Instimatch - FX morning commentary - 1/4/25

Good morning

Tariff headlines ahead of “Liberation Day” may prove more influential than data. While initial news reports point to a select 15 or so countries being targeted (the so-called “dirty 15”), President Trump himself dismissed this notion and said these tariffs will start with “all countries”. Meanwhile, the Wall Street Journal reported Trump was pushing his team to be more aggressive in their proposals including revisiting a universal tariff of up to 20% (presumably in combination with reciprocal tariffs).

Nonetheless, the key release for EUR rates with a view to the upcoming ECB meeting is the Eurozone flash CPI. The consensus is looking for the headline rate to fall to 2.2% and the core rate to 2.5%y/y. After the softer-than-expected readings out of France, Spain and yesterday in Germany, there are downside risks versus the consensus. We will also get the unemployment rate, which is expected to tick slightly higher to 6.3%. The final manufacturing Eurozone PMI for March will come alongside releases from Italy and Spain. ECB speakers of the day are Cipollone, President Lagarde and Chief Economist Lane, the latter two speaking at an AI event.

Important data out of the US are the March ISM manufacturing (49.5 from 50.3) and the JOLTS job openings numbers (7.65mln expected from 7.74mln), which will be scrutinised for any further signs of economic cooling. The probability is low that they’ll directionally steer markets ahead of the big event risk tomorrow.

The dollar index fell 0.1% in Asian trade to 104.16, keeping to a tight range ahead of Trump’s tariff announcement.

EUR/USD is holding steady around 1.0820. Bloomberg published an article yesterday suggesting that more ECB officials appear ready to accept an April rate pause. However, the meeting is two and a half weeks away and the thinking may yet shift. Traders hold the view of a final 25bp rate cut before sticking to a long pause.

Within Asia, the likes of India, Thailand, Vietnam, and China are more vulnerable to reciprocal tariffs, while uniform tariff increases will likely also hit the export-oriented economies such as Singapore, Malaysia and South Korea. For India and to a smaller extent Thailand, they have relatively high tariff differentials with the US, while China and India are perceived to have high non-tariff barriers including subsidies and other key barriers to trade. Vietnam would most certainly stand out in terms of its high trade surplus with the United States and also its strong linkages with the Chinese supply chains.

Asia FX was on the back foot yesterday with the global risk off sentiment and the sharp 4% correction in the Nikkei. USD/JPY eased 0.2% to 149.85 after a nearly 5% drop through Q1, with the yen continuing to be underpinned by its safe haven status.

AUD/USD pair rose about 0.1% to $0.6261, trimming early gains after the RBA kept interest rates on hold at 4.1%. But the central bank flagged heightened uncertainty over the Australian and global economy, especially in the face of increased U.S. trade tariffs. Analysts expect the central bank to next cut rates in May, after the Australian federal elections. But the RBA’s easing cycle is expected to be shallow amid sticky inflation and a strong labour market.

USD/CNY pair rose 0.1% to 7.2672, even as private purchasing managers index data showed better-than-expected growth in the manufacturing sector. China is set to be a major target of Trump’s tariffs.

USD/KRW pair fell 0.2% to 1,471.41 after local media reports said the country’s top court will rule on impeached President Yun Suk Yeol later this week.

The Bank of Thailand said on Monday that it is “too soon” to assess the exact economic impact of the recent earthquake. The BOT expects the impact on tourism and private consumption to be short-term, while the property sector may face some pressure from safety concerns. The Thailand central bank has also instructed financial institutions to extend special debt relief for disaster-affected borrowers, similar to measures implemented due to floods a year ago. Meanwhile, South Korea’s exports for March disappointed slightly to 3%y/y (vs consensus of 5%), while the PMIs out of Asia indicated a softening outlook for the likes of South Korea, Taiwan, and Thailand (even before the recent earthquake).