Instimatch - FX morning commentary - 2/6/25

Good morning

On Friday evening, Trump announced doubling of the earlier tariffs on steel and aluminium to 50% on June 4th. The announcement came just a few hours after he accused China of violating an agreement with the US on Truth Social. Last week, the U.S. Trade Court ruled against tariffs imposed with the authority of International Economic Emergency Powers Act (IEEPA), but the product-specific tariffs imposed under Section 232 authority were not part of the ruling. As such, we could see more product-specific tariffs replacing the current country-specific measures, if the U. S. Supreme Court ends up confirming the Trade Court ruling over summer. The tariff uncertainty continues to distort incoming US macro data as well.

Regarding US-China relations, Trump said China had “totally violated” the agreement. His tone suggests a tougher stance on trade enforcement going forward. This could be in relation to claims about China holding back some minerals it agreed to release during trade talks with the US. China “firmly rejected” Trump’s accusations that the country violated a recent trade deal signed in Geneva, Switzerland, and said it will continue to safeguard its interests.

There seems to be no new macro developments supporting the US dollar for now, with markets still attaching a policy risk premium on the US dollar. The risk is that prolonged policy uncertainty in the US will hurt the US economy more leading to a weaker US dollar, despite the US dollar index (DXY) already down by about 8.4% so far this year. The USD index fell about 0.1% to 99.20 in Asian trade.

In the euro area, focus turns to the final manufacturing PMI data for May. Manufacturing rose more than expected to 49.4 in the flash release showing limited signs of trade uncertainty.

From the US, ISM manufacturing survey for May is due for release in the afternoon. Regional Fed manufacturing indices and the flash PMI released earlier pointed towards a modest rebound, which could be partially explained by renewed front-loading after the US-China trade deal. Federal Reserve's Powell, Goolsbee and Logan are scheduled to give speeches in the evening.

Throughout the rest of the week there are several interesting data releases and meetings to look forward to. Most important, there is May Eurozone inflation and the April US JOLTS Job Openings report on Tuesday. On Wednesday, the Bank of Canada will publish a statement on the rate decision, while the ECB board meets on Thursday, where a 25bp cut is widely discounted taking the policy rate to 2.0%. Traders will also look out for the release of the Chinese services PMI from Caixin on Thursday. Friday's releases include May US non-farm payrolls and a revision of Q1 euro area GDP.

EUR/USD is back above 1.1350 but with gains capped at 1.1400 so far and US yields are ticking higher, all whilst equity futures are well in red.

GBP/USD kicks off the week with a positive bias amid the emergence of fresh USD selling but remains below the $1.3500 level. GBP continues with its relative outperformance on the back of expectations that the BoE would pause at its next policy setting meeting on June 18 and then take its time before lowering borrowing costs further.

The Japanese yen benefited from safe haven demand amid heightened risk-aversion, with focus also on ongoing high-level trade talks between Tokyo and Washington. The USD/JPY pair fell 0.1% to around 143.48

Asian currencies have found support in a weaker US dollar in May. US-China tariff de-escalation has helped to shore up sentiment in the Asia region, while heightened risks from US trade and fiscal policies have remained a drag on the US dollar. The Bloomberg Asia Dollar index was up by 1.6% in May. Notable gains were seen in the TWD (+6.5%) and KRW (+2.9%) last month.

While Chinese markets were closed, the yuan’s offshore USD/CNH pair rose 0.2% to 7.2170, reflecting some weakness in the yuan.

Meanwhile, China’s NBS manufacturing PMI rose to 49.5 in May, from 49.0 in April and in line with market estimates. But it remained below the 50-level, indicating contraction for a second straight month. The PMI sub-indices for new orders, raw material inventories, and employment have all remained in contraction territory, though there are signs of slight improvement.

USD/KRW pair was an outlier in Asian trading, falling 0.4% to 1,374.69 before a snap presidential election to be held later this week, which traders bet will help settle increased political uncertainty in the country. 

Thailand’s merchandise import rose 17.4%y/y in April, outpacing export growth of 9.9%y/y (slowing from 17.7%y/y in March). This led to the monthly trade balance slipping into a deficit of $1.4bn in April, reversing the $3.4bn surplus in March. The front loading of exports to the US in Q1 could fade in the coming months as the US had imposed 10% baseline tariffs on Thailand in April.

India’s GDP rose 7.4%y/y in January-March, up from 6.4%y/y in October-December and beating the 6.8% estimates. However, RBI could still cut rates by another 25bp on 6 June amid below-target inflation, bringing the repo rate to 5.75%.  USD/INR fell 0.1% to 85.381 after the data was released.