Instimatch - FX morning commentary - 3/4/25

Good morning

The rumours of watered down tariffs ahead of Trump’s Liberation Day press conference that gave a lift to equities and US yields going into the press conference proved to be wrong. The administration set a minimum baseline tariff of 10% on all countries, and additional reciprocal tariffs up to 49% for 60 countries. Analysts estimate US average effective tariff rates are now expected to rise to 23%. This would bring tariff rates above those last seen in the 1930s. The outcome was worse than expected and it raises the risk for a US recession. Equity futures plunged with S&P 500 and Nasdaq indicating a sharp fall at opening. Nikkei is down some 3.5%. US Treasuries rallied across the curve while the 2s and the 10s are off some 15bp from yesterday's highs. The USD is generally weaker.

Asia is generally harder hit than other regions. Among the Asia markets, Vietnam (+46%), Thailand (+36%), China (+34%), Taiwan (32%), Indonesia (+32%), and India (+26%) received the highest increase in reciprocal tariffs. Nonetheless, even the Philippines (+17%) and Singapore (+10%) which were thought the two least likely to be targeted in the region were not spared. Canada and Mexico seem to be exempted from these tariffs for now, at least until perhaps a review at a subsequent date on its USCMA-compliant trade.

While US growth concerns have intensified, driven by weak soft data and underperforming US equity markets, there has been no significant weakness in hard data. US recession fears could continue to drive price action alongside tariff developments, making the USD more sensitive to a weaker jobs report. Consensus forecast for nonfarm payrolls is 140k a weaker outcome would weigh on the greenback expect and lower US rates.

More short-term volatility will obviously be the name of the game with the dust still settling and awaiting the reaction function of nations and the US going forward from the current set-up. In order to restore some market equilibrium, much will probably depend on how “final” current announced tariff rates are.

In terms of data, the European morning will see Spanish and Italian PMIs, but markets will likely not place too much emphasis on these unless a significant undershoot amplifies the downbeat risk sentiment. The same can be said for the Eurozone aggregate PPI numbers. More attention will likely be paid to the US ISM services indices later in the day. The headline index is expected to nudge down from 53.5 to 52.9. A lower number than consensus would add to the recent series of weaker US data readings and would weigh on UST yields.

The dollar index fell 0.6% to 102.78 in Asian trade, extending steep declines.  Analysts said they expected “considerably more” monetary easing by the Federal Reserve through mid-2025 to mid-2026, although interest rates are likely to fall later rather than sooner.

EUR/USD whipsawed following the tariff announcement, initially rallying above 1.09 on the relatively benign 10% flat tariff applied to all US trading partners, declining on the more aggressive reciprocal tariff measures, and then moving back above 1.09 again. While tariffs, in isolation, are likely USD-positive through higher net exports and increased foreign investment, US recession fears counterbalance this effect. This also explains the relatively modest reaction in EUR/USD, despite larger moves in other markets.

GBP/USD has rallied strongly to test $1.3100 level with the UK’s more lenient 10% tariff providing some support for Sterling.

USD/JPY loses 2% overnight and opens the European session at 147.24, while USD/CHF touched its strongest level in four months at $0.8754 before easing back toward $0.8725.  The yen and Swiss Franc continue to benefit from safe-haven demand.

From an FX perspective, traders believe the path of least resistance is for weaker Asian currencies from a directional perspective, and certainly for the export-oriented ones and those who were hit harder such as China, Vietnam, Thailand, and South Korea. China is now expected to outline more retaliation against the U.S. measures, which is likely to be harsher than initially feared. 

USD/CNY has strengthened to 7.2938 following China's 34% tariff designation – one of the highest rates imposed and yuan proxies AUD and NZD have shown some weakness, even if modest in magnitude.

AUD/USD pair fell 0.4% to $0.6301, although deeper losses in the Aussie were limited by Trump only imposing 10% tariffs against Australia. Data showed Australia’s trade balance slumped to a near five-year low in February, as Trump’s tariffs disrupted global trade.