Tariff Tensions and Currency Volatility: A Week in Global FX Markets

AUD

The Australian dollar outperformed most other G10 currencies last week, albeit only marginally in most instances. Fears that the miss in the February jobs report would force the Reserve Bank of Australia to cut interest rates at a more aggressive pace this year have receded slightly in the past few trading sessions. Swap markets see almost no chance of a cut at this week’s meeting (01/04), and we think that one would be an April Fool for thinking otherwise given that recent remarks have pushed back against such hastiness. 

The key for AUD will instead be the tone of the bank’s communications. It will be interesting to hear the bank’s take on the latest news on the jobs market, and whether they view the February downturn as a one-off or the start of a trend. We suspect that it is too soon to signal the latter and we favour a hawkish tilt in the communications that raises doubts over a May cut, particularly with underlying inflation remaining above the midpoint of the RBA’s target range. 

NZD

The USD/NZD cross traded within a narrow range last week, as New Zealand’s domestic narrative remained largely unchanged amid an absence of significant economic or policy developments. Looking ahead to this week, Trump’s announcement of reciprocal tariffs on Wednesday will be pivotal. New Zealand, however, remains far from the spotlight in this context. Despite maintaining a trade deficit with the US, its average tariff rate on US imports is significantly lower than that applied in the reverse direction.

More critical for the New Zealand dollar will be the evolution of the trade war, particularly Trump’s approach toward China, and its resulting impact on risk sentiment. Last week, Trump indicated that he may reduce levies on China should Beijing facilitate the TikTok sale. Any progress in that direction could provide some relief for the key trading partners of Asia’s largest economy, New Zealand included.

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 monthly PCE inflation (the Fed’s preferred gauge) rose again. On the other hand, the March PMIs surprised heavily to the upside. In addition to the tariff announcement, this week’s employment data (JOLTS on Wednesday, jobless claims on Thursday and, critically, the March payroll report Friday) take on added importance to confirm whether consumer retrenchment is starting to affect business hiring decisions.

CNY

Sentiment towards Asia was quite poor last week, with equities and currencies generally on the back foot amid the auto tariff announcements and expectations for additional US trade levies next week. The scale of the sell-off in the region’s currencies was rather muted, however, and the USD/CNY exchange rate was little changed. 

Trump’s auto tariffs are not likely to have a significant impact on China’s economy – US restrictions on the sector are already in place (including Biden’s 100% tariff on Chinese EVs), and China accounts for a minuscule share of the US auto market. Uncertainty on that front is high given incoherent messaging from the US administration, but more levies are likely on the cards. On a positive note, Trump has signalled a willingness to reduce Chinese tariffs if a deal on TikTok sales to a non-Chinese buyer is reached. Aside from the eagerly anticipated tariff announcements, the latest PMI figures will be released throughout the week. 

JPY

The yen posted some solid gains on the US dollar late-last week, buoyed by the strength of the latest Tokyo inflation numbers. The main inflation measure in the country’s capital edged up to 2.9% in March, while the core rate, which strips out the volatile component of fresh food prices, jumped to 2.4% (from 2.2%). If markets needed further convincing, the data adds to an increasingly compelling case for a continuation in the Bank of Japan tightening cycle, with swaps now seeing a more than 50% chance of another hike at the June meeting.

Trump’s auto tariffs, meanwhile, presented another unwanted headache for Japanese policymakers last week (cars to the US account for around 5% of the country’s total export revenue). It remains to be seen whether Trump will cave to Japan’s demands for exemptions, – given the relatively muted reaction in the yen to last week’s news, markets seem to think that he will. The safe-haven yen could rally this week if Trump goes big on broad reciprocal tariffs, although this is very much contingent on Japan itself being spared from the levies.