Written by the Market Insights Team
Focus shift to fiscal
Kevin Ford – FX & Macro Strategist
This week, two big developments grabbed the market’s attention: a disappointing bond auction and the House Republicans’ approval of the “Big, Beautiful Tax Bill.”
First, the Treasury Department held a routine auction for $16 billion in newly issued 20-year bonds. These auctions typically don’t make headlines, but this one sparked investor concerns about growing uncertainty in U.S. economic policy, particularly whether the market can absorb the refinancing of nearly $3 trillion in U.S. debt maturing in 2025, much of it short-term. Their concerns might be justified, as the auction resulted in a 5.05% yield on the 20-year note, a noticeable increase from the 4.6% average across the last five auctions. While the 20-year bond isn’t as liquid as other maturities, the lack of demand raised red flags in the market. But does this signal trouble for the world’s largest debt market?
To put things into perspective, a significant portion of the U.S. government’s maturing debt is short-term. Since 2000, Treasury securities with maturities of less than a year have consistently accounted for 25%-40% of total maturities. When combined with 1- to 5-year notes, short- and mid-term debt makes up about 70% of the total debt structure.
On the other side, this weak auction comes at a sensitive time for markets. Investor anxiety is mounting as a Republican-led Congress advances a tax bill that could add $3.3 trillion to the national debt by 2034. Historically, the U.S. has maintained an average federal fiscal deficit of 3.4% as a share of nominal GDP, but rising deficits in a higher-rate environment raises questions about long-term sustainability.
That said, while the newly approved tax bill signals further fiscal expansion, adding about $380 billion to the deficit annually, the baseline 10% tariff could help offset part of the gap. Tariffs have become a lasting feature of U.S. trade policy, making this revenue stream a crucial factor in shaping the country’s fiscal outlook. According to estimates from the Congressional Budget Office (CBO), current tariff rates are expected to generate approximately $2.7 trillion in revenue between 2026 and 2035. Even after accounting for potential economic growth slowdowns, tariff revenues could still total around $2.3 trillion over the same period.
As more clarity emerges around fiscal policy, some of the uncertainty premium in long-term yields may start to fade, easing market concerns. However, the dollar is still on track for its biggest weekly fall in six weeks and is struggling to reclaim the critical 100 threshold.
Business outlook rebounds for Canadian small businesses
Kevin Ford – FX & Macro Strategist
The Canadian Federation of Independent Business (CFIB) stands as Canada’s largest organization representing small and medium-sized enterprises, with a vast network of 100,000 members spanning every industry and region.
Optimism among SMEs remains exceptionally low, with businesses engaged in international trade reporting even weaker confidence levels compared to those operating solely within Canada.
Although small business confidence in Canada saw a modest uptick in May, reaching 40 on a 0-100 scale, it remains significantly below the neutral threshold of 50—signaling ongoing uncertainty. Employment plans are sluggish, with both full- and part-time hiring falling well below typical seasonal trends. At the same time, business owners anticipate price increases of 2.9% over the next year, a slight dip from the 3.5% forecast in the previous month.
Looking at the broader historical trend, optimism among entrepreneurs has steadily declined over the years, underscoring the increasing challenges of the business landscape. The average optimism index stood at approximately 64 from 2000 to 2010, declined to 61 between 2011 and 2020, and has dropped further to around 55 in the current decade. These figures reflect the mounting difficulties that small businesses continue to navigate.
The Loonie kicked off the week near 1.40 and has gained 1% over the past five days, yet remains unable to break below 1.38, hovering just above the key technical support. Looking ahead, with a light macro calendar next week, range-bound trading is likely to persist through month-end, with key resistance level at 20-day SMA at 1.388. However, with renewed US dollar weakness, as the Loonie has dipped below 1.39, touching a low of 1.3803, it could gain momentum to test key support at the 90-week SMA at 1.3795.
Euro shrugs off weak PMI prints
Antonio Ruggiero – FX & Macro Strategist
EUR/USD brushed off an intra-day drop of nearly 0.4% following a raft of weaker-than-expected PMI data for key Eurozone economies—namely France, Germany, and the broader region. The Eurozone Composite PMI fell from 50.4 to 49.5 in May, with the services sector being the main driver of the decline. While manufacturing has remained sluggish for some time, the previously-resilient services sector has now also slipped into contraction territory.
Contributing to yesterday’s decline was the ECB’s April meeting minutes, which confirmed policymakers’ concerns over the region’s weak economic outlook. The tone of the minutes suggested that the ECB’s dovish stance is here for the long run, particularly given the increasingly disinflationary backdrop. Altogether, yesterday’s events reinforce the narrative of a sluggish Eurozone economy, as elevated uncertainty continues to weigh on activity. Nonetheless, EUR/USD pared losses heading into the daily close, underscoring the prevailing sentiment that the euro still holds a relative advantage over the dollar at this juncture.
Contributing to the rebound may have been the EU’s proactive approach in launching a potential trade truce with the US, as it submitted a revised trade proposal to the White House. Overall, while we maintain a constructive view on EUR/USD—still trading above both short- and long-term moving averages—a more sustainable rebound will likely require stronger hard data and greater clarity on trade developments.
Peso pushes ahead
Kevin Ford – FX & Macro Strategist
The 20-day SMA has become a strong short-term resistance line for the Peso, at 19.50, which has gained close to 1% versus the US dollar this week. The Peso has benefited this year from a shift from global investors to emerging and Latin American markets. The Mexican stock exchange has surged up 17% YTD, as measured by the S&P/BMV IPC Index, while the peso has gained 7% against the USD YTD.
The Peso kicked off the week at 19.5 before dipping to a low of 19.2, testing key support at its 60-week SMA. A retracement near its 20-day SMA could trigger sell pressure, fueling upward momentum to retest this year’s low at 19.2—also a seven-month high. Should the currency gain further traction, a push toward the 19 level could be in play. Much of this will hinge on whether risk aversion eases and credit risk concerns fade, potentially driving renewed demand for high-yield emerging market assets.
On the macro side, revised GDP data confirms a Q1 rebound, avoiding recession, but growth concerns persist. Weak US growth, tariffs, and trade uncertainty weigh on the economy. Slower activity and rising slack in Q2 are expected to drive disinflation, reinforcing rate-cut expectations. However, it’s key to note that March retail sales delivered a stunning surprise for the Mexican economy, soaring from -1.1% to 4.3%, the sharpest growth rate since November 2023, fully reversing the previous month’s decline.
Dollar weakness sees Yen, Swiss Franc and Sterling shine
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 19-23
All times are in ET
Have a question? [email protected]
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quothave a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
Leave a Reply