Instimatch - FX morning commentary - 4/4/25

Good morning

Post what was the largest tariff hike by the US since the 1930s Smoot-Hawley tariffs, markets made massive moves across the board including in FX. Risk sentiment took a significant hit with the S&P500 down close to 5%, the NASDAQ down 6%, while European and Asian equities all fell more than 3%. In Asia, equity sentiment was the worst in Vietnam, and for good reasons given the much sharper than expected reciprocal tariff increase of 46%. Meanwhile, US Treasuries rallied massively at the short end of the curve with the 2Y down 30bp and 10Y down 10bp to 4% with growth concerns dominating, while Asia local currency rates were generally dragged lower as well. Markets moved to price close to 4 Fed rate cuts by the end of 2025 from 3 previously.

In FX, the moves were equally big, the USD weakened by 1.7%, its second biggest loss in one day since the GFC, with strength in safe haven currencies such as JPY and CHF. The USD index slid from 103.80 at Tuesday’s close to 101.70 currently.  Asian currencies generally lagged the moves in G10 with VND, CNH, THB all underperforming, but eventually the weaker Dollar trend helped to cap losses in Asian FX.

Looking ahead, traders will focus on the US non-farm payrolls print to gauge whether the US labour market managed to dodge any negative impact from DOGE job cuts. Consensus forecasts see payrolls come in at 140k, with the risk of a lower print that would weigh further on the greenback. Also, of interest will be Fed Chair Powell’s speech on the economic outlook for fresh directives. The broad USD remains highly vulnerable, having now fully erased its post-election gains, as US growth concerns continue to dominate its safe-haven status. The probability of a US recession in 2025 has clearly risen.  EUR/USD surged to an intraday high of 1.1144 and trades just below this morning around 1.1081.

The impact on the UK will be smaller – it faces the baseline 10% tariff only and has lower goods exports to the US as a share of GDP. The UK government also seems less inclined to retaliate and so there may not be an inflationary effect from countermeasures. Still, the overall growth impact on the UK is unlikely to be negligible for an economy which carried little momentum into the year. GBP also suffered yesterday as elevated uncertainty yet again proved a struggling environment for the currency.

CHF benefitted from the sharp sell-off in risk during yesterday's session, cementing its flight to safety status. This was despite a downside surprise to Swiss inflation for March and Switzerland being relatively hard hit by a reciprocal tariff rate at 30%. Both headline inflation and core inflation remained steady at respectively 0.3% y/y and 0.9% y/y but coming in slightly below consensus expectation. With disinflation well underway in Switzerland coupled with downside risks to global growth, this should leave the SNB on track to deliver its final rate cut to 0% in June.

USD/JPY fell 0.5% to 145.65 after the pair eased 2% to a fresh six-month low in the previous session.

The Chinese yuan’s offshore USD/CNH pair was down 0.4% at 7.2483. Onshore markets were closed for a public holiday.  Rating agency Fitch downgraded China by one notch to A from A+. The move came after the agency in April last year put the outlook China on negative. “The downgrade reflects our expectations of a continued weakening of China's public finances and a rapidly rising public debt trajectory during the country's economic transition.” The outlook is now again set at stable. 

AUD/USD fell around 1.5% overnight to $0.6244. Traders ramped up bets that the RBA could cut interest rates in the near term, following a sharp escalation in U.S. trade tariffs that stoked fears of a global economic slowdown, particularly impacting Australia’s key exports such as iron ore and coal.

Meanwhile, South Korea’s Constitutional Court upheld the impeachment of President Yoon Suk Yeol in a unanimous 8-0 decision and markets welcomed the news. The presidential election is set for June 3.  USD/KRW fell around 0.9% to 1,436.37 although the outlook for South Korea remains clouded by delayed fiscal support and the negative impact of US tariffs.