### United States
The global capital markets are grappling with the profound changes triggered by the new US administration. The real economic impact of these policies remains to be fully seen, as some measures of economic activity might be artificially inflated due to anticipations of US tariffs. Government and private sector job cuts have not yet influenced weekly jobless claims or the March nonfarm payroll report. Even with Elon Musk’s efforts to slash US spending, the March 2025 budget deficit was about $15 billion greater than anticipated, and the Q1 2025 deficit was roughly 7.5% higher compared to the previous year. Contrary to expectations, the US dollar depreciated sharply in response to tariffs, even though it appreciated by 9% last year and has since lost nearly 4% of its value since the end of January. This depreciation, alongside falling US stocks and bonds, raises concerns about a potential capital strike against the US. The TIC capital flow report to be released will only cover February, a period during which the trade-weighted dollar fell by roughly 0.35%, the S&P 500 experienced a correction, and the 10-year yield went down by 33 basis points.
Senior US administration officials and market observers acknowledge that interpreting the current financial volatility and uncertainty is more critical than relying on high-frequency data. Additionally, with reciprocal tariffs postponed, the average effective tariff remains over 20%, posing challenges for growth and inflation. The Federal Reserve remains resolute, showing no urgency to cut interest rates, despite discussions about possible executive interferences in dismissing independent agency officials, which might affect Fed Chair Jerome Powell. Meanwhile, bipartisan support for a legislative check on executive power concerning trade and tariffs is gaining momentum.
Federal Reserve Chair Powell has noted the disparity between weak soft data, such as surveys, and the more resilient hard data, like nonfarm payrolls. The real sector data presents a mixed picture: strong auto sales may inflate retail sales figures while industrial production appears to slow following a previous surge.
The dollar experienced increased pressure in recent sessions, with the DXY falling significantly before recovering slightly but failing to re-enter certain technical ranges. Previous support levels might now act as resistance, and downside risks extend to potentially significant lows.
### Eurozone
The trade war introduces a new shock following Russia’s invasion of Ukraine and the de-risking from China, affecting the Eurozone as recovery seemed imminent. The likelihood of an ECB rate cut is high, with an anticipated quarter-point reduction, bringing the deposit rate from 2.5% down, according to market expectations, to around 1.65% by year-end.
The aggregate February industrial production figures, though historically not market movers, should align with a gradual recovery. Germany’s economic sentiment has improved, owing partly to reduced current assessment pessimism and an uptake in expectation metrics since Russia’s Ukraine invasion.
The euro hit a significant high against the dollar recently before retreating slightly, indicating persisting volatility with the possibility of reaching higher levels should support from recent buyers continue.
### United Kingdom
The United Kingdom’s financial dynamics show that the broad movement of the dollar heavily influences sterling, evident from a strong inverse correlation. Nonetheless, the UK’s latest labor market report and CPI data reveal a gradually slowing workforce yet resilient wage growth, which may dissuade rapid policy easing.
Consumer Price Index readings align with ongoing adjustments in economic activities, including a potential rate cut looming. Sterling concluded the past week with noticeable gains and is poised for further positive movement, contingent on broader economic variables and comparative resilience in the face of past highs.
### China
China’s monetary authority, the PBOC, has allowed a bit more flexibility into the yuan, accepting depreciation against the dollar. While many predicted a large devaluation of the yuan, it was the dollar that saw a sharp decline instead.
Upcoming trade data and GDP figures will reflect export adaptations to US tariffs and provide a clearer economic picture for Q1 2025. The yuan’s volatility has increased, yet it maintains general stability within expected bands.
### Japan
US rate movements largely dictate the yen’s behavior, giving it an ongoing image as a safe haven currency. Japan’s trade balance is notable for improvements due to adaptive measures against US tariffs, with March CPI expected to indicate an upward inflation trend.
Despite fluctuations against the dollar, the yen remains supported by strategic economic responses, including the potential for further devaluation.
### Canada
The Canadian dollar is more responsive to US dollar movements than to other influencing factors like interest rates or oil prices. The Bank of Canada faces decisions on potential rate cuts amid shