10 of 59,371 Instimatch - FX morning commentary - 4/2/24

Good morning

Trump delayed the 25% tariffs on Canada and Mexico by at least 30 days, after a call with leaders from both countries. Mexico said that they will send 10,000 troops to the border to stem the flow of fentanyl and migration into the US. Meanwhile, Canada said that it is appointing a new fentanyl czar and will also go ahead with a plan to add more border security resources including helicopters. There was no sign yet of any deal with China, but Trump said the US will be speaking to China probably over the next 24 hours. The Dollar trimmed its gains with these delays in tariff imposition.

It has been a volatile start to the week in FX markets following the US tariff news being 'on' and then (for now) 'off', but the best performers among major currencies since Friday is ... MXN, BRL and CAD.

Today from the US we have JOLTS job openings numbers, which will be watched closely given payroll numbers will be released later this week. Other data includes factory and durable goods orders. The Fed’s Daly and Jefferson are scheduled to speak including Q&A sessions, and thus they will likely be asked for the latest views on tariffs.

Meanwhile, US ISM manufacturing data yesterday was stronger than expected at 50.9 up from 49.3 previously. The new orders sub component was also very strong at 55.1 from 52.5. These numbers follow from the broader set of data suggesting a post-election rebound in the US, but nonetheless, growth is expected to moderate moving forward if only due to the uncertainty generated by possible tariffs under the new administration. 

Tariff headlines will likely remain the primary driver of price action in the coming weeks.  The USD index rose 0.2% in Asian trade to 108.89.  The US Treasury yield curve bear flattened yesterday with daily yield changes ranging between +5.1bp (2-yr) to +0.4bp (30-yr). Markets currently fear upside inflation risks from the tariff threats more than they do downside growth risks. First Fed comments tended to confirm this with the likes of Chicago Fed Goolsbee saying that Trump policies could slow the Fed’s cutting cycle and Atlanta Fed Bostic also inclined to wait a while before a next move. Boston Fed Collins would try to look through the impact of tariffs if inflation expectations stay anchored, but she’s equally not in a hurry to make additional policy rate adjustments.

EUR/USD is hovering around 1.0300 after dropping as low as 1.0141 - its lowest level since November 2022. French Prime Minister Bayrou pushed through his 2025 budget bill in parliament yesterday using Article 49.3 to avoid a no-confidence vote. He did so because his government lacks a majority. Meanwhile France is relying on emergency legislation to avoid a state shutdown until a full annual budget is adopted

GBP/USD benefited from the improving risk mood in the US trading session and posted modest gains on Monday. The pair stays on the defensive in early European trading but holding above $1.2400 at $1.2415.  Traders are broadly positioned for another 25bp cut in rates from the BoE this week that would take the rate down to 4.5%.

Asian currencies were trading broadly weaker before paring back some losses on the day on the back of the postponement of tariffs. But regional markets were still nursing losses in recent weeks, especially amid growing concerns over U.S. interest rates remaining high for longer. Overall, Asia’s PMI numbers out yesterday were mixed, with weak prints out of Vietnam, Thailand, and Malaysia, and domestic oriented markets such as Philippines being more robust.

USD/JPY pair rose 0.3% to 155.15 after falling sharply the previous session, USD/KRW was flat around 1,461.28, while AUD/USD eased 0.2% to 0.6193.  USD/INR remained in sight of a record high above the 87 rupee level. 

China’s Commerce Ministry said they will impose 15% tariffs on US coal and liquefied natural gas (LNG) imports. "Additional 10% tariffs will be imposed on crude oil, farm equipment and some automobiles," the Ministry said.  Meanwhile, China’s Caixin PMI came in softer than expected at 50.1 from 50.5 previously, adding to some urgency regarding stimulus measures to help support the economy.

 USD/CNH was steady overnight around 7.3172, Trump is set to speak with Chinese President Xi Jinping as soon as this week, the White House said, potentially setting up a diplomatic deal that could avoid a greater trade war.