiwan, Australia, and the Philippines markets fell. India and Singapore, New Zealand, and Indonesia advanced. European bourses are mixed, while the US index futures are off by 0.65%-0.90%. European benchmark yields are mostly around two basis points lower. With holidays in Tokyo and London, US cash Treasuries have not traded, but the futures show sharply lower yields. After falling 2.4% last week, gold is rebounding. It is up nearly 2% today to push back above $3300. OPEC+ agreement to boost output by another 411k barrels per day in a bid to punish the quota cheaters, sent the June WTI contract to almost $55 after having been turned back from $60 before the weekend. Still, after gapping lower, the contract has recovered to about $57.50 in the European morning. USD: The Dollar Index appeared to have broken out of a bottoming pattern last Thursday but its pullback before the weekend was disappointing and leaves a mixed technical picture in its wake. Still on balance, given the 1) still resilient labor market, 2) a likely hawkish hold by the Fed on Wednesday, and 3) the favorable momentum indicators, we favor a continued upside dollar correction. However, given the pullback in yields today as the equities and oil drop, the Dollar Index is consolidating inside its pre-weekend range. Last Friday's low was was near 99.40. Moreover, there are expectations for an announcement on semiconductor tariffs on Wednesday. Today's final April services and composite PMI are less important the services ISM, and even then, in the big picture, the survey data will have little impact on Wednesday's Fed decision or the next one in June. Soft survey data are par for the course, the key issue is whether it is spilling over into the real sector. The nonfarm payroll report suggests not so much so far and seem appropriately dismissive the heavily distorted distortions in Q1 GDP. EURO: The final April services and composite PMI typically do not draw much attention; the generalization is likely to hold tomorrow. The market is confident that the ECB will deliver another rate cut at its next meeting on June 5. More important for the immediate price action is the status of the technical topping pattern in the euro that seemed to have been undermined by the euro's recovery ahead of the weekend. Th euro is trading inside last Friday's range and is confined to a roughly $1.1295-$1.1350 range. The $1.1260 area must yield to confirm the topping pattern. A move above $1.1400-25 would negate it. CNY: Hopes that the US and China will soon de-escalate the effective embargo against each other, and the US dollar broadly heavier tone saw the greenback fall nearly 1% to below CNH7.21 before the weekend. It fell to its lowest level since last November. It finished below its lower Bollinger Band Follow-through selling saw the greenback slip below CNH7.119 earlier today before steadying. The lower Bollinger Band is around CNH7.2070 today. Recall that the dollar settled near CNY7.2715 before the May Day holiday, and the reference rate was last set at CNY7.2014. After surging before the weekend, several Asian emerging market currencies continues to rise today. The Taiwanese dollar rose for the sixth session and another large move (~2.4% after 3.7% on Friday), muted on the margins by dollar-buying intervention. The Malaysian ringgit rose 1.1% and after a similar gain before the weekend. It is also the fifth consecutive daily advance. Many financial centers are closed today in the region, including Tokyo, China and Hong Kong, South Korea, and Thailand. The first thing tomorrow, Caixin will report its April services and composite PMI. US semiconductor tariffs, and ideas of another Plaza-like agreement, coupled large dollar exposure by financial firms (think Taiwanese life insurers) and exporters appear to be the main considerations. We are skeptical that the US and China are about to enter talks. Neither side appears to have experienced sufficient pain to force a change in position. So far, judging by the seeming US pivots around extreme market turmoil, it appears the US is more sensitive to the pain than Beijing. The US has threatened fresh action against China for buying Iranian oil. If the narrative about container shipments from China is fair, Beijing will likely get a better deal from the US in a few weeks than now. JPY: Last week's dovish hold by the BOJ helped the dollar confirm a bottoming pattern against the yen. And it happened as the dollar appeared poised to correct higher from the technical perspective. From about 10-days before President Trump's second inauguration until April 22, the dollar fell nearly 12% against the yen. The move above the JPY144.00-50 on May 1 lent credence to the head and