Mexican peso jumps on US-Mexico deal, yuan dips to 2019 lows

The Mexican peso jumped against the dollar on Monday after the United Statesand Mexico struck a migration deal late last week to avert a tariff war, providing some much-needed relief to fragile market sentiment.

Over the past year, trade disputes between the United States and its trading partners, including a long-running conflict with China, have slowed global growth and unsettled financial markets.

China’s exports unexpectedly returned to growth in May despite higher U.S. tariffs, data showed on Monday, but many suspected the rise was due to firms front-loading shipments to avoid higher U.S. tariffs. Fears of a longer U.S.-China trade war continued to persist.

The figures showed imports in May dropped 8.5% from a year earlier, a much worse than expected outcome that signaled weak domestic consumption and weighed on the yuan.

The Mexican peso rose 2% to 19.2275 pesos per dollar after trading resumed for the first time after Mexico agreed on Friday to expand along the entire border a program that sends migrants seeking asylum in the United States to Mexico.

U.S. President Donald Trump had threatened to impose 5% import tariffs on all Mexican goods starting on Monday if Mexico did not commit to do more to tighten its borders.

“We all knew that Donald Trump was unpredictable, but this was taking it to a whole new level,” said Chris Weston, Melbourne-based head of research at foreign exchange brokerage Pepperstone.

“This was political, it was social. It meant that financial markets had to wear a higher risk premium.”

Futures for the S&P 500 were last up 0.2%. Benchmark 10-year Treasury yields jumped back 3 basis points to 2.114% after hitting a 21-month low of 2.053% on Friday after soft U.S. jobs data.

Against the safe-haven yen, the dollar gained 0.25% to 108.475 yen.

The yen gained in late May on the deteriorating global trade outlook as the currency tends to benefit during geopolitical or financial stress as Japan is the world’s biggest creditor nation.

Bart Wakabayashi, Tokyo branch manager at State Street Bank, said the lift to sentiment from the U.S.-Mexico deal would “probably spill over to optimism with China and hopefully some progress there.”

“We’ve had trade talks with the EU, with Japan. Hopefully these will start to turn to the positive narrative which should see further dollar weakness in the yen,” he said.

Still, the dollar’s gains were checked by rising expectations the Federal Reservewill cut interest rates during the second half of the year.

Those views were bolstered on Friday when data showed nonfarm payrolls increased by 75,000 jobs last month, much smaller than the 185,000 additions estimated by economists in a Reuters poll, suggesting the loss of momentum in economic activity was spreading to the labor market.

Fed funds rate futures are still pricing in more than two 25-basis-point rate hikes by the end of this year even after their retreat early on Monday after the U.S.-Mexico migration deal.

“The market is saying it is not a question of if, it is a question of when, and to what extent, we’re going to get a rate cut for this year,” said Pepperstone’s Weston.

Against a basket of six peers, the dollar index rose 0.2% to 96.750, recovering slightly after ending with a 1.2% loss last week, its worst weekly performance since the week of Feb. 16, 2018.

Group of 20 finance leaders said on Sunday that trade and geopolitical tensions have “intensified”, raising risks to improving global growth, but they stopped short of calling for a resolution of the deepening U.S.-China trade conflict.

Elsewhere, the Chinese yuan was last down about 0.3% at 6.9336 per dollar in onshore trade after briefly brushing its lowest since late November in the wake of the weak import data.

The Australian dollar slipped 0.4% to $0.6973, giving up some of last week’s gains, when it rose 0.9%.

The euro dipped nearly 0.2% to $1.1313, retreating from an 11-week high of $1.1348 touched on Friday.

Yen up on Mexico tariff fears as investors await ECB

Japan’s yen approached a five-month high on Thursday after a lack of progress in U.S.-Mexico trade talks hurt risk sentiment and drove investors towards safe-haven currencies.

Investors were focused on the euro, which has strengthened recently on the back of dollar weakness caused by rising bets on a U.S. interest rate cut.

The European Central Bank meets on Thursday, with traders looking to see how concerned policymakers are about signs of a downturn in growth.

