In the expectation that Trump 2.0 would entail higher inflation,and a more hawkish Federal Reserve, the US Dollar Index rose by around 8% in the final quarter of 2024. We’ve seen an element of ‘buy the rumour, sell the fact’ since then, with the Republican’s plans for tariffs largely taken in stride by market participants thus far. While it remains early days, and news on the details of some of his protectionist policies have come somewhat sooner than we had anticipated, it appears as though the worst-case scenarios for tariffs will be avoided.
AUD
As expected, the Reserve Bank of Australia cut interest rates for the first time since the pandemic era in 2020 last week, although it struck a hawkish note on future policy moves. In her press conference, governor Michele Bullock said that the decision was a carefully balanced one, given the country’s tight labour market on the one hand, and trade uncertainties stemming from Trump’s protectionist threats on the other. The bank also explicitly warned over cutting rates “too much, too soon”, and said that the victory on inflation was yet to be won.
Last week’s communications make us confident in our call that no more than gradual rate reductions are on the way from the RBA this year. While recent developments on inflation will clearly be welcomed, we are yet to see the sort of deterioration in the jobs market that would warrant an aggressive pace of easing. Indeed, markets are now not even pricing in two more cuts during the remainder of the year, with the next one not fully priced in until the bank’s July meeting.
NZD
There were no major surprises from the Reserve Bank of New Zealand last week. The policy rate was lowered by 50 basis points, as was expected by most economists (and largely priced in by financial markets). Yet, the communications were mildly hawkish. Policymakers poured cold water over the possibility of any further 50bp cuts, which appear to be a thing of the past. Yet, further rate reductions appear to be on the way, with the bank voicing confidence on achieving its inflation objection, while saying that economic activity remains subdued.
Additional 25bp cuts at the next two meetings in April and May were effectively confirmed during the press conference, and seem a pretty safe bet to us, provided economic conditions evolve as anticipated. Beyond then, much will likely depend on the extent of Trump’s tariffs, particularly those aimed towards China, which will be key for the near-term performance of New Zealand’s economy. For now, we still favour an underperformance in NZD.
USD
The stability of US Treasury rates last week was remarkable considering the newsflow we have been seeing on inflation. The upward surprise in wages in the January labour report was followed last week by unpleasantly upward surprises in all of the main inflation metrics. A 0.5% month-on-month print in the headline report, which equates to 6% annualised, and a 0.4% monthly jump in the core index (5% annualized) is the last thing that the Federal Reserve wanted to see. We argue that this perhaps brings into question the possibility of any cuts in rates at all in 2025, which is clearly a dollar positive.
For now, the US bond market is taking this news in stride, and the US dollar is trading off of tariff-related headlines, for the most part. With little news of note this week (the PMIs are less market moving in the US than elsewhere), and a holiday-shortened week, the dollar will probably trade mostly off news elsewhere – assuming no further tape bombs from the Trump administration, of course.
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. Meanwhile, the USD Index rose 3%. Looking at most recent changes, last week most found themselves in the top half of the EM dashboard and appreciated against the dollar. The yuan was no exception. A big part of currencies’ resilience appears to be a relative leniency of the Trump administration towards China so far. Last week the US president actually hinted at a possible deal on trade with the country. We also suspect that the US withdrawal from a number of international organizations and a temporary freeze of most foreign aid as well as its newfound harsh approach towards 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. MLF rate will also be announced over 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. Bank’s LPR rates were left unchanged last week.
JPY
The yen was the big winner in the G10 last week, with the Japanese currency buoyed by rising bets in favour of higher Bank of Japan rates. Former BoJ member Shirai warned last week that the central bank could raise rates as early as its March meeting should US President Trump push through his tariffs plans, while a former top diplomat said that the bank could hike rates on two occasions this year.
Speculation in favour of a more hawkish approach to policy was supported by Thursday’s national inflation data. Not only did the annual inflation rate jump to a two-year high 4% (two times the BoJ’s target), but core price growth rose to an above forecast 3.2%, its highest level since June 2023. At the time of writing, swaps see around 35 basis points of hikes from the BoJ this year. If anything, we think that this is too conservative.