United States
April 2, often referred to by President Trump as “Liberation Day,” is expected to be a historical marker. The markets are currently feeling the tremors. The trade war with China has intensified, especially as Beijing has implemented significant retaliatory measures such as heightened tariffs on U.S. imports alongside further restrictions on rare earth exports. Notably, Canada and Mexico have been spared from these “reciprocal tariffs,” yet both countries have announced the intention to diversify their trade and economic alliances. Despite Nixon severing the dollar’s last connection to gold on August 15, 1971, the dollar continued its reign as the world’s primary currency. It is likely that this status will continue as no other currency or precious metal provides a formidable challenge. However, the tariff announcement on April 2 may signal a shift of considerable magnitude. There is a perception that the U.S. is relinquishing its role of global leadership, a scenario that could persist even if these tariffs are mere negotiating tactics or not a strategy for funding tax cuts or reshoring manufacturing. Looking ahead, China’s and the U.S.’s Consumer Price Index (CPI) are important metrics to watch. In March, China’s consumer inflation is anticipated to have emerged from deflation. The trade war is likely to affect China similarly, by raising prices and curtailing growth. Although U.S. inflation may decelerate slightly, Federal Reserve Chair Jerome Powell seemed to disregard any changes at the forthcoming May 7 meeting. The stronger-than-expected job growth (228k vs. the 2024 average of 165k) supports this stance. A hypothetical situation resembles another week where the S&P 500 loses nearly 11%, and the Nasdaq drops almost 12.5%. This could prompt congressional intervention to challenge emergency powers. Multiple facets contribute to this complex scenario in the U.S. economy. Questions remain as to whether the reciprocal tariffs primarily are a negotiating tactic or a method to spur onshoring and increase revenue. Additionally, if a rapid decline in equities provokes the anticipated “Fed put,” the Federal Reserve may respond to potential negative economic impacts by reducing interest rates. In terms of data, the March U.S. CPI and PPI figures are particularly significant. The general expectation is for the headline CPI to rise by 0.1%, reducing the year-over-year rate to 2.6% from 2.8%. Conversely, the core CPI might experience upward movement by 0.3%. The headline producer price index (PPI) is projected to increase by 0.2%. The Federal Open Market Committee (FOMC) minutes will provide further insights into thoughts about the transitory impact from tariffs. Market participants should note that inflation concerns have surfaced in surveys. However, market indicators such as the yield spread between conventional bonds and those adjusted for inflation do not share such apprehension. The Dollar Index saw substantial momentum above 103.00. A comprehensive view shows that the current ambiance is laden with elements that can shape the economic landscape moving forward.
Eurozone
The Eurozone faces a dual challenge: grappling with the trade war’s shock while potentially benefiting from the nascent recovery alongside increased defense and infrastructure spending. While the trade war has been a headwind, it hasn’t completely blunted progress. It’s essential to note that European investors have been unwinding their record U.S. equity purchases from last year. In the forthcoming days, several economic reports are expected, including Germany and Italy’s industrial production figures and France’s current account. The European Central Bank’s (ECB) decision on April 17 is unlikely to be closely tied to these data points. The swaps market is pricing in a roughly 85% chance of a rate cut by the ECB. Recently, the euro appreciated by approximately 1.2%, marking its fourth weekly rise in the last five weeks. However, given the range from the previous Thursday (~$1.08-$1.1145) and the current lack of clarity, market consolidation appears likely. It closed near its peaks from last month and November. Notably, a drop below the $1.0900 mark may trigger a reversal among late investors. Since February, the euro has gained nearly 10%, and the 38.2% retracement stands near $1.0760.
United Kingdom
Recent changes in sterling seem to be more closely linked to fluctuations in the U.S. two-year yield rather than the UK’s two-year Gilt. While the correlation had been negative for over two years until last month, the overall direction of the dollar still holds significant influence. The UK economy contracted by 0.1% in January, surprising analysts who expected a 0.1% growth. Industrial production dropped by 0.9%, driven primarily by a 1.1% decrease in manufacturing output. An expected recovery may be evident in the February GDP report, anticipated this Thursday. However, the manufacturing PMI further declined in both February and March. Reports of gold shipments will heighten focus on the trade balance, with January marking the UK’s first monthly trade surplus since June 2021, excluding precious metals. Sterling spiked nearly to $1.32 during the volatility following the U.S. reciprocal tariff announcement. Yet all gains were subsequently erased, with sterling dipping below $1.2950, reaching levels last seen in early March. Since bottoming near $1.2100 in mid-January, sterling has traversed a notable distance, although momentum indicators suggest a continuing downward trend. If recent movements mark a climactic peak, a further target could be between $1.2785 and $1.2815. Additionally, sterling’s sales against the euro show that despite the eurozone being disproportionately affected by U.S. tariffs, the euro appreciated roughly 2% against sterling during the last two sessions.