Recession fears are sweeping across the world and central banks have in recent weeks cut rates in what could signal the start of a global monetary easing cycle.

The Japanese yen has been the main beneficiary from a shift towards assets investors deem safer.

It rose as much as 0.3% to 108.07 yen per dollar, close to its strongest level since Jan. 10, after negotiations in Washington on Wednesday aimed at averting U.S. tariffs on Mexican goods showed little sign of progress.

U.S. President Donald Trump unexpectedly told Mexico last week to take a harder line on curbing illegal immigration or face 5% tariffs on all its exports to the United States.

The Mexican peso, already saddled with trade concerns, took a hit after credit ratings agency Fitch downgraded its sovereign debt rating on Wednesday by a notch from BBB+ to BBB, just two notches above junk status.

The euro was 0.05% higher at $1.1227 after retreating 0.3% on Wednesday. The single currency has brushed a 1-1/2-month high of $1.1307 this week.

The ECB will try at Thursday’s meeting to give the ailing euro zone a boost and may even set the stage for more action later this year as an escalating global trade war unravels the benefits of years of monetary stimulus. It will also give updated staff growth and inflation forecasts.

“What matters during the ECB meeting today is whether the Council will stick to its view that the economy will recover in the second half of the year,” Antje Praefcke, an analyst at Commerzbank, wrote in a note to clients.

“Draghi would have to sound very concerned about the growth and inflation outlook to cause a reaction in the euro.”

ECB President Mario Draghi is expected to maintain guidance about the possibility of more stimulus.

The dollar index against a basket of six major currencies stooped to a two-month low of 96.749 midweek as benchmark U.S. yields declined sharply this week to 21-month lows on investor risk aversion and heightened prospects of the Federal Reserve cutting interest rates.

Dollar hovers near 7-week low on Fed rate cut prospect

The dollar struggled near seven-week lows on Wednesday after U.S. central bank officials hinted at the possibility of an interest rate cut in the face of rising risks to trade and global growth.

Federal Reserve Chairman Jerome Powell dropped his standard reference to the Fed being “patient” in approaching any rate decision on Tuesday, saying instead the central bank will respond as “as appropriate” to trade pressure.

The dollar index against a basket of six peers was last flat at 97.077, within reach of a recent low of 96.995 brushed overnight – its lowest since April 18. It has now fallen 1.3% from a more than two-year high of 98.371 touched on May 23.

Masafumi Yamamoto, chief currency strategist at Mizuho Securities, said major currencies barely reacted to Powell’s comments as investors had already priced in several rate cuts by the Fed on the back of the shifting global growth outlook.

The Fed chairman’s comments came a day after St. Louis Federal Reserve President James Bullard said in a speech that a rate cut may be needed “soon.”

Rate cuts by some central banks in recent weeks could potentially signal the start of a global monetary easing cycle to stave off a sharper economic downturn.

“Central banks across the globe are adopting a dovish tone. It’s kind of a preemptive move,” said Yamamoto.

“It doesn’t necessarily mean that the economy is worsening – rather the outlook worsened. It’s mainly related to the trade tensions between the U.S. and China and the U.S. and Mexico.”

Australia’s central bank on Tuesday slashed benchmark cash rates to a record low of 1.25% and signalled willingness to go further if the worsening outlook persists.

Last month, New Zealand’s central bank cut its benchmark interest rate for the first time in two-and-a-half years as it moved to support a cooling economy and counter global uncertainties.

In South Korea, its central bank last week kept policy settings unchanged but adopted a more accommodative tone while India is expected to cut rates at its policy meeting on Thursday.

On Wednesday, the Australian dollar rose 0.15% to $0.7000 despite data showing growth in the Australian economy picked up only modestly in the first quarter while the annual pace was at its slowest in a decade.

The A$1.9 trillion ($1.3 trillion) economy expanded 0.4% in the three months ended March, while annual GDP rose 1.8%, the weakest since the global financial crisis.

