Dollar Weakens Amid Trade News

CURRENCY FUTURES

The US dollar was lower against most major currencies, including the yen and euro, as markets continue to monitor the trade situation and the impact on the US economy. The dollar fell after new US trade data was released showing a larger-than-anticipated trade deficit, resulting from a rush of imports in the country to try and get ahead of tariffs.

The dollar slid to a record low against the Taiwan dollar amid speculation that Taiwan is appreciating its currency as part of a trade deal with the US. A stronger Taiwan dollar may be a sign of goodwill to US negotiators by making American goods more affordable and addressing US concerns on currency manipulation.

The Eurozone’s services PMI for April exceeded expectations, coming in at 50.1. However, this was lower than last month’s reading of 51.0. Economists had anticipated a reading of 49.7. Germany, the largest economy in Europe, recorded a PMI of 49.0, which was above the expected 48.8 but still below the previous month’s reading of 50.9. Despite the better-than-expected reading providing some support for the euro, the slower growth and weaker performance in Germany could limit its strength against the dollar. The European Central Bank is expected to continue to cut rates in June, while the Fed is poised to hold rates steady this month. June Euro futures are holding above $1.13.

The U.K.’s services PMI readings came in line with its European counterparts with an April reading of 49.0, down from 52.5 in the previous month. Economists had expected a reading of 48.9. British pound futures are trading above $1.33.

The Japanese yen gained against the dollar for the third straight session. Japan held interest rates unchanged at 0.5% last week as the bank downgraded its growth and inflation outlooks, adding to expectations that future rate hikes are unlikely. Japan and the US finished a second round of trade talks last week, with Japan aiming to finalize a deal by June.

STOCK INDEX FUTURES

Stock index futures were lower in overnight trade as tariff concerns hung above investors’ heads before the Fed meeting this week. On Monday, President Trump said he plans to implement pharmaceutical tariffs over the coming weeks, renewing worries over the impact of a trade war.

72% of S&P 500 companies are done reporting earnings for the first quarter; the index is on pace for year-over-year earnings growth of 12.8%. Despite the strong earnings growth, many companies issued caution and reduced guidance on their fiscal outlooks, citing tariffs and trade uncertainties. Equity markets will be looking for more trade news to keep the market recovery going. Without any solid progress on trade deals, markets may soon lose confidence in the US economy.

Canadian Prime Minister Mark Carney is set to visit the White House this week for trade talks after recently claiming victory in the Canadian election last week.

The US trade balance in March showed that imports exceeded estimates, causing a trade deficit of $140.50 billion, a steep change from the previous deficit of $123.20 billion.

INTEREST RATE MARKET FUTURES

Futures are higher at the front end of the curve and lower at the long end. Futures were lower Monday after data showed that the services sector in the US economy remained resilient last month. The ISM non-manufacturing prices index rose to 65.1, a large increase over the previous month’s reading of 60.9. The index is a leading indicator of CPI inflation, and the stronger-than-expected headline may result in the Fed pausing rate cuts for longer than previously expected.

The US yield curve steepened following the data, and the spread between the two-year and 10-year yields is over 50 bps, compared to 48.4 bps last Friday. The current curve is described as a “bear steepener” as long-term interest rates are rising quicker than short-term rates. This results when inflation expectations increase, prompting investors to sell long-term bonds in anticipation of higher yields. The effects from tariffs will most likely be influencing consumer prices in May and June as pre-tariff countermeasures run out and costs begin to be passed on. The 10-year yield is currently at 4.342%.

The US Treasury will auction $42 billion in 10-year notes at noon central time on Tuesday and $25 billion in 30-year bonds on Thursday. Attention will be paid on the 10-year note sale, as the level of demand for the debt security will paint a better picture of US economic sentiment. A weak auction may signal slowing economic activity and reduced foreign interest in US assets.

Federal Reserve Chair Jerome Powell is set to deliver remarks on the US economy Wednesday after the bank announces its rate decisions. Data from the CME is predicting a 97% chance the Fed keeps rates unchanged at the May meeting and a 70% chance that the Fed will not cut rates at its June meeting. Markets are expecting the first rate cut to come in July with about 77 bps of easing before year-end.  The Fed will need to carefully balance its efforts to support the economy with concerns about the inflationary effects of tariffs. Unless there is a notable decline in the labor market, the Fed will continue to be cautious in cutting rates until the inflation picture eases.

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