China
U.S.-China tensions are escalating. China’s response includes a 34% tariff on all U.S. imports effective April 10, along with bans on certain products and further restrictions on rare earth exports. Moreover, China has discouraged new investments in the U.S. The People’s Bank of China (PBOC) set the dollar reference rate to its highest level of the year ahead of the weekend, allowing further dollar appreciation while the yuan weakens. China’s retaliation, though currently limited to trade and investment, could potentially extend into geopolitical realms. Aggressive military exercises near Taiwan underline Beijing’s seriousness. Market data on China, such as the CPI and PPI figures expected on April 10, will be closely monitored. Deflation is a current issue in China, which prefers lower rates and a weaker currency. Expectations indicate a rebound in the CPI after a 0.7% year-over-year decline. Prices may continue to rise, as suggested by PBOC’s recent dollar fix, signaling a tolerance for a weaker yuan. Over recent sessions, the dollar-traded yuan ranged from ~CNH7.24 to CNH7.35, marking the third consecutive week of higher closing prices.
Japan
Japan’s yen shows a greater tendency to correlate with movements in the U.S. 10-year yield, unlike the differential between U.S. and Japanese 10-year rates. The Bank of Japan (BOJ) is currently tightening while the Federal Reserve pauses its easing cycle. This strengthens the correlation at the 10-year level more than the two-year differential. Japan will report February’s current account on April 8. This month has consistently shown improvement from January for over two decades. In January, Japan reported a JPY257.6 billion shortfall, yet February’s surplus has exceeded JPY2 trillion annually since 2016. Despite conventional wisdom on Japan’s export strength, its current account surplus is not based on a trade surplus. The yen rebounded from JPY150.50 mid-week to JPY144.55 before the weekend, marking its lowest level since last October. Following the U.S. employment report, 10-year Treasury yields increased by more than 10 basis points, boosting the greenback to JPY147.50 before sellers returned. Last week marked the fourth time in the last nine weeks that the dollar fell by more than 1.7% against the yen.
Canada
The U.S. dollar’s exchange rate with the Canadian dollar has grown more sensitive to the changes in the U.S. two-year yield. The inverse correlation of changes was about -0.50 toward the end of March, the most inverse since early 2020. The Canadian dollar has also been influenced by the broader risk climate. The Canadian dollar has recently become more sensitive to U.S. equity markets, represented by the S&P 500. Modification in this inverse correlation highlights the shifting economic climate. Data highlights for the week include the IVEY PMI and the Bank of Canada’s Business Outlook Survey. The Bank of Canada will meet next on April 16. The market predicts a roughly 1-in-3 chance of a rate cut, with those odds increasing to over 80% by the following meeting in June. The swaps market points to a year-end target rate near 2.25%, lower than last year’s anticipation of 2.65%. Last week, the Canadian dollar felt a broad U.S. dollar sell-off in reaction to tariffs, a stock market drop, and falling rates. The greenback fell to almost CAD1.4025, hovering around its lowest point since last December. Although Canada was not directly impacted by reciprocal tariffs, the dollar rose to nearly CAD1.4255 before the weekend. Nearby resistance levels are expected near CAD1.4315-25.
Australia
Two main factors are driving the Australian dollar’s movement. Firstly, broad U.S. dollar movements have shown a strong correlation with changes in the Australian dollar. Secondly, the changes in the Australian dollar also correlate with movements in the Canadian dollar, revealing steady interaction over recent months. In the upcoming week, Australia will release several economic surveys that typically have minimal market impact. However, the Reserve Bank of New Zealand’s meeting on April 9 may draw interest. While the New Zealand economy was hit hard last year, it improved by 0.7% in Q4. Limited changes in the year-end target rate are noted, suggesting possible stability. Despite the U.S. dollar strengthening before the weekend amid increased risk aversion, the Australian dollar fell to an almost unprecedented level of $0.5985, the lowest since the early days of the pandemic in 2020. Volatility saw the Australian dollar trading outside its usual bands, prompting potential pullbacks in trading ranges.
Mexico
For Mexico, the U.S. trade war arrives at a particularly tumultuous moment, disrupting the core of Mexico’s modernization strategy, including NAFTA and the USMCA. Economic challenges and high real policy rates, alongside falling inflation, afford the central bank room to ease policy more notably than last year. Businesses and investors remain tentative due to the tension between certainty (what the U.S. has already enacted) and uncertainty (what remains in store). In the middle of the week, Mexico will report March CPI figures, with an anticipated decline in the headline rate from February’s 3.77%. The central bank’s overnight rate is at 9%, with the swaps market expected to cut nearly 125 basis points over the next six months. February’s industrial production, due at week’s end, has shown declines over recent months. While the dollar dipped from near MXN20.50 on Wednesday to a low near MXN19.84, it later strengthened to MXN20.56 before settling slightly above MXN20.44 due to a positive close in the U.S. dollar. The next resistance level for the dollar might be around MXN20.70, with a note that last month’s high was closer to MXN21.00.
