Instimatch - FX morning commentary - 28/2/25

Good morning

President Trump said that the 25% tariffs on Canada and Mexico are on track to go into place on 4 March, and that he would impose an additional 10% tax on China, presumably on top of the 10% already imposed from February. This naturally pressured CAD, MXN, and CNH against the greenback.  In his social media post, Trump said that the tariffs are linked to drug trafficking and illegal immigration, with Trump citing high levels of drug imports from Canada and Mexico, and China’s role in the fentanyl trade. There are nonetheless hopes that a deal could possibly be reached before 4 March, assuming Trump’s demands are eventually met.

The market reaction was reasonably strong, with the Dollar strengthening, risk assets including the S&P500 falling by more than 1.5%, and US 10-year yields declined further to 4.25%, even as markets continue to live with the uncertainty and whiplash of the multitude of tariff proposals in the pipeline. Asian currencies and risk assets also reacted accordingly, but the higher beta and more export-oriented likes of KRW, THB and SGD underperforming.

However, the market reaction was relatively muted compared to what would have been expected a few months ago, suggesting that markets may be waiting for actual implementation before fully pricing in the impact. Analyst’s view remains that Trump tends to over-threaten on tariffs but ultimately under delivers. As such, if the tariffs are not implemented next week, there is potential for a reversal of yesterday's move. Additionally, yesterday's uptick in initial jobless claims to 242k (cons.: 221k), the highest level this year, could be an early sign of job cuts at federal agencies - next week's labour market data will provide further clarity.

Today the focus will be on French, Italian and German inflation numbers which should be watched since they have moved markets by considerable amounts in the past. From the US, we have the PCE readings for January, of which the core component is expected to come in at 0.3%m/m. Not a great number on an annualised basis. Having said that, forecasts by economists see more downside than upside risks. Also from the US we have wholesale inventories and the MNI Chicago PMI. 

The USD index rose in Asian trading to 107.40.  Risk sentiment remains key for FX markets and traders continue to err on the side of caution.

EUR/USD has eased back below its recent 1.04-1.05 range to open the European session near 1.0390.  The pair are back under pressure as the risk sensitive Euro faces selling pressure amid heightened risk aversion following renewed US-EU trade tensions.

GBP/USD is holding below $1.2600 to trade near $1.2580 while EUR/GBP remains firm near 0.8250 as concerns over potential US tariffs on the UK escalate.  Trump met with UK PM Keir Starmer yesterday, and President Trump was quick to announce that there might be trade tariffs imposed on the UK as well unless ambiguous terms of a trade deal with the US are agreed upon within an undetermined deadline.

USD/JPY eased 0.2% to 150.01 overnight.  Tokyo’s core inflation rose 2.2%y/y in February, slowing from the 2.5% increase seen in January, according to data released overnight.  Despite the slight decline, inflation remained above the BoJ’s 2% target for the fourth consecutive month, backing the BoJ’s view of more rate hikes.  Meanwhile, Japan’s industrial production fell 1.1% in January from the previous month, in line with market expectations.  At the same time, retail sales grew 3.9%y/y in January, matching estimates and highlighting steady consumer spending.

China’s Politburo, the country’s top leadership, said in a statement on Friday that it “will implement more proactive macro policy,” The Chinese yuan’s offshore USD/CNH and onshore USD/CNY pairs were both trading marginally higher around 7.2958.