The equity and credit markets experienced a rally, while the US yield curve bear steepened following President Trump’s initial executive orders and announcements concerning trade tariffs, proposed tax cuts, and his preference for lower oil prices and interest rates. Societe Generale’s FX analysts observed that the correlation between the US dollar and the Treasury curve is undergoing an initial and cautious regime shift. However, with the Federal Reserve and European Central Bank meetings approaching next week, they urged caution in making premature conclusions.
Source: Create.vista.com
US Dollar Loses Momentum
Societe Generale’s experts highlighted that the Canadian dollar (CAD) and Mexican peso (MXN) gained strength yesterday and are on course for weekly increases, alongside broader G10 and emerging markets currencies. This is notable despite the looming threat of 25% US tariffs on imports from Canada and Mexico starting February 1. Since last November’s elections, a steeper yield curve had fueled a stronger dollar. However, this trend reversed over the past 48 hours, challenging the previously successful strategy of buying on dollar dips. Both the Chinese yuan and the euro appeared unfazed by the US tariff threats.
They further reported that the EUR/USD pair climbed to a new high of 1.0457, narrowing the gap with two-year bond spreads. Within the G10 currencies, the Scandinavian currencies were top performers this week. Among emerging markets, Latin America, led by the Brazilian real (BRL), and Central and Eastern Europe, driven by the Polish zloty (PLN), stood out. Bond market dispersion was evident, with the UK and Australia outperforming relative to Europe, Canada, and the US.
Meanwhile, Brent crude oil prices dropped to a low of $78 per barrel after Trump emphasized his intent to lower oil prices as a strategy to end the conflict in Ukraine. Lower energy prices would also align with his goal of reducing inflation.
The Federal Reserve is scheduled to meet next week and is widely anticipated to leave interest rates unchanged. Market pricing for the March FOMC meeting remained steady at approximately -7 basis points. Analysts noted that while US continuing jobless claims rose to 1.899 million—the highest level since November 2021—it did not alter perceptions regarding the strength of the labor market.
In the bond markets, demand for new investment-grade and benchmark bonds remained robust in both the US and Europe. Analysts observed strong bidding activity for syndicated debt issued in France and the UK. Similarly, Spanish and US debt attracted significant investor interest. Japanese investors continued their trend of purchasing foreign bonds for the second consecutive week and increased their allocation to non-Japanese stocks for the sixth week in a row.
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