shoulders bottom pattern that projects toward JPY148.00-50. However, the dollar fell back to around JPY143.75 ahead of the weekend, after it was turned back from almost JPY146. It is holding above the pre-weekend low today, but a break below JPY143.40 may put it at risk. Meanwhile, Finance Minister Kato who brandished the implicit leverage of a large holder of US Treasuries indicated he would not be playing the card in trade negotiations. The signal was sent, just the same. GBP: UK markets are closed for a bank holiday today. Tomorrow's final services and composite PMI will not distract the market from Thursday's Bank of England meeting, which is widely understood to result in a quarter-point rate cut (to 4.25%). The BOE cut rates twice in 2024, beginning in August. After this week's cut, the swaps market is anticipating two and nearly three more cuts this year. If sterling recorded a double top (~$1.3425-$1.3445), the neckline is near $1.3235. It made a marginal new seven-session low today slightly below $1.3260 before stabilizing. A break of the neckline could signal a move toward $1.3035. Alternatively, if sterling were simply retracing last month's rally from almost $1.27 on April 7, the (38.2%) retracement is near $1.3165. CAD: The US dollar fell to a marginal new six-month low before the weekend near CAD1.3760. But as happened a few times last month, US dollar demand quickly emerged, and it settled above CAD1.3800. The CAD1.3860 offers the nearby cap. The swaps market is almost 50/50 for a rate cut at the June 4 Bank of Canada meeting. Today's April PMI is not nearly as important as the employment data at the end of the week. AUD: The Liberals electoral victory was consistent with the latest polls. As was the case in the recent Canadian election, the head of the opposition lost their own parliament seat as overtures to Trump or Trumpian politics were punished. Recall, Australia like others with a free-trade agreement with the US still faced a 10% across-the-board tariff. Unlike last year, when the incumbents in the high-income countries generally lost, the two G10 elections this year have seen them fare better. The Australian dollar made new five-month highs before the weekend near $0.6470 and it closed firmly, even if below the 200-day moving average (~$0.6460). It was lifted to almost $0.6490 today and is the strongest of the G10 currencies ahead of the North American open. The next target is in the $.6500-25 area. MXN: The central bank may find itself between weak growth impulses, even though the economy eked out growth in Q1 (helped by the agricultural sector), and inflation, which may be flirting the upper end of the target range. The market has been favoring a 50 bp cut (to 8.50%) but should the CPI (Thursday) surprise to the upside, it may have second thoughts. Meanwhile, the dollar has forged a floor around a little below MXN19.50. It is holding in a narrow range so far today, mostly between MXN19.55 and MXN19.63. A move above MXN19.75 could signal a breakout, and an initial and conservative estimate is around MXN20.00, which is also near the 200-day moving average. Disclaimer

President Trump says there are trade talks with China. Beijing denies it. Around the time the US reports that the world's largest economy contracted slightly in Q1 (0.3% annualized), US Treasury Secretary Bessent said that the effective embargo was shutting down the China's economy. The week ended with China's Commerce Ministry statement that it was evaluating US overtures for trade talks, which implies the US caved, as the psych-ops continue. Trump and Bessent's call for lower interest rates will get little attention for the Federal Reserve. With a decent jobs report in hand, the Fed has no incentive to either cut rates or signal that it is preparing to cut. The uncertainty remains thick, but not too thick for the Bank of England, for which the market fully expects a quarter-point cut at the upcoming meeting. Sweden and Norway's central banks hold policy meetings and both will standpat. The central bank of Brazil meets and after three consecutive 100 bp hikes, a half-point hike is expected, which would bring the Selic rate to 14.50%. Last Thursday's price action seemed to lend support to the idea that the dollar had forged a bottom and was set to recover. However, the lack of follow-through despite the employment report seemed to undermine the constructive dollar outlook. Still, given the backing up of US rates, pushing out the next cut in Q3 from Q2, resilient labor market, and the position of the momentum indicators, we expect the dollar's upside correction to continue. US Drivers: The seemingly erratic US trade policy sows confusion and uncertainty. President Trump's "Art of the Deal" includes "pivoting" when your adversary does not accede to the initial bold demands. He does not use the word retreat, but whether it was about the firing of Federal Reserve Chair Powell or "playing nice" with China, many investors see it as such. China says it will consider US overtures for trade talks, but we suspect this is part of the feint and parry taking place, which in this instance essentially accuses the US of blinking first. These incentives some to try to wait out a further scaling back of some tariff threats. For other businesses, the uncertainty paralyzes capex and other strategic decisions. Data: With Q1 GDP behind us, recognizably massively distorted, the focus is on Q2 data, beginning with last week's employment data. The April 177k rise in nonfarm payroll growth, which was 37k more than the median in Bloomberg's survey, while the February and March jobs were revised down by 58k. Still, the general take away is that the US economy is still in what Fed Chair Powell calls a "good place." The market slashed the odds of a June rate cut to about 40% from 70% a week ago. The ISM services report this week has downside risks after the weaker preliminary services PMI (51.4 vs. 54.4) regional Fed surveys. Yet, the Fed and Treasury Secretary Bessent seem to be dismissive of soft survey data. The highlight of the week is the FOMC meeting, which concludes on May 7. While the Fed is highly unlikely to cut rates, the market will focus on forward guidance, which is likely to be sparse if anything given the uncertainty and Prices: The US and China have raised tariffs to levels that are an effective mutual embargo. Moreover, the agriculture and energy the US previously supplied have been replaced by other countries, including Brazil and Canada. And, despite the drying up of the container traffic on the west coast gradually crossing the country like a shadow, the greenback appeared to have begun an upside correction in earnest. However, the setback ahead of the weekend despite a constructive jobs report puts it at risk. Still, the Dollar Index settled slightly above 100.00. A break of the 98.85 area weakens the technical tone. EMU Drivers: The euro is a beneficiary of the US dollar's decline. It is the un-cola to the dollar's cola. We suspect some of the euro's gains are the unwinding dollar positions and the increase in dollar hedges. The euro's 14% rally from the early February lows left momentum indicators stretched, and a correction appeared to have been triggered by Trump's "pivot" on Powell and greater confidence that a good part of US tariff threat is bluster and negotiation tactic. Still, at the very least Europe should be prepared for 10% across the board tariff, in addition to some sectoral tariffs. The EU will reportedly present its first trade proposals in the week ahead. Data: The March PPI and retail sales are not important given last week's Q1 GDP estimate. Germany reports March factory orders and industrial output figures. In March, the manufacturing PMI rose to 48.3, its best level since August 2022, though it pulled back in April. Prices: The euro has had a strong run, from almost $1.0140 in early February to nearly $1.1575 on April 21. Just when it looked like a correction was unfolding, buyers emerged near $1.1265 last Thursday, and despite the rise in US rates, lifted the euro new to highs after the stronger-than-expected US jobs data near $1.1380. Resistance is seen in the $1.1400-25 area. A break of the $1.1260 would reinvigorate the downside correction that could extend two cents. China Drivers: Beijing has defied expectations of a significant devaluation to offset the US tariffs. It has maintained stability against the dollar, which we recognize as strategic not simply tactical. It denies the US of competitive advantage against it as the dollar weakens. Indeed, the stability against the dollar means that it has depreciated against most other currencies. The key issue now is how much of the loss of US demand and other countries, where it has outsourced production, will be made up by boosting domestic demand and how much will deflect the exports to other markets. The more it does with the former, the less antagonism it will draw for relying on the latter. Data: April’s trade data will draw attention. The US tariffs on China (and others) will likely be evident after efforts to front-run them may have helped bolster March exports. At the same time, observers are remiss if they do not recognize that China is rejecting US goods (canceling Boeing orders), energy, and a variety of agriculture products, including grains and meat. It has secured alternative supplies, and while this will not boost imports in aggregate, the