Instimatch - FX morning commentary - 2/4/25

Good morning

Trump’s announcement of his tariff plans will commence at 3pm Washington time, which means European markets will already be closed. Before that we will have US data on factory orders and durable goods, which will be watched closely given the recent US data disappointments. Having said that, these are unlikely to move markets with “Liberation Day” taking centre stage. From the ECB we also have Schnabel speaking about reviving growth in the euro area. Given broader EU spending ambitions, analysts are curious to hear the ECB’s view in relation to this.

According to news reports, Trump is thinking about 3 different tariff options – a universal 20% tariff, a tiered system with 3 different tariff rates, and country-based tariffs. A blanket 20% tariff is less likely, according to an official that was quoted by CNBC, and that the goal is to have country-specific tariffs. Trump will be announcing his reciprocal tariff plans today. Sectoral tariffs involving pharmaceutical and semiconductors, among others, would be announced at a later date, while the 25% auto tariff announced earlier will come into effect on 3 April.

Meanwhile, US economic data shows a slightly weaker labour market, with jobs opening slightly lower at 7568k in February versus 7762k in January, quit rates easing to 2% from 2.1%, and layoff rate inching up to 1.1% from 1%. The ISM manufacturing index fell to 49.0 (< 50 indicates contraction) in March, from 50.3 in February, with new orders (45.2 vs. 48.6 prior) and employment (44.7 vs. 47.6 prior) sub-indices falling deeper into contraction. However, ISM prices paid jumped to 69.4 from 62.4 in February. US Treasury yields have declined across the curve amid potential negative impact of tariffs on US economic growth.

Fed’s Barkin has said that President Trump’s tariffs could hurt jobs and raise inflation. He has also added that uncertainty is still high over what trade policies will be implemented.

For USD FX, there has been a shift in the USD's reaction to Trump tariff announcements, a stagflation narrative so far has tended to work in the greenback’s disadvantage. With markets focusing on the narrative of weakening growth in the US and increasingly pricing the risk of a US recession, the dampening effect of tariffs on growth now takes centre stage.

The dollar index steadied to 104.27 in Asian trade after posting some overnight gains.  EUR/USD is holding steady below $1.0800 at $1.0780 in muted trade.  Core bonds continued to excel with April EMU CPI figures strengthening the case for a final 25bp ECB rate cut (to 2.25%) on April 17 before installing a long pause. Headline and core inflation rose by 0.6% m/m and 1% m/m respectively to 2.2% y/y (from 2.3%) and 2.4% (from 2.6%). The readings were in line or even slightly below consensus.

GBP/USD also continues to trade in a tight range around the $1.2920 level.

USD/JPY fell 0.2% to 149.89 after briefly rising past 150 yen, despite increased safe haven demand. 

USD/CNY was steady around 7.2699 with sentiment also on edge after China began more military drills near Taiwan. China's private manufacturing PMI showed factory activity expanding at the fastest rate in four months in March, on the back of robust export orders. However, this improvement could prove to be short-lived, given rising US tariffs.

The Australian dollar was a standout performer in Asia on Wednesday, with the AUD/USD pair rising nearly 0.9% to $0.6294 in its second straight session of gains. The Aussie’s gains came as building approvals data read much stronger-than-expected for February, while Assistant RBA Governor Christopher Kent said the central bank will slightly hike its overnight market operations repo rate. 

Meanwhile, Singapore is not expected to be directly targeted by Trump. But given it is a major shipping hub; the SGD is still highly exposed to higher global tariffs and a slowdown in world trade. Thai baht has been resilient so far against the US dollar, but this may not last, given a weaker outlook for domestic growth, likely lower visitor arrivals in the coming months, and potential reciprocal tariff hikes.

USD/KRW pair fell 0.3% to 1,465.75, with focus turning squarely to a top court ruling on impeached President Yoon Suk Yeol this Friday. South-Korean inflation unexpectedly reaccelerated in March.Headline inflation rose by 0.2% m/m and 2.1% y/y while a slowdown to 1.9% was expected. Core inflation (ex-food and energy) also rose slightly to 1.9% from 1.8%. The Bank of Korea further reduced its policy rate by 25 bp to 2.75% in February. Next meetings are scheduled for April 17 and May 29. The weak won is at least partially responsible for the easing of inflation to slow down.