Liberation Day Chaos : Trump’s Tariffs Shake Global Market and Hit Risk Sentiment Hard

AUD

It was a thoroughly miserable week for the Australian dollar, with the AUD/USD exchange rate collapsing by more than 3% – by our reckoning, that’s the largest sell-off in the pair since September 2022. The direct impact of the tariffs on Australia’s economy will probably be quite minor – the 10% levy imposed is on the lenient side and Australia’s exposure to US demand is rather low. The indirect consequences will likely be significant, however, given the country’s exposure to global demand, notably a high dependence on China, which itself is now staring down the barrel of US tariffs in excess of 50%. AUD is a traditional liquid proxy of the yuan, so it typically underperforms when investors fret over the state of China’s economy, which is exactly what we saw last week. 

Focus will now shift to how the Reserve Bank of Australia responds to the tariffs. It seems almost a foregone conclusion that the bank will adopt a more dovish stance as a consequence, with markets now almost fully pricing in three consecutive rate cuts at the next three meetings in May, July and August. Yet, with the bank placing heavy emphasis on inflation in recent communications, there is a possibility that this is overly aggressive, which may provide some hope for AUD. 

NZD

The New Zealand dollar ranked among the weakest currencies against the greenback last week, penalised by fears of a widespread growth slowdown after China unveiled retaliatory measures against the US on Friday. Prior to that, the kiwi was enjoying some momentum, buoyed by less severe than expected US levies set at a modest minimum rate of 10%. Prime Minister Luxon stated he would refrain from retaliatory actions, opting instead for talks between the two nations. New Zealand’s already low tariff rates will help mitigate tensions and boost hopes of a compromise, although NZD may face stronger headwinds from weaker sentiment surrounding global growth.

More insight into the country’s response will emerge this week, with the Reserve Bank of New Zealand meeting scheduled for Tuesday. Market participants and ourselves expect a 25 bps rate cut, though the odds of a more aggressive 50 bps reduction are not negligible given fears over domestic growth. The bank’s communication will draw significant attention. Other central banks have already started to sound concerned, and a similarly cautious tone from the RBNZ could heighten expectations of further easing, exposing the kiwi to a more dovish repricing. 

USD

Evidence that Trumpian chaos is harming consumer confidence, expectations, and spending is piling up, but it’s still short of dispositive. Consumer spending in February again undershot expectations, while the core index of the Fed’s preferred gauge, the PCE rose again on a monthly basis.  On the other hand, the March services PMI surprised heavily to the upside, driving the composite sharply higher. In addition to the tariff announcement, this week’s employment data (JOLTS on Wednesday, jobless claims on Thursday and, critically, the March payroll report on Friday) take on added importance to confirm whether consumer retrenchment is starting to affect business hiring decisions.

CNY

Asia was the target number one of Trump’s reciprocal tariffs with China seeing a punishing 34% levy on top of the 20% added since Trump’s first weeks in office. Rather than going with a non-escalatory reaction as was the case before, China decided to hit back with a tit-for-tat 34% tariff as well as other measures. The aggressive response was already bashed by Trump with market concerns about escalating trade spat accelerating a sell-off in risk assets toward the end of last week. 

The yuan was among the currencies closing the week lower versus the US dollar although the extent of the sell-off wasn’t yet massive, with authorities trying to calm the market. PBOC’s USD/CNY fixing on Friday was the highest since early January but the difference from previous days was not large by any means. There is little indication that the central bank is moving away from protecting currency stability, but how determined it will be to prevent a sell-off will be scrutinised by markets. Beyond that, any headlines from China regarding additional support for the economy will be watched with tariff news likely to bring forward monetary policy easing as well as, potentially, some more fiscal stimuli. As the tariff implementation dates approach (09/04 for the US, 10/04 for China), attention is focused on how the relationship between the world’s two largest economies develops.

JPY

Alongside its fellow safe-haven, the Swiss franc, the Japanese yen was one of the big winners in the G10 last week, as fears over the impact of Trump’s tariffs sent investors flocking to low risk assets. Trump’s reciprocal levies aimed towards Japan were very much on the aggressive end of things at 24%. This will not only ramp up fears over the possibility of a Japanese recession, but we find it difficult to see how the tariffs won’t slow the pace of Bank of Japan policy normalisation, assuming that they remain in place at or near current levels.

Japanese stocks suffered from their largest weekly drop in five years last week, but the yen itself managed to outperform almost every other currency. Focus this week will be largely on a speech from BoJ governor Ueda on Wednesday, who is almost certain to comment on the impact of the tariffs. Any suggestion from the governor that additional rate increases may be off the table for now could trigger a reversal in the yen, although any move here may be modest given that markets now only see 11bps of hikes in 2025 (down from around 30bps).