USD remains weak, stocks rebound - Scotiabank

A late Friday reprieve for consumer electronic imports from the 145% tariff on Chinese goods and the 10% flat rate tariff marks another concession to the global markets, allowing for solid gains in Asian and European equities, along with firmer US equity futures.

USD retains weak undertone

"The latest tariff pause may not last long. President Trump indicated that sector-specific tariffs are still coming for electronics and chips. No-one is 'off the hook' he commented at the weekend. Bonds have firmed alongside stocks, with Treasury yields easing 5-6bps. Japanese government bonds are a notable underachiever overnight, with long bond losses adding 4bps to yields. Crude prices have firmed but slower global growth prospects are leaving the sector worried about excess supply."

"There is, however, no reprieve for the USD; sentiment remains weak, despite the bounce in stocks. The USD is trading broadly lower on the session, with only the CHF and KRW down losing ground on the day. High beta/commodity FX is outperforming on improved risk appetite. Short-term metrics--that's to say, 1- and 3-month risk reversal pricing for the Bloomberg dollar index--reflect a significant slump in USD sentiment. Riskies are pricing in their largest ever premium for index puts over similar delta calls outside of the pandemic volatility swings."

"The DXY is trading below 100 and continues to pressure long-term retracement support (61.8% Fibonacci of the 2021/22 rally); sustained losses through 99 would imply longer-term risk of a drop in the index to the 90-95 range. Stocks got a bit of a lift late Friday on headlines quoting the Fed's Collins that the Fed would 'absolutely be prepared' to help stabilize financial markets if conditions became disorderly. That is what any central banker would effectively say in this environment though."