## United States
The global markets are reacting to recent developments connected to the United States. Conversations among market analysts have centered on a potential agreement between the US and China, where China might allow the yuan to appreciate in return for eased tariffs. Although this scenario seems unlikely, speculations arose due to the pragmatic reputation of the newly nominated Treasury Secretary, Bessent. However, President Trump’s recent comments suggest imposing a 25% tariff on all Canadian and Mexican products and an additional 10% on Chinese goods from January 20, which have impacted various currencies and markets. Despite many G10 currencies recovering, the Australian dollar, Norwegian krone, and Canadian dollar have decreased, with the Canadian dollar seeing a 0.75% dip. Meanwhile, most emerging market currencies weakened, with the Mexican peso losing over 1%. In the equities market, Asian markets fell except in Hong Kong, European stocks broke a three-day rally, and US index futures have stabilized. In the bond markets, Asia Pacific bonds reacted to the US rally, European yields inched up, and the US 10-year Treasury yield increased slightly. Gold briefly extended its earlier decline to nearly $2,605 before recovering, while WTI crude also saw fluctuations.
## Eurozone
The Eurozone is facing numerous challenges, moving from the COVID-19 crisis to dealing with Russia’s invasion of Ukraine, and now navigating the impact of the evolving global automotive transition led by China. Additionally, Trump’s potential return and tariff threats are causing unease. The German government is on the brink of collapse, potentially leading to a national election, while France’s polarized election results might result in a short-lived government. The German 10-year bond yield premium over France is close to its highest since 2012. The euro has been volatile, initially rising to $1.0530 against the dollar before falling due to Trump’s tariff comments. It rebounded to $1.0520 in European trading hours. Anticipated EMU CPI figures might influence expectations of ECB rate cuts next month.
## United Kingdom
Sterling is experiencing significant fluctuations, hitting a session high around $1.2615 in North America but then declining to $1.2540. Amid the tariff talks, sterling dipped further to $1.2505 before rebounding to $1.2585 in late European trading. Despite the euro reaching new two-year lows last week, sterling has maintained some resilience, with this year’s low recorded in April near $1.2300.
## China
In China, the yuan faced volatility, with the dollar reaching new highs against it following Trump’s tariff threats. The exchange rate dynamics are complicated by the People’s Bank of China (PBOC), which is keeping the dollar’s reference rate weaker than expected to manage the yuan’s appreciation pace carefully. Amidst speculation of a broader deal involving a stronger yuan, the PBOC’s strategy continues to draw attention, particularly as US policy shifts may influence further adjustments.
## Japan
Japan is under watch as the US 10-year bond yield premium over Japan fell below 330 basis points, following a peak near 345 bp last month. With the yen under scrutiny, speculation is growing about a potential rate hike by the Bank of Japan (BOJ) next month. Recent oil price declines and Governor Ueda’s comments have fueled these expectations, with the swaps market now factoring in 15 basis points of tightening, a marked increase from late October estimates.
## Canada
The US’s announcement of tariffs targeting Canadian imports had an immediate impact, pushing the Canadian dollar to a four-and-a-half-year low of CAD1.4180 against the US dollar. This move follows US market trends, with the dollar showing some retreat to trade below CAD1.41. Canadian markets remain volatile as the tariff implementation looms on the horizon.
## Australia
Within the Asia Pacific markets, the Australian dollar initially rose to a nine-day high, closing above the 20-day moving average. However, it could not maintain this momentum against the backdrop of Trump’s tariff threats and other global pressures. The Reserve Bank of Australia is positioned as one of the more hawkish G10 central banks, counter to the Reserve Bank of New Zealand’s dovishness.
## Mexico
The Mexican peso experienced significant pressure, initially dropping more than 1% with Trump’s tariff announcement. The US dollar traded at a three-day low of MXN20.25 against the peso before the tariff comment brought it to MXN20.75, still lower than the post-election high of MXN20.8070. With the US’s focus on tariffs, the peso remains sensitive to ongoing trade discussions and economic data releases.
