Instimatch - FX morning commentary - 3/6/25

Good morning,

The US Dollar weakened, and Asian currencies traded mixed at the start of the week. This may have been driven in part by higher policy uncertainty out of US and question marks around the current US-China tariff pause, with announcement of tariff hikes to 50% from 25% on steel and aluminium products by Trump, together with accusations from both US and China on violations of the Geneva trade détente. Meanwhile, US data was weak and pointed to a continued stagflationary environment, with US ISM manufacturing declining to 48.5. Details showed new orders and employment remained in the contractionary zone while prices paid were elevated at 69.4. While the details were not as bad as the headline numbers suggest, given a decline in inventories and slight pickup in new orders, the bigger picture is still a negative supply shock for the US from tariffs compounded by significant policy uncertainty.

Taking a step back, the interesting part for markets has also been a continued breakdown in correlation between the US Dollar and US Treasuries, and also correspondingly how the Dollar has not benefited when US data surprises to the downside. In fact, alternative safe haven assets including gold and even some Asian bond markets have benefited during such risk-off periods looking at the price action, and the broader picture may still raise questions over the extent of US exceptionalism.

Risk aversion was also furthered by geopolitical strife, as U.S.-Iran nuclear talks appeared to be falling through, while a Russia-Ukraine ceasefire also appeared distant. 

Focus today turns to Eurozone May HICP inflation data release. Headline inflation is expected to decline to 2.0% y/y from 2.2% y/y, driven mainly by core inflation falling from 2.7% y/y to 2.4% y/y, based on regional data already released. Also in the euro area, the unemployment rate in April is expected to remain close to a record low at 6.2% as indicated by survey data.

In the afternoon, US JOLTs labour turnover survey is due for release for April. Traders will keep a close eye on how the number of job openings as well as firms' hiring, and layoffs evolved after the 'Liberation Day'. In the evening, the Fed's Cook and Logan will be on the wires.

The dollar index rose 0.2% in Asian trade to 98.87, recovering mildly from losses in the previous session. 

EUR/USD has edged lower to 1.1430 in the early European session.

GBP/USD is trading with a mildly negative bias but holding above $1.3500 ahead of BoE Monetary Policy Report Hearings before Parliament later today. Traders will closely scrutinise comments from BoE Governor Andrew Bailey and other Monetary Policy Committee (MPC) members for insights on the policy outlook, which, in turn, will help drive GBP price action.

The Australian dollar was the worst performer overnight, with AUD/USD losing 0.5% to trade around $0.6464 after the minutes of the RBA’s May meeting reiterated the central bank’s dovish stance.  A host of weak economic readings for Q1 – including a bigger than expected current account deficit– also dampened sentiment towards Australia before Q1 GDP data due tomorrow.

The Chinese yuan was steady, with the USD/CNY pair hovering around 7.1978 yuan after the long weekend. Recent PMI readings signalled persistent weakness in the Chinese economy, especially amid increased U.S. trade tariffs. 

Caixin manufacturing PMI data showed an unexpected contraction in May to 48.3 from 50.4, coming in line with official PMI data released over the weekend. The reading showed export orders for Chinese goods were stalling amid high U.S. tariffs. While Beijing and Washington had agreed to temporarily slash their tariffs in May, recent reports showed talks had stalled, while the rhetoric between the two countries remained abrasive. 

A key event for markets in Asia will be South Korea’s Presidential elections, and in particular between the two leading candidates – Lee Jae-myung of the Democratic Party of Korea, and Kim Moon-so of the People Power Party. Latest polls still point to a win by Lee Jae-myung of the DP as the most likely scenario, but the polls have pointed to a tightening race between these 2 candidates. While a win by Lee and DP should be good for the South Korean won given the expectation for additional fiscal stimulus coupled with lower policy uncertainty, not all things are equal in practice. Traders still think the dominant factor for KRW will be the negative impact of tariffs and also the underlying structural weakness of South Korea’s economy including its soft property market and weak domestic demand. USD/KRW pair rose 0.2% to around 1,379.03.

USD/INR tread water around 85.369 before a closely watched RBI rate decision later this week. The RBI is expected to cut rates by another 25bp.