diversification may earn goodwill from other countries. Aggregate lending in Q1 25 was above 18.5% above Q1 24 levels and in April 2024, lending slowed slightly, which was unusual. The IMF revised down its projection for this year's growth to 4.0% from 4.5%. Prices: The dollar fell sharply against the offshore yuan ahead of the weekend as the greenback sold off broadly. It slipped briefly below CNH7.21, its lowest level since last November, and it settled near the 200-day moving average (~CNH7.2225). Ahead of the holiday, the dollar closed near CNY7.2715, warning of a possibly significant adjustment when the onshore market re-opens on Tuesday. Japan Drivers: What appears to be the unwinding of structural short yen position, perhaps as part of leveraged trade where borrowed yen is used to buy other higher yielding or more volatile assets has seen the correlation of changes in the exchange rate and the US 10-year yield continues to break down. The 30-day correlation was hovering a little above 0.70 earlier this year and now is below 0.15, the lowest since early 2023. On the other hand, the 30-day correlation with changes in the Dollar Index is near 0.88, among the strongest in the past decade. Data: March labor earnings and household spending are the highlights. Adjusted for inflation, Japanese labor earnings continue to fall on a year-over-year basis, and this is one of the factors that limit consumption. Also, there are, arguably, demographic (aging population) and cultural considerations. Japan strikes us to be a better candidate than the US for the stagflation scenario. Last week's BOJ meeting resulted in a cut in this fiscal year’s growth forecast from 1.1% to 0.5%, which is in line with the new IMF's World Economic Outlook that put it at 0.6%. The core CPI forecast was shaved to 2.2% from 2.4%. Prices: The dollar appeared to have carved out a technical bottom pattern against the yen. It projected toward JPY148. The greenback reached almost JPY146 before the US jobs report and then was sold to about JPY143.75. Buyers emerged and sent the dollar back a little above JPY145 late in the North American session, arguably helped by the sharp rise in US rates while the swaps market downgraded the chances of a BOJ hike this year. UK Drivers: Sterling appears to benefit more from the US dollar's weakness than optimism about the UK's economic performance. Also, the delay in the reciprocal tariffs that hit the EU harder than the UK keeps the playing field more level until July. Data: The highlight of the week is the Bank of England meeting on May 8. The market is confident that it will deliver a quarter-point rate cut. The rate cut is fully discounted in the swaps market. The BOE will update its forecast. Growth was seen easing to 0.8% this year from 1.1% last year. It projected growth in 2026 and 2027 at 1.5%. Inflation was forecast to accelerate from 2.5% in 2024 to 3.5% this year and then moderate to 2.5% (2026) and then 2.0% (2027). The swaps market has almost 95 bp of cuts priced in for this year. That is three quarter-point cuts fully expected and an 80% chance of a fourth. As recently as late March, not even two cuts were discounted. Prices: Sterling set a new three-year high last week near $1.3445 before falling into the $1.3260-65 area in the last two sessions, which seemed to attract new buyers. It looked as if sterling's rally from last month's low near $1.2710 was over, and a possible double top had formed. However, there was not follow-through selling ahead of the weekend. Still, sterling settled near session lows. A break of $1.3235 is needed for confirmation that could lead to another couple of cents decline. Canada Drivers: Mark Carney has secured his own popular mandate as Canada's prime minister. He brings a gravitas to the office and will help Canada finally diversify from the US. Closer relations with Europe are the obvious steps. China is encouraging the fissure and is buying a record amount of oil from Canada as it reduces energy imports from the US. Data: There are three high-frequency economic reports due this week. The March trade data is probably the least important. It is dated and may be skewed by the activity to build inventories in the US ahead of the tariff bite. The April IVEY may reflect the uncertainty but also the anxiety of Canadian businesses. Still the consumer boycott of US brands and collapse of forward tourist bookings may help underpin domestic demand. The April employment data at the end of the week is the most important. Canada's labor market has weakened in Q1 25, and this is before the full impact of the US tariffs has been felt. Canada created an average of almost 15k jobs a month in Q1 25, about half of the Q1 24 average. More significantly, Canada lost 82k full-time posts in the February-March, the worst since the early days of Covid. In Q1 25, it lost more full-time positions than in gained in Q1 24. Still, the swaps market has downgraded the likelihood of a rate cut at the June central bank meeting, but the CPI readings and the evolution of the financial conditions may be more impactful. Prices: The US dollar has been consolidating for around three weeks mostly between CAD1.3800 and CAD1.3900. The lower end was taken out last week. A new, nearly seven-month low was set ahead of the weekend near CAD1.3765 but the greenback closed above $1.38. A move above CAD1.3860 would bolster the case for a a technical correction that could extend toward CAD1.40. Australia Drivers: Prime Minister Albanese is expected to lead the Labor to a second consecutive victory, but this appears to have been discounted for some time. Economic activity has softened, and inflation is moderating. The central bank is expected to accelerate its easing cycle. Australia faces a key challenge as the US pushes countries to choose between it and China. The US and Australia have a free-trade agreement that went into effect in 2005, and Australia is integrated into the US global security system, including the intelligence sharing of "Five-Eyes" and the US-UK pact to deliver nuclear submarines. Meanwhile, optimism about the possibility of US-China trade talks and the broad weakness in the greenback ahead of the weekend fueled strong currency gains ahead of the weekend. Data: March household spending is the highlight of the light economic calendar in the week ahead. Australian household went on a shopping spree in Q4 24, with the largest rise in household spending the most since Q3 23. Spending appears to have slowed in Q1 25 but still relatively strong. We suspect this and the still firm underlying core quarterly inflation readings will spur the central bank into a 25 bp cut rather than a half-point cut when it meets later this month, for which there has been some speculation. Prices: The Australian dollar recovered from the mid-week pullback (~$0.6355) to trade at new five-month highs ahead of the weekend near $0.6470. It traded above the 200-day moving average (~$0.6460) for the first time since last November. It settled near $0.6435. The nearby technical objective is around $0.6500, and the $0.6550 area is the (61.8%) retracement of the loss from last October's peak near $0.6940. It takes a break of the $0.6350 area to boost the chances of a downside correction rather than a choppy sideways consolidation. Mexico Drivers: The peso has been unexpectedly resilient in the face of the volatility unleashed by the uncertainty over US trade policy. It has risen almost 6.0% against the dollar this year, in addition to the interest rate pick-up. It has generated a 9.5% return to dollar investors. That said, the peso still trades like a risk currency. On a rolling 30-day basis, the correlation between changes in the exchange rate and the S&P 500 is nearly 0.65, which is the highest since late 2023. Data: Mexico reports April CPI and it looks to have stayed, even in barely, within the target of 3% +/- 1%. Barring a surprise and given the peso's resilience, the central bank is expected to deliver another 50 bp cut when it meets on May 15 (which would bring the overnight target rate to 8.5%). It does not draw much attention from the markets, but Mexico will also report April auto production and exports. In March, Mexico exported around 87% of its auto production. China by contrast exports a little more than 20% of its auto output and is routinely criticized for excess capacity. There are three basic economic development strategies: import substitution, export-oriented, and entrepot (commercial and financial center, e.g., Singapore and Hong Kong). The entrepot model offers limited potential, especially for large countries and those fairly close to other financial/commercial centers. Mexico was forced into the import-substitution strategy by the disruption of the world wars. And although it was initially preferred by the economists and multilateral institutions, the Asian export-oriented approach delivered superior results. Nearly by definition, the export-oriented strategy requires capacity in excess of domestic demand. Prices: The US dollar has been trading in a fairly narrow range in the last couple of weeks around MXN19.60. Given the momentum indicators (turning higher), our bias has been for this to be a base as opposed to a nesting pattern before the next leg down. The dollar rose for the first time in four weeks. It may require a move above MXN19.75 to begin forcing out some of the weak peso longs. Disclaimer