Tariffs optimism grows as risky assets rewarded
Updated Updated Fri, 2025 May 9 09:38
FX: USD was firmer against all major peers, amid buyers stepping in amid a slow reintegration of confidence in the US economy in the FX space. Accompanying the move, Treasury yields across the curve gained sizably, as money markets priced fewer rate cuts from the Fed. (67bps of easing vs 75bps). Traders continue to mull Fed Chair Powell’s resilient view of strength in the economy and his wait-and-see approach.
EUR broke down as the dollar strengthened. Prices fell through the first minor Fib level (23.6%) of this year’s rally at 1.1243. Interest rate differentials are widening which is a euro negative. Little progress on a US/EU trade deal also contrasts with other neighbouring countries.
GBP fell but was the best performing major versus the buck. The BoE lowered rates as expected by 25bps, but it failed to endorse market projections of faster rate cuts ie quicker than every quarter. The bank stuck to its prior script and “gradual and careful” future reductions. Another hawkish surprise was that two out of nine MPC officials also voted for no change. The US/UK trade deal also helped sterling.
USD/JPY jumped, up over 1.4%, as the yen was the worst major underperformer on wider yield spreads and the BoJ hinting to caution on rate hikes. Improved risk sentiment also hit safe haven currencies. The month-to-date top is 145.92 with the 50-day SMA at 146.41. The first major Fib level (38.2%) of the January-April decline is 147.13.
AUD dipped again for a second day and further away from the 200-day SMA at 0.6458. CAD broke to the upside out of its range from mid-April, between support around 1.3750 and resistance around 1.39. A break would find additional resistance in the mid-1.39s, around the 61.8% retracement of September-February rally.
US stocks: The S&P 500 gained 0.58% to settle at 5,663. The tech-heavy Nasdaq finished up 0.98% at 20,063. The Dow closed 0.62% higher at 41,369. The VIX eased fractionally but remained a touch elevated at 22.48. Five sectors were in the red with healthcare off 0.91%. Consumer discretionary and industrials were the top performing sectors with energy and materials not far behind.
Asian stocks: Futures are mixed. Asian equities were mostly higher on optimism around US-China trade talks and potential easing of US export restrictions on advanced AI chips. The Hang Seng (+0.37%) extended its winning streak after the PboC’s policy loosening. Japan’s Nikkei (+0.4%) rose helped by yen weakness and trade deal optimism. Regional sentiment, however, remained cautious given ongoing geopolitical tensions between India and Pakistan.
Gold fell for a second ay after the Fed remained on hold, though there are still three gold-supporting rate cuts priced in for the rest of this year. A strengthening dollar could impact bullion upside.
Day Ahead – Canada Jobs
April tariff chaos and existing tariffs on steel/aluminium and non-USMCA goods likely weighed on the domestic Canadian labour market. Economists say there could be federal election hiring that might mask a broader hiring pause and downsizing in tariff-hit sectors of the economy. The unemployment rate is expected to rise one-tenth to 6.8%, with an easing in wage growth pausing.
The last BoC decision saw the bank hold rates, against split expectations for a hold or cut. The latest minutes also revealed that the policymakers were split over whether to cut or hold. A deteriorating labour market would bolster the case for further rate cuts. But there is still major uncertainty ahead on the US trade policies and how they affect the Canadian economy.
Chart of the Day – AUD/USD hits 200-day SMA
The aussie has rebounded sharply from its sudden aggressive sell-off on the Friday after Liberation Day. Prices posted a low in the following days not seen since the pandemic lows in March 2020 at 0.5913. The major has bounced with the improved risk mood and relative easing of trade war tensions. Of course, AUD is a proxy for China. The major has hit the 200-day SMA at 0.6459 and sold off through the midpoint of the October-April drop at 0.6427. There is a major support zone with the 50-day and 100-day SMAs and the next Fib level around 0.63.
