- EU-US: Trump says EU must commit to buying $350bn US energy to win reprieve from tariffs, dismisses EU offer of "zero-for- zero" tariffs on cars, industrial goods. EU near agreement on 25% counter-tariffs to take effect from 16 May and on 1 December.
- China FX regime change to managed depreciation? PBoC sets yuan fixing at 7.2038, above the closely watched 7.20 red line, clearing path for USD/CNY to have a go at 7.35. PBoC previously vowed to maintain stable exchange rate.
Calm returned to stocks in Asia overnight at least to the Nikkei and causes panic selling to subside in Europe after another frenzy of liquidation yesterday which saw losses for the Stoxx 600 snowball to 17.9% from the March high to the intra-day low. The index has not been this heavily oversold (RSI 17) since the pandemic, but without central bank ‘put’ or lasting de-escalation on trade hostilities, the scope for a meaningful mean reversion is likely to be limited. Negotiations with Japan are “prioritised” but there is no indication that the US will relent on the reciprocal tariffs that come into force tomorrow, or on the car tariffs that took effect last week. The US threatened China with even higher tariffs if Beijing does not pull its retaliatory 34% tariff today. The weaker yuan fixing by the PBoC this morning did not go unnoticed and suggests something of strategy change at the PBoC as it tries to absorb the trade shock with managed depreciation of the exchange rate. Currency stability has until recently been the constant in the exchange rate policy of the PBoC to maintain confidence among foreign investors and avert capital outflows. The weaker fixing is part of a broader array of measures incl support for the equity market and consumption. USD/CNY gapped up to 7.3375, the highest since Sep-23. CNH crossed 7.35/USD. If it establishes beyond 7.37, a larger uptrend could take shape. Next projections could be located at 7.41 and 7.46/7.47 (see Technicals below). This would not bode well for the euro but also for the AUD given the trade relationship with China and FX correlations. EU ministers are reportedly near an agreement to levy 25% counter-tariffs on some US imports in response to the tariffs on steel and aluminium. Tariffs on certain goods would take effect on 16th May and others on 1st December. However, a second round designed to reply to the blanket 20% tariff on other imports from the bloc, and a flat rate of 25% on cars, remains under debate. The 10y Bund yield yesterday narrowly missed out on a bullish outside after closing at 2.613% and yields remain delicately perched inside the gap of 5 March between 2.50% and 2.67%.
The rollercoaster reversal in when US yields was initially triggered by the surge in stocks following reports of a blanket 90-day pause in US tariffs, later dismissed as fake news. Selling accelerated through the 3.96% technical level led by algos and by the unwinding of basis trades. Yields returned to the 4.10%-4.15% area which proved crucial support on the way down last week. The reception of 3y supply will be closely watched today as a barometer of overseas and non-dealer buying. Concerns over the direction of the US economy and dovish repricing of the Fed may entice buyers in the front end but the 10y tomorrow and 30y on Thursday could be a more challenging proposition against the deteriorating fiscal background. If the base of tax receipts does not keep up, deeper spending cuts or more debt issuance may follow. The implied probabilities of central bank policy action continue to fluctuate wildly with ructions in equities and credit spreads. Fed futures are pricing almost four cuts this year, double the dots of March. The ECB is estimated to drop the policy rate below neutral rate with money markets implying a depo rate of 1.65% by year-end. Positioning for a dovish cut next week and speculation around the Yuan complicate the outlook for the euro and could precipitate profit taking in stretched FX crosses incl EUR/GBP provided the correction in equities does not resume.
In EMs, inflation in Hungary eased to 4.7% in March, confirming MNB Governor Varga's view that inflation peaked in February. The room for manoeuvre for rate cuts this year is limited but it diminishes stagflation risks. EUR/HUF retraced from a high of 409 and the 10y HUFGB yield declines by 9bp. The ZAR leads the selloff in FX sliding nearly 5.5% just this month to trade at 19.68/USD the weakest level since May 2023. The second largest party of the coalition government (DA) in South Africa is threatening to withdraw support for the budget. For USD/ZAR the June 2023 high of 19.92 stands in way of test to 20.00. For Brazil, the money markets adjusted their view on the peak in the Selic rate at 14.75% against 15.25% at the beginning of the month. In India, a 25bp cut to 6.0% tomorrow is fully priced in. The RBI may opt to shift its stance to accommodative from neutral instead of cutting 50bp.
