Instimatch - FX morning commentary - 4/6/25

Good morning

Stronger US labour market data, with job openings for April rising to 7.4mln from 7.2mln, the highest level in almost a year, prompted a turnaround in the greenback yesterday. The details did show a slight rise in layoff rates and a decline in quit rates, but from a big picture perspective the numbers were still indicative of a decent and normalising labour market. Safe haven flows took a bit of a breather with improved risk sentiment, with the JPY, CHF, and particularly gold weakening. EUR/USD fell back below 1.14 again and USD/JPY breached 144 anew. 30Y US treasuries are once again testing the 5%-level, which we expect to be breached as investors require a higher premium for buying US treasuries currently. 

From the Eurozone, we will get the final services PMIs. US releases will be the main focus with the ADP payrolls report and the ISM services ahead of Friday’s Nonfarm Payrolls report. For the assessment of the Fed’s stance, the spotlight will be on the Beige Book, which contains anecdotal evidence of the economic situation from regional Fed contacts. The Fed’s Bostic is the only scheduled speaker.

Beyond the data, question marks around whether President Trump and President Xi will pick up the phone and have a conversation were also an important driver of markets. The White House Press Secretary said the two leaders will likely talk this week, with also unconfirmed headlines yesterday that the call could happen this Friday. While these developments likely partly explained the move in USD/CNH below 7.18 levels despite weak Caixin Manufacturing PMIs out yesterday, whether there can be a durable détente is also a key question. There is a sense that the negotiations will continue to be difficult, but perhaps some of the near-term sticking points such as the perception of lack of flow of rare earth exports can be resolved. For what it’s worth, the US Chamber of Commerce President in Shanghai was quoted as saying he is already seeing some approvals for rare earth exports come through.

The dollar index rose 0.3% in Asian trade to 99.25, strengthening further from the previous session. 

EUR/USD was steady overnight trading around 1.1380. Softer May Eurozone inflation data had limited market impact, with around 57bp of ECB rate cuts still priced in for the full year and a 25bp cut effectively fully priced for tomorrow's meeting.

GBP/USD is holding above the $1.3500 level at $1.3520 in early European trade. BoE Governor Andrew Bailey reaffirmed the bank’s ‘gradual and careful’ approach to interest rate adjustments yesterday, emphasising the need to balance inflation control with economic stability. Traders interpreted this as a commitment to the bank’s cadence of quarterly interest rate cuts, which it appears to have adopted this year.

The slightly firmer USD has seen USD/JPY tick higher is early European trade to around 144.30. BoJ Governor Kazuo Ueda's cautious remarks on Tuesday fuelled speculations that the next interest rate hike won't come soon.

For today the Bank of Canada meeting will gain traction with analysts split on an unchanged decision and a 25bp cut. Irrespective of the rate decision markets will focus on the central bank's balance of risk assessment. An unchanged decision today would likely boost the CAD temporarily in a move that we would favour selling into. There is some talk that a US and Canada trade deal could happen before the G7 Summit next week.

EUR/CHF tracked higher during yesterday's session as Swiss headline inflation reached deflationary territory for the first time since 2021. Headline inflation dropped to -0.1% y/y (cons:-0.1%, prior: 0.0%) and core to 0.5% y/y (prior: 0.6% y/y). Core pressure also continues to decrease significantly with core SA at -0.5% m/m for the month of May. The low print yesterday means that inflation has come in significantly lower than the SNB's projections from March yet again. Traders expect a final 25bp cut at the next meeting on 19 June bringing the policy rate to 0% and the SNB to opt for FX intervention before resorting to negative territory. Growth data to the strong side also supports this. Sight deposit data shows no signs of FX intervention so far. However, the risk of a larger 50bp cut is definitely on the table following the print yesterday further amplified by the negative effects from the trade war with Switzerland set to be hit by a 32% tariff rate. For CHF FX, the global investment environment will continue to take centre stage and expected to put downward pressure on EUR/CHF.

Australian GDP growth slowed down more than expected in Q1 2025: from 0.6%q/q in Q4 2024 to 0.2%q/q (+1.3%y/y). The weather-influenced GDP data don’t rule anything in or out for the Reserve Bank of Australia. They cut the policy rate twice now (February & May), with money markets convinced that the central bank has room to accelerate with first back-to-back action in July. AUD/USD sticks within the extremely tight 0.6350-0.6550 range in place since mid-April.

In South Korea’s Presidential elections yesterday, Lee Jae-myung of the Democratic Party of Korea won the elections, with 49.4% of the vote, while Kim Moon-soo from the People Power Party secured 41.2% of the vote. While the actual numbers were a narrower margin than indicated by an earlier exit poll, the implications are still that both the President and the National Assembly in South Korea are now under the same party, making it easier to pass through legislation and reforms, and as such also removing some political uncertainty which has been weighing on the country since the recent and short-lived imposition of Martial Law.

The dominant factor for the South Korean won remains 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.