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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