Instimatch - FX morning commentary - 25/3/25

Good morning 

Sensitivity to tariff headlines increases as US “liberation day” draws closer. In terms of data Germany’s Ifo business climate will be followed closely for the impact of the fiscal changes. For a change there could also be some more hawkish tones from the ECB with Holzmann and Nagel scheduled to speak. Other ECB speakers include Kazimir, Muller and Vujicic.

In the US the main focus is the Conference Board’s consumer confidence index, next to a slate of housing market related data. Fed speakers for Tuesday are Kugler and Williams. Joining Powell’s debate on the temporary inflationary impact of tariffs, Fed’s Bostic indicated that he sees only room for one rate cut this year as tariffs might slow the disinflation process.

Brent oil prices jumped to $73/bbl while the Dollar strengthened, as President Trump threatened a 25% tariff on any nation purchasing oil and gas from Venezuela. This tariff would go into effect on 2 April, and according to Trump would be on top of existing tariffs.

According to the EIA, more than 60% of Venezuelan crude oil exports went to China in 2023. In Asia, the top buyers likely include India as well which ramped up imports of Venezuelan oil in 2024 according to news reports. In theory, this would mean that China may get another 25% tariff on top of the 20% already imposed, although in practice some rerouting of official oil flows globally may occur.

Meanwhile, President Trump said that he might soften reciprocal tariffs he plans to impose next week, by signaling that trading partners would receive possible exemptions or reductions.

According to Trump, he is “embarrassed to charge countries what they have charged the US”, although he mentioned that the tariffs will still be substantial, with auto import tariffs still in the pipeline and to be announced soon.

The USD index was steady in Asian trading at 104.29. The Fed’s cautiousness on rate cuts has likely prevented bearish sentiment weighing further on the greenback.

EUR/USD is trading around the 1.08 level after yesterday's session, which was characterised by slightly weaker-than-expected March PMIs from the euro area and slightly stronger readings from the US. Euro area PMIs came in softer, with the composite PMI rising to 50.4 (cons.: 50.7) from 50.2. The increase was driven by the manufacturing sector, where the PMI climbed more than expected to 48.7 (cons.: 48.2) from 47.6, while the services sector disappointed with a decline to 50.4 (cons: 51.1) from 50.6. In contrast, US PMIs showed the opposite trend. The manufacturing index fell back into contractionary territory, aligning with weaker signals from regional Fed indices (Empire, Philly Fed). However, the services index rebounded sharply to 54.3 (from 51.0), contributing to a modest rise in US yields and a stronger USD.

GBP/USD is holding steady above $1.2900 while EUR/GBP is in consolidation mode trading around 0.8360 (close to the 3-week low set on Monday). UK yields hardly reacted to a stronger than expected UK PMI (52.0 from 50.2). The upcoming budget update and several key data probably prevented a more pronounced reaction.

Canada's PM Carney has called for a snap election April 28, but as this was heavily expected the reaction in CAD has been muted. Hence, tariffs continue to weigh heavily on USD/CAD. In the short term, USD/CAD remain under some selling pressure and the pair are expected to tick lower toward 1.42 amid stretched short-CAD positioning.

South Korean consumer sentiment weakened further in March as political divisions intensified, falling to 93.4 from 95.2 in February. This follows two months in which confidence improved after a sharp drop in December to 88.2 from 100.7 in November.  Domestic growth is slowing, but political uncertainty has pushed the USD/KRW higher again recently to trade currently around 1,469.31.

The Chinese yuan’s both onshore USD/CNY and offshore USD/CNH pairs, inched 0.1% higher to 7.2607 and 7.2667.

The Indonesian rupiah depreciated to levels not seen since the 1998 Asian financial crisis amid concerns about the nation’s fiscal stability and economic growth. USD/IDR jumped as much as 0.7% to 16,654.6 rupiah, after gaining nearly 1% last week. Bank Indonesia (BI) attributed this to a combination of global uncertainties and domestic challenges, Reuters reported.

Domestically, investor apprehensions have intensified due to President Prabowo Subianto’s expansive fiscal initiatives, which have led to significant budget cuts in essential sectors like education and public works. The country’s stock market has also seen continuous sharp falls this month. In response to the rupiah’s decline, Bank Indonesia has intervened in the foreign exchange market to stabilise the currency.

News reports suggest that India’s government is trying to seek an exemption from Trump’s reciprocal tariffs during talks with US trade officials when they visit for bilateral trade negotiations from 25-29 March. India’s government has also taken some initial steps to meet trade demands by the US by lowering import tariffs on certain goods, while latest reports also suggest that it may remove its “digital tax” on some online advertisement services and reduce tariffs further on other goods. It remains to be seen whether these moves will ultimately result in an exemption of tariffs by the US on India come 2 April, and INR markets are currently now likely underpricing the risks from reciprocal tariffs. USD/INR pair was trading 0.1% higher at 85.695