Currency Market in Flux, Tariff Tensions and Economic Indicators Shape Global FX Landscape

AUD

The Australian dollar remains one of the best proxies for the Trump tariff risk. Last week’s news of fresh 10% tariffs aimed towards China is a clear negative for the Australian economy, and the dollar subsequently ended the week at the foot of the G10 FX performance tracker, down more than 1% on its US counterpart. Remarks from RBA deputy governor Hauser last week were hawkish, as he warned that more tangible progress would be needed on inflation before the bank would be in a position to lower its policy rate again.

This week looks set to be an unusually busy one in Australia. Retail sales and PMI figures for January and February respectively will give us a timely read as to the state of both domestic demand and business activity. Fourth quarter GDP figures on Wednesday are expected to show that the economy posted a modest acceleration in growth at the end of last year. We will, however, perhaps be more interested in Tuesday’s RBA meeting minutes, which will shed more light on the bank’s decision to cut interest rates for the first time since the pandemic at its February meeting.

NZD

The China tariff risk continues to weigh on the New Zealand currency, which last week slipped to its lowest level on the US dollar since the beginning of February. We continue to see the kiwi currency as particularly vulnerable to Trump 2.0, given its high exposure to Chinese economic demand. For its part, the RBNZ looks likely to maintain its accommodative stance to policy, with another 25 basis point cut appearing almost a done deal at the bank’s next meeting in April.

Last week’s business confidence data was surprisingly encouraging, although this will not, in our view, even remotely dissuade the RBNZ from cutting rates again next month and, if anything, swap markets are now somewhat underpricing the extent of cuts during the remainder of 2025.

USD

Last Friday saw an unusually bad slew of economic data from the US. Business sentiment fell sharply in February, while consumer long-term inflation expectations rose to a 30-year high. We will await confirmation of this weakening trend in the weekly jobless claims and the February payrolls report in two weeks, but for now this data was enough to keep the dollar somewhat on the backfoot, in spite of the significant increase in geopolitical risks.

With little macroeconomic or policy news to guide currency markets, we will be paying particularly close attention to any developments on tariffs or clarification of the US position with respect to European security in the coming week. PCE inflation numbers out of the US on Friday will, as always, also be closely monitored by FOMC officials. Following last week’s disappointing PMI numbers, markets are now back eyeing two interest rate cuts from the Fed this year, as opposed to just one, but this stance will likely be tested this week.

CNY

For all of the fears about Asia FX under Trump 2.0, the region’s currencies have not fared too badly thus far, down approximately 2% on average since the US election. Last week, most Asian currencies found themselves in the top half of the EM performance dashboard, and the yuan was no exception. A big part of this resilience appears to be the relative leniency of the Trump administration towards China so far. The US president actually hinted at a possible deal on trade with the country last week, albeit in an off the cuff comment. We also suspect that the US withdrawal from a number of international organisations, and a temporary freeze of most foreign aid, as well as its newfound harsh approach towards its allies, might create new opportunities for Asia’s largest economy.

This week’s economic calendar is relatively light with Saturday’s NBS PMI data covering February the only key macro reading on tap. The MLF rate will also be announced in the coming days, but no changes are expected there – authorities are likely to wait for a bit more clarity on tariffs before engaging in any significant policy adjustments. The bank’s LPR rates were left unchanged last week.

JPY

The yen traded within an unusually narrow range against the US dollar last week, holding its own around the 150 level on the greenback. Last week’s Tokyo inflation numbers came in slightly weaker than anticipated, and there were also downside surprises in the latest housing, retail and monthly industrial production figures. We don’t think that this changes the narrative too much for the Bank of Japan, however. The next move in rates will undoubtedly be upwards, and the only question relates to the timing. As things stand, the next 25bp hike is not fully priced in until October, which we think is entirely too late. Communications from BoJ governor Ueda on Wednesday should shed more light on the thoughts behind the bank’s decision making. Ongoing tariff toings and froings will likely be key for the yen this week given its safe-haven status, and we could see another bout of JPY strength should Trump indeed follow through with his Canada, Mexico trade restrictions.