Trump’s 2.0 : A Rollercoaster for FX Markets and the US Dollar

AUD

The Aussie dollar was one of the better performing currencies in the G10 last week, with the AUD/USD pair edging back above the 0.63 level late on Friday. A relatively quiet few days that was devoid of any significant negative headlines on tariffs, or out of the Chinese economy, was enough for AUD to post a mild outperformance against its major peers. Gains for the currency remain hard to come by, however, in part due to the looming spectre of Trump’s trade restrictions and the RBA’s easing cycle. 

The Reserve Bank of Australia will highly likely hold rates steady at its next meeting at the start of April, although signs of further progress on inflation, or a deterioration in economic conditions, could force the bank’s hand at the following meeting in May. This Thursday’s labour market report for February may be important in this regard, with economists currently bracing for another solid month of job creation around the +30k level.

NZD

The New Zealand dollar has modestly outperformed its Australian counterpart since the start of the year. We think that it may be difficult for this trend to continue, however, as the RBNZ still has room for at least a handful of additional cuts, while the New Zealand economy remains in a rather fragile state. Fourth quarter GDP figures (out on Wednesday) are set to show a modest rebound in activity in the final three months of the year, which would bring to an end the country’s technical recession. Yet, annual growth will almost certainly remain negative, with any rebound looking likely to be gradual in light of frail domestic consumption and weak overseas demand. 

USD

Fears of a US economic slowdown brought on by Trump’s erratic policymaking have driven down US stocks and the dollar. Interestingly, Treasury yields have not moved down in tandem, as one would expect, and are fairly close to where they were when the stock market selloff began. We note that labor market data has yet to indicate any meaningful weakening. With the Fed committed to a wait-and-see stance, we expect markets to both the central bank’s level of concern with the potential slowdown and the raft of economic reports out this week, in particular retail sales for February he PMI indices of business activity for March. 

CNY

USD/CNY remained relatively stable last week. This calm behaviour contrasted with that of China’s equity market which saw a sharp rally, with the CSI 300 index jumping to the highest level since mid-December on Friday. This came amid news of a planned briefing on the government’s plan to boost consumption – exactly the thing investors have been hoping for. The State Council’s statement referenced by Xinhua on Sunday mentions actions to promote higher wages and stabilise the equity market, among a long list of other things to help domestic demand to recover. 

Our initial read of the above is cautiously optimistic. It serves as yet another indication that China is getting serious about shifting its orientation towards promoting domestic demand. Nevertheless, as always, the devil is in the implementation. Convincing Chinese consumers to buy is not an easy task, particularly in an environment where the all-important housing market is wobbly and Trump’s tariff rampage adds to economic risks.