The US Dollar recovery really depends the most on President Xi

Outlook

Today we get the usual weekly jobless claims, the April manufacturing PMI’s from both S&P and ISM, and March construction spending. Data loses some of its muscle while we await tariff effects.

The stock market is willing to shrug off bad data when Big Tech has good earnings. Reuters notes “Nasdaq and S&P 500 futures are up 1-1.5% ahead of today's bell as a result. The Nasdaq, though still down 10% for the year to date, has clawed back all its losses since President Donald Trump's April 2 tariff announcement. The S&P500 and 'Magnificent Seven' Megacap ETFs on Thursday are likely to have also regained the ground lost after ‘Liberation Day.’"

The stock market is not the economy but it sure can influence sentiment.

The PCE and core PCE not moving during March and the y/y dipping to 2.3% in the headline and 2.6% in the core may well auger well for that Fed rate cut. But not next week. The CME FedWatch tool has the probability of no change at 95.4%. June is another matter. There the Fed funds bettors have a 62.2% chance. The Fed does not like to surprise the delicate little darlings in the money and bond markets, so unless we start hearing some aggressive language, that’s the forecast. You have to wonder if anyone at the Fed is whispering in Trump’s ear that he will be getting his way, just not right away.

The mix of pretty good news and really awful bad news is very confusing and we see a lot of noise in prices all over the place. Even the most advanced and experienced expert can’t always explain every twitch and whipsaw.

Because trades are private in FX and the fixed income markets, we can get a fluke in which a big buyer or seller moves a thin market but then things return to the status quo ante. This means it pays to keep the big picture in mind and not get upset when—for example—the 10-year yield falls rather a lot but the dollar doesn’t follow. That’s what we seem to be getting this week so far, seemingly without regard for the hard macro data.

In fact, the yield has gone from nearly 4.5% back to nearly 4.0% and at month-end is landing about where it was on April 1. In fact, it’s sitting on top of the linear regression—see the last chart in the Chart Package. This doesn’t mean the bond guys think the economy is okay or that foreigners are not exiting. It just means they are neither excited about good things coming nor any longer terrified of the bad ones.

Sometimes conditions are unsettled and weird stuff happens. It’s likely there are contrarians out there and they are the ones wreaking havoc. We recall hearing in a professional trading room that conditions are “too boring, let’s start a move.”

Then there’s month-end and quarter-end. Today it’s the May Day holiday in all of Europe and markets are closed. Also, most institutions from banks to insurance companies and even hedge funds have limits on how big a position can be over what time period before the boss says “pare it back.”

So yesterday we had the odd combination of some currencies (AUD, CAD and yuan) rallying rather a lot near the end of the New York day while the three majors, the pound, euro and yen were in the dumps and still headed down. When we get odd outcomes like this, we can’t count on the bond market to bail us out. Maybe it’s not ALL about the dollar anymore, for a while anyway.

The odds favor the next data and/or news from the US, like payrolls on Friday, being fairly bad. Now that everyone expects bad data and the fear factor is evaporating, the bond market pressure on the dollar may be mitigating. That doesn’t mean the dollar is a buy. It does mean, probably, that we are in for a stretch of sideways moves until the non-king brings forth the next Shock.

Forecast

We are astonished that all the markets are shrugging off the negative Q1 GDP reading and other negatives as “just tariffs.” In FX, overnight the dollar index hit its highest in two weeks. The stock market may well recover all it has lost since tariff day. The 10-year yield looks tame and just on-track normal (the linear regression), and not hot and bothered.

This is nuts. Trump says the current slowdown is not due to tariffs. Well, it is. And unless new deals get made PDQ, it’s going to get a lot worse—no toys for Christmas because shelves are empty. (Trump said they can have two dolls instead of 30.)

Maybe it’s exhaustion from Trump derangement syndrome. Maybe it’s self-medication relief from too much stress. Maybe the Big 7 can lead again and the AI obsession is justified, like railroads and electric light in their day.

All this means the dollar correction can go somewhere interesting. But remember, corrections usually last 3-5 days up to three weeks before the primary movers take hold again. We guess that China holds all the cards now and is smart enough to keep Trump waiting. The dollar recovery really depends the most on Pres Xi.

We find it hard to buy dollars given the developments of April. But it’s becoming clearer that being short is going to be expensive for a while.

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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