Instimatch - FX morning commentary - 4/3/25

Good morning 

US President Trump has confirmed that the 25% tariffs on Mexico and Canada will come into effect today. He has also signed an executive order that will raise additional tariffs on China to 20% from 10%. This raises the risk that Trump will indeed also follow through his threat on reciprocal tariff hikes on 2 April.  In a joint meeting with TSMC, the Taiwanese semiconductor company, Trump also announced a plan for the world's largest contract chip maker to invest $100bln in building five additional chip facilities in the US in the coming years. USD/CAD and USD/MXN both touched their highest levels in one month at 1.4478 and 20.7355 respectively. 

Markets have also become more concerned about US economic growth. US ISM manufacturing PMI index fell to 50.3 in February, from 50.9 in January, staying in expansionary territory for the second straight month but missing Bloomberg consensus of 50.7. Notably, the new orders sub-index fell to 48.6 from 55.1 in January, while the ISM employment sub-index declined to 47.6 from 50.3. The US 10-year yield fell to below the 4.20% level, while the US 2-year yield stayed below 4%. The fed funds futures markets have now priced in 3 rate cuts in the rest of this year. The broad US dollar index also fell 0.8% in Monday’s session and opens today at 106.60.

What’s also concerning is the jump in US ISM manufacturing prices paid, with the index rising to 62.4 from 54.9, beating Bloomberg consensus of 56.0 and reaching the highest level since June 2022. Prices paid have increased for four straight months, suggesting inflationary pressures are starting to build at the producer level.

Additionally, the US announced the suspension of its military aid to Ukraine to pressure President Zelensky to settle a deal with Russia amid tensions with President Trump. This move could advantage Russian forces and challenges European allies to increase support for Kyiv. The announcement comes after a day in equities when Europe's defence sector experienced a significant rally, with substantial share price increases as trader’s anticipated increased military spending by European governments.

Today the Eurozone will publish the unemployment rate for January, which is expected to remain at 6.3%, close to the all-time low of 6.2%. From the US no notable data is scheduled, but we do have the Fed's Williams speaking to Bloomberg. President Trump’s first address before US Congress is a risky wildcard tonight.

SEK was among the big winners yesterday amid an outperformance in European assets with EUR/SEK declining close to the 11.00 level.

However, EUR/USD posted a strong performance, gaining 1% trading close to the 1.05 level.

GBP/USD looks set to target immediate resistance at the 3-month high of $1.2724.

USD/JPY remains under modest selling pressure with the pair falling 0.1% to 149.41, in sight of a fresh 3-month low.  Gains in the yen were stymied by softer-than-expected capital spending data, while other readings showed an unexpected increase in Japan’s unemployment rate to 2.5% (consensus 2.4%).

China announced tariffs on U.S. goods and a slew of other trade measures in retaliation for an increased, 20% trade tariff imposed by U.S. President Donald Trump against the country. China’s finance ministry said it will impose tariffs of 15% on chicken, wheat, corn, and cotton imports from the U.S., while soybeans, sorghum, pork, beef, fruits and vegetables, aquatic products, and dairy will face a 10% tariff. China’s Commerce Ministry added 15 U.S. entities to an export control list and added 10 U.S. firms to a list of unreliable entities. The measures will take effect from March 10. 

In the upcoming National People’s Congress, Chinese policymakers could provide more pro-growth measures including announcing a larger budget deficit target and maintaining a 5% growth target for this year.

USD/CNY steadied around 7.2857 yuan, with declines in the yuan being limited by government support.

Among broader Asian currencies, AUD/USD eased 0.3% to $0.6208.  Losses in the Aussie came even as the minutes of the RBA’s February meeting showed policymakers non-commitment towards more rate cuts, after a 25bp cut in February. Other data showed Australian consumer spending remained strong, with retail sales growing more than expected in January.