Instimatch - FX morning commentary - 10/2/25

Good morning

The dollar strengthened and risk assets fell heading into the weekend, as markets considered the net impact of tariff developments, a decent January US non-farm payrolls, and amid signs of rising inflation expectations indicated by the University of Michigan survey.

In particular, President Trump said on Friday that he plans to announce reciprocal tariffs on many countries by Monday or Tuesday this week. He did not identify which countries would be hit but suggested it would be a broad effort, and could also be done in place of the universal 10-20% tariffs mentioned previously. Trump's new weekend pledge to impose 25% tariffs on all steel and aluminium imports is hurting commodity currencies such as AUD and CAD. Meanwhile, Trump said that tariffs targeting automobiles were also under consideration. Traders have been placing a somewhat lower probability on reciprocal tariffs given the likely meaningful increase in administrative costs in implementation, coupled with the requirement of legislation if this were done on a full reciprocity basis across all countries.  

The USD index firmed in Asian trade to 108.27, US yields are steady, even marginally softer this morning.  Analysts and Fed officials have warned that tariff-related inflation could keep interest rates high in the long term. The eco calendar in the US and EMU is thin today. Later this week, look out for the US CPI (Wednesday) and retail sales (Friday). Fed Chair Powel will appear before Congress on Tuesday and Wednesday. For now, there is no reason for him to leave the wait-and-see, higher for longer narrative.

EUR/USD is starting the week's heading towards support level around 1.0300-1.0250.  French Foreign Minister Jean-Noel Barrot said that France and its European partners should not hesitate to defend their interests in the face of US tariff threats.  The EC will decide on the sectors that will be affected by a response.

GBP/USD endured a volatile week testing a high of $1.2550 before sellers emerged on the back of a dovish interest rate cut by the BoE.

Last week was a rollercoaster ride in CAD FX space, strongly determined by Trump's tariff "on" then "off"-button. USD/CAD rallied significantly last Monday, reaching a multi-year high just shy of 1.48 amid Trump's steep tariffs on Canada. However, this rally was quickly reversed as the US and Canada struck a deal on tariffs, delaying these for 30 days to allow time for negotiations. Thus, the Loonie concluded the weak around 1.43, gaining some 1.1% on a weekly basis. Importantly, this indicates that any US-related news - specifically the tariff-saga - is the primary trigger of movements in USD/CAD at present and will continue to be so for some time.

The Japanese yen was the worst performer among Asian currencies, with USD/JPY rising 0.4% to 151.80 from its lowest level since early-December.  The yen firmed last week as a mix of strong wage data and hawkish BoJ comments saw traders price in more aggressive rate hikes.

AUD/USD is testing immediate support at $0.6250.  Traders are increasingly confident that the RBA will cut its 4.35% cash rate at its upcoming meeting later in February, with market expectations suggesting a 95% probability of a reduction to 4.10%.

Despite the rise in US tariffs, the pressure on the yuan has eased somewhat over the past weeks. It reflects a slight weakening of the overall USD as short end US yields have moved lower over the past month. USD/CNY moved higher to 7.3065 after the US jobs report on Friday. The yuan was also pressured by softer-than-expected Chinese inflation data, which showed CPI inflation grow less than expected, while PPI inflation continued to soften.

Asian currencies were mixed to weaker on the back of developments around tariffs coupled with the non-farm payrolls print. The Reserve Bank of India cut its key repo rate by 25bps on Friday, bringing it to 6.25% from 6.50% previously. While this was in line with forecasts heading into the policy meeting there was speculation of a larger rate cut.  USD/INR has retreated from a fresh record high of over 88 rupees amid likely RBI intervention.