### United States
In recent discussions among market analysts, there’s been speculation about a potential broad agreement between the US and China. This hypothetical deal would involve China allowing its currency, the yuan, to strengthen in exchange for lower tariffs imposed by the US. While this scenario seems unlikely, it is based on the idea that figures like Bessent, the Treasury Secretary nominee, exhibit pragmatism. President Trump’s recent comments during the early Asia Pacific trading hours introduced a 25% tariff on all products from Canada and Mexico and an additional 10% tariff on Chinese products, effective January 20. These remarks initially affected global currencies, but most have since recovered. Among the G10 currencies, only the Australian dollar, Norwegian krone, and Canadian dollar have depreciated, with the Canadian dollar down about 0.75%. Emerging market currencies, for the most part, are weaker, with exceptions such as some Central European currencies and the South Korean won. The Mexican peso has depreciated by over 1%.
US equities are experiencing downward pressure. While markets in the Asia Pacific declined, Hong Kong was the exception. Europe’s Stoxx 600 is breaking its three-day rally, declining by over 0.5%. US index futures have recovered most of their earlier losses and are now showing minor declines. Bond markets in the Asia Pacific reacted to the US rally, while European yields are rising. The 10-year US Treasury yield has increased by a few basis points, nearing 4.30%. Gold extended its significant 3.35% drop from the previous day, dipping towards $2,605 before rebounding above $2,630. January WTI saw a marginal decline to almost $68.55 before rising by over a dollar in Europe.
The US is witnessing a flurry of data releases today, though most aren’t market-moving. Both investors and businesses are contemplating the likely policies of the upcoming US administration and how these might impact Fed policy. Some analysts argue against viewing the nomination of a mainstream Treasury Secretary as pivotal, pointing out that power dynamics within the administration matter more. President Trump seems determined not to be overshadowed by advisors or cabinet appointments, maintaining his authoritative stance. Meanwhile, US economic indicators such as house prices, new home sales, consumer confidence, and regional Federal Reserve surveys may attract attention, but only superficially. The FOMC minutes could offer a clearer picture of the Fed’s stance on a December rate adjustment.
### Eurozone
The eurozone is navigating multiple crises. Just recovering from the Covid shock, the region now faces challenges from Russia’s renewed aggression in Ukraine and the automotive industry’s shift towards electric vehicles (EVs). The latter transition is heavily influenced by China. On top of these pressures, Trump’s return to the US presidency, along with tariff threats, is causing additional instability. Political turmoil compounds the region’s woes—the German government has effectively collapsed, awaiting a confidence vote to trigger new elections. France faces its own election challenges, with a polarized outcome likely causing governmental instability.
In currency markets, the euro experienced a sharp increase, reaching $1.0530 during North American trading. It previously hit a low near $1.0335 following disappointing PMI data. The euro faced resistance around the $1.0520 mark before retreating to approximately $1.0465. Following Trump’s tariff announcement, the euro briefly fell to $1.0425 but later rebounded to $1.0520. There are substantial options at $1.05 set to expire, suggesting market positioning around this level. Further resistance might appear between $1.0565 and $1.0580. A higher-than-expected EMU CPI reading later this week could decrease expectations for a 50 basis point ECB rate cut next month.
### United Kingdom
The British pound has been under pressure. After briefly reaching a new session high near $1.2615 in North American trading, it fell to around $1.2540. In response to Trump’s tariff announcements, the pound dropped to almost $1.2505. However, like the euro, it has since rebounded, trading at approximately $1.2585 later in European trading. There are options totaling GBP410 million at $1.26 set to expire, which might influence near-term movements. It’s worth noting that while the euro dropped to new two-year lows in the previous week, sterling didn’t follow suit. Its lowest point this year, back in April, was around $1.2300.
### China
The dollar remained relatively stable against the Chinese yuan yesterday, although trading was somewhat volatile. The high for the session was near CNH7.2580 in late Asia Pacific trading, while the low occurred in North America, around CNH7.2360. In reaction to Trump’s announcement of an additional 10% tariff on all Chinese imports, the dollar climbed towards CNH7.2725, a new four-month high. This move came after speculation about a potential deal involving a stronger yuan in exchange for relaxed tariffs. The People’s Bank of China (PBOC) continues to influence the market by setting the dollar’s reference rate weaker than market expectations, possibly limiting the dollar’s appreciation pace. Accusations of “manipulation” tend to arise more when officials attempt to lower the yuan than when they work to strengthen it. The PBOC set the dollar’s reference rate at CNY7.1910 today, compared to CNY7.1918 yesterday, while the average from Bloomberg’s survey was CNY7.2394.
### Japan
Japan’s economic landscape offers limited insight into exchange rate dynamics, particularly following a 2.9% year-on-year increase in producer service prices for October. One factor to consider is the US 10-year Treasury premium over Japan, which recently hit a five-month high near 345 basis points. Although it dipped below 330 basis points yesterday, this correlation remains stronger than that with changes in the 10-year interest rate differential. Additionally, the yen’s recent weakness and comments by Bank of Japan Governor Ueda have led markets to anticipate a potential rate hike next month, with 15 basis points already priced in by the swaps market. By mid-next year, 40 basis points of tightening are anticipated. The focus will shift to meetings from central banks like the Reserve Bank of New Zealand, which is expected to enact a second consecutive half-point cut.
The dollar dipped below its 20-day moving average against the yen yesterday but rebounded slightly above JPY154.70. It has since remained in a narrow range across Europe and North America. A minor pullback in the US 10-year yield appeared exaggerated, and the yen seems unaffected by Trump’s tariff threats. The dollar has been trading within yesterday’s range, approximately JPY153.55 to JPY154.40.
### Canada
The Canadian dollar hit a new four-and-a-half-year low against the US dollar, falling to nearly CAD1.4180 following Trump’s tariff announcement, which included Canada. Since then, the currency has mildly rebounded to trade just below CAD1.41. Intraday indicators suggest potential for a further pullback, with support likely in the CAD1.4025-50 range.
During yesterday’s trading, the US dollar briefly reached a new nine-day low against the Canadian dollar before trending higher in the North American session. The rise past CAD1.40 followed the uncontroversial appointment of a new Treasury Secretary. Despite this, the market reaction to the tariff news led to a further increase in the exchange rate, pushing past recent highs.
### Australia
The Australian economic calendar is poised for important updates, particularly concerning CPI data for October. A series of four consecutive monthly declines, which saw inflation drop from 4.0% to 2.1%, appears to have concluded, with a slight rise to 2.3% anticipated. The Reserve Bank of New Zealand is expected to cut rates by half a point, setting the cash rate target at 4.25%.
The Australian dollar reached a nine-session high near $0.6550 as investors reacted positively to the US Treasury nomination. However, this momentum was short-lived, as sellers drove the currency down to a new session low near $0.6490. The initial reaction to Trump’s tariff threats pushed the Aussie to a two-month low, dropping to $0.6435 earlier today. It has since recovered to near $0.6500 and is stabilizing, finding support around $0.6475.
### Mexico
The Mexican peso depreciated by over 1% following Trump’s tariff announcements, continuing a recent downtrend. The US dollar settled at a three-day low against the peso, around MXN20.25, prior to the tariff revelation, with support found ahead of the 20-day moving average. After the announcement, it reached MXN20.75, yet remained below the post-election high.
Emerging market currencies experienced gains mostly in central Europe and Latin America. The Chilean peso outperformed the Mexican peso, becoming the strongest currency in the region, appreciating by approximately 0.85% compared to the peso’s 0.80% gain. In Brazil, the US dollar settled above BRL5.80 for a third consecutive session, approaching the four-and-a-half-year high set in early August at BRL5.8550.