The New Zealand dollar was in the spotlight after a senior official of the Reserve Bank of New Zealand was quoted as saying the central bank’s central view was that interest rates would remain broadly around current levels for the foreseeable future.

The kiwi was last up 0.3% at $0.6629, having brushed a one-month low earlier in the session.

Against the yen, the dollar edged down 0.02% to 108.125 yen per dollar, within striking distance of a near five-month high of 107.845 – its highest since Jan. 10 – hit during the previous session.

Minori Uchida, chief currency analyst at MUFG Bank, said the yen was likely to be supported for the time being as a U.S. rate cut would likely signal further weakness in the global economy.

“The dollar will lose some of its strength if interest rates will actually be cut in the United States,” said Uchida.

“Japanese interest rates are already at such a low level that they are unlikely to be cut any further. Rate differentials are likely to get smaller if other countries conduct monetary easing,” he said.

The euro was up 0.1% at $1.1260, extending its gains to a fourth session.

Yen, Swiss franc shine as trade tensions spark flight to safety

The yen brushed a more than four-month high against the dollar on Monday and the Swiss franc rose as U.S. President Donald Trump’s hard stance on trade broadened to countries beyond China, stoking investor demand for safe-haven assets.

With trade issues remaining front-and-center, investor appetite for risk has been dampened by fears of a global growth slowdown that has helped stoke demand for government debt and triggered an equity sell-off.

Perceived safe-haven assets were well supported despite a private survey on the Chinese manufacturing sector pointing to a modest expansion in factory activity as export orders bounced from a contraction.

In a recent development, U.S. and Mexican officials were preparing for trade talks after Trump vowed to impose punitive tariffs on all Mexican goods in an intensifying dispute over migration.

“The Mexican news is quite punchy. No one was really expecting it to the same extent they were with China,” said Chris Weston, Melbourne-based head of research at foreign exchange brokerage Pepperstone.

“Mexico is a huge trade partner with the U.S.,” he said.

The Swiss franc rallied 0.3% against the dollar to 0.9975 and the yen gained 0.15% to 108.10 yen, its highest since mid-January.

On Friday, the Japanese currency had booked its sharpest daily rise in more than two years, climbing a little over 1.2% during the session.

The yen is considered a safe haven asset in times of geopolitical and financial turmoil as Japan is the world’s biggest creditor nation.

U.S. and Mexican officials were preparing on Sunday for upcoming talks aimed at averting a trade clash after Trump said he would apply 5% tariffs on the country’s goods on June 10 if it does not halt the flow of illegal immigration across the U.S.-Mexico border.

A day earlier, Mexico’s president Andres Manuel Lopez Obrador had hinted his country could tighten migration controls to defuse tensions with Trump, saying he expected “good results” from talks with Washington.

The Mexican peso, hit by Trump’s sudden threat to impose tariffs on Friday, regained some stability, trading at 19.6165 to the dollar, after its 2.5% fall on Friday.

Market participants also kept a focus on the trade dispute between the United States and China, the world’s two largest economies.

A senior Chinese official and trade negotiator said on Sunday Washington cannot use pressure to force a trade deal on China and refused to be drawn on whether the leaders of the two countries would meet at the G20 summit in Japan at the end of the month to bash out an agreement.

“Markets are trying to catch up with negative news in relation to trade relations for the time being,” said Kumiko Ishikawa, senior analyst at Sony Financial Holdings.

“They’re seriously starting to react to prolonged trade tensions in a risk-off way.”

The dollar dipped after benchmark 10-year U.S. Treasury yields hit as low as 2.121% on Monday, their lowest since September 2017.

Against a basket of six major currencies, the dollar index slipped 0.15% to 97.606, though it is still up 1.5% for the year.

The euro gained 0.15% to $1.1185, rising for a second session after tacking on 0.35% on Friday — its first gain in five sessions.

The Australian dollar was up 0.3% to hit a near three-week high of $0.6958 on the back of the positive Chinese factory activity reading.

The Aussie’s gain came despite a New York Times report, citing sources, that Trump had been urged to impose tariffs on Australian imports in response to an increase in exports of aluminium to the United States over the last year.