Instimatch - FX morning commentary - 18/2/25

Good morning

Overall, global markets continued to price in a higher probability of increased defence spending by European countries on the back of fraying of transatlantic ties between US and Europe, while the Dollar was slightly firmer in the Asian session.  The USD index rose 0.2% to 107.01, overall, the USD index has fallen just over 3% from its early January high. 

With US markets closed for Presidents Day, spotlights were on Europe yesterday. French president Macron summoned a handful of European leaders as well as EC president von der Leyen and Nato chief Rutte. The goal was not so much to announce big defence initiatives – Europe’s buy-in at the negotiation table with Russia – as it was to show the EU’s decisiveness and speediness when it is once again cornered. Actual decisions, however, require all 27 member states to be part of the discussions. Funding as always will be one of the key topics.

US secretary of state Rubio, national security adviser Waltz, and Witkoff, Trump’s special envoy to the Middle East, will be meeting Russia’s foreign policy advisor Ushakov and foreign minister Lavrov in Riyadh. It’s the high-level first in-person meeting since the invasion in 2022.

EUR/USD remained steady near $1.0450.  With German politics in the spotlight, the outcome from the ZEW survey expectations will be closely watched. Consensus sees the expectations component improving moderately from 10 to 20. From the US, we have the empire manufacturing index and TIC data. Overall, expect news headlines to grab more attention than data releases. 

EUR/GBP declined close to the 0.8300 mark during yesterday's session. GBP FX is in for an eventful week packed with macro data releases. This morning, we get the labour market report for December/January. Consensus expects a pick-up in wage growth and unemployment to rise to 4.5% from 4.4%. Payrolls have come in to the weak side the past months and vacancies have edged lower with surveys indicating a further weakening in labour demand. The BoE is still expected to cut rates in May. Overall, the UK looks better insulated against possible US tariffs on UK goods than the euro area. The UK mainly exports services to the US, it does not have a big US-trade deficit and US President Trump has a better relationship with UK PM Starmer. Traders think this favours GBP vs EUR, supporting a strategically bearish view on EUR/GBP. 

USD/CAD has stabilised just below 1.42 over the past couple of sessions - today, the focus in CAD FX turns to the January inflation figures.  Risks are tilted in favour of a weaker inflation print, though consensus expects a slight uptick in the headline figure to 1.9%y/y.  The market reaction is likely to be muted, as tariffs continue to be the main driver of USD/CAD, first downside target emerges near 1.4150.

The JPY was the clear outperformer in the G10 space in a relatively quiet start to the week, as Japan's economy grew much stronger than expected in Q4 2024.  USD/JPY is steady at the European open around 151.97.

The RBA reduced its official cash rate by 25bp to 4.10% as widely expected, marking its first rate cut in over four years. This decision reflected the central bank's response to moderating inflationary pressures and a more cautious economic outlook.  The RBA board acknowledged the progress made but remained cautious about further policy easing, highlighting the risks of stalling disinflation if monetary policy is relaxed too quickly.   AUD/USD remained on the defensive after the decision, down 0.2% at $0.6347.

Chinese President Xi Jinping met with prominent entrepreneurs, including Alibaba’s Jack Ma, signalling China’s support for the private sector. President Xi acknowledged that private companies face “difficulties and challenges” and promised to do more to make their lives better. This includes ensuring private companies have equal access to goods, markets and government projects, reducing financing costs for private enterprises, and resolving issues of overdue payments and excessive fines and inspections by local government officials. He also encouraged private entrepreneurs to embrace entrepreneurship and patriotism, and also actively fulfil social responsibilities.  The Chinese yuan’s onshore pair USD/CNY was largely unchanged at 7.2540, while the offshore pair USD/CNH edged higher to 7.2853.

Significant foreign funds outflows and the recovery in the greenback has weighed on the Indian rupee, USD/INR is trading around 86.977.  Nonetheless, any significant decline in the INR might be capped amid further intervention by the RBI.

Indonesia is implementing a plan to require natural resource exporters to keep all foreign exchange earnings onshore for a year, from the previous requirement of 30% FX earnings for 3 months. These new rules will be effective in March and apply to exporters in mining, plantation, forestry and fisheries sectors, but exempt oil and gas exporters. Exporters will be allowed to use their FX earnings to pay dividends, taxes, loan payments and other obligations, as well as procure raw materials, capital goods and other materials not available locally. Meanwhile, Bank Indonesia will also provide instruments to provide attractive yields for these FX holdings together with deposit facilities for FX swaps for companies.