Saxo’s Global Head of Macro Strategy, John Hardy
First a quick word on the Trump tariff “carveouts” for China obviously aimed to support key US companies (especially Apple) and to avoid shortages and price spikes for key US consumer products (smartphones, laptops and chips). This news was greeted with a fresh surge in market optimism for good reason as the 145% tariff level on all imports would have thrown Apple and others into a vicious crisis. So, sure, immediate crisis averted, but a deepening US-China decoupling is set to continue, so we may quickly switch to a wait-and-see stance in global risk sentiment.
Poor liquidity was in evidence across the board last week in nearly all markets, whether global equities, US treasuries or in foreign exchange. One can see it in wild surges and retreats in EURUSD on Friday, for example when the exchange rate surged to 1.1383 in Asian trading hours on Friday after trading below 1.1000 the prior day and closing the New York session around 1.1200. Then a retreat to 1.1250 before another surge to 1.1473 and then a retreat to sub-1.1300 levels before we hit 1.1400+ again on Monday. AUDUSD had a wild week as well, dipping to sub 0.6000 levels for the first time since 2020 before erasing the entire sell-off triggered by the risk-off meltdown on Trump’s reciprocal tariff announcements on April 2.
Chart: AUDUSD
The combination of a Trump tariff reprieve on key categories of Chinese imports and positive risk response have seen the USD lower across the board, even against the Australian dollar, as AUDUSD has now neutralized all of the steep sell-off that was kicked off by the April 3 announcement of Trump’s reciprocal tariffs. But before we invest too much significance in the move here, a look at the AUD elsewhere shows that it is the weakest non-USD G10 currencies as concerns remain on the trajectory of China and its currency. The USDCNH rate has remained relatively steady as the USD has weakened sharply, a kind of stealth devaluation of China’s currency, and one that is weighing negatively on the AUD. It’s tough to wax more positive on the AUDUSD unless the USD price for key Australian exports rises or China shows a more supportive stance on its currency. Technically, the key overhead resistance is around 0.6400 level, while there is significant heavy lifting to fully reverse the trend from the September 2024 high of 0.6940
Source: Saxo
Part of the narrative and reality driving the US dollar lower is the idea that Trump’s hostile tariff moves and other posturings, together with disruptive fiscal policies that raise the risk of a US recession, have market participants second guessing their extraordinary portfolio exposure to US equities and US treasuries. On the one hand, it makes sense to see the US treasury prices and the US dollar lower when global money managers and investors (and maybe even central banks) are supposedly pulling up stakes and moving out of US assets and repatriating their capital. On the other hand, we have to consider whether there are other drivers involved and linking this back to the poor liquidity observations above.
As a general rule, when market volatility accelerates, the first thing that especially leveraged players in markets can do to meet margin calls is to sell the most liquid holdings, knowing that the market price for their riskiest holdings will be very poor due to poor liquidity. The most liquid thing in the world should be a US treasury, so when we see the kind of price action we saw last week in US treasuries, it might be a sign of this dash for liquidity rather than a reflection of some fundamental assessment of the US treasury market. This is a very different driver indeed than the “rotation out of US assets” narrative or the idea that the world is calling time on the trajectory of the US fiscal deficits and sustainability of the US national debt – although who is to say it is not all of the above that has sent the USD lower?
One thing for sure – instability in the US treasury market is unacceptable and will bring measures to bring order from the US Fed and US treasury – some argue that this could look like Fed balance sheet expansion by bailing out the hedge funds involved in treasury basis trades, and also by expanding the ability for the commercial banks to hold treasuries. Most would see any Fed bailout and liquidity provision as further drivers of USD weakness. On the other hand, any bailout efforts this time around could take a very different shape than the bailouts of past cycles. Considering the geopolitical situation now – could provision of USD liquidity to the world this time around come with significant strings attached? Unsure, but if this latest Trump climbdown from tariff chaos kicks off a period of better market liquidity and the US treasury market turns more orderly and yields drop, the US dollar might find some near term support versus the recent safe haven currencies like EUR and CHF and even JPY even if we remain in a secular USD bear market.
Looking across the major currencies, it’s worth wondering whether the euro and the Swiss franc can continue this pace of strengthening versus the US dollar in the near term regardless, as that strength is already darkening the outlook for European markets even before the final shape of Trump tariffs is known. Is it time for the ECB to wax more cautious this week?
The week ahead in event risks.
Besides the ongoing news flow from the Trump administration on tariffs and how China responds, we have a few macro event risks of note this week. Tomorrow sees the latest UK labor market and earnings data, as well as the April Germany ZEW survey.
Wednesday we have UK March CPI, US March Retail Sales and a Bank of Canada meeting with little anticipation and considerable relief for Canada as it avoided the latest round of Trump tariffs. More drama in Canada in the upcoming April 28 election and whether Liberal Mark Carney is set for the strong victory that the polls point towards, with his popularity driven in large part by the outrage over Trump’s posturing on Canada joining the US and his tough rhetorical stance against US trade policy.
Thursday was have an ECB meeting where Lagarde and company would do well to turn cautious and more dovish on the outlook, in part on the strength of the euro in addition to a weakening outlook from cratering asset markets and risks from US trade policy. The market is 95% priced for a 25-basis point rate cut this Thursday, about 70%+ for another cut I June and is priced for just over 3 cuts total this calendar year.
Friday we have Japan’s March National CPI data, with less drama around these releases when the focus has been on the stability of global markets and what kind of signals the market gets from US and Japanese negotiators in trade talks – which we might also use as a template for the terms the US will try to extract elsewhere.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
Note the weaklings here are the US dollar, the Chinese yuan and the Australian dollar as the market sees Australia as a satellite economy of China. Note again that just because CNH has a weaker trend reading than the US dollar, it does not mean that the CNH is falling relative to the US dollar, only that the CNH is broadly very weak, with the intensity of the reading due to pace of the move on a relative-to-past volatility basis. On the strong side, the CHF continues to toward above the rest of FX – the SNB would probably like to do far more about that, but Trump and tariffs….
Source: Bloomberg and Saxo Group
Table: NEW FX Board Trend Scoreboard for individual pairs.
The long-standing EURSEK downtrend is set to end today barring a strong SEK comeback. This likely reflects more concern for the European growth outlook in the near term than previously. NZDUSD confuses with a trend score at positive 4.3, but with the trend still officially negative because the latter moves far slower than the score, because it is determined by exponential averages, while the trend score includes the latest price relative to moving averages and we have seen wild swings in price action everywhere in USD pairs since April 2.
Source: Bloomberg and Saxo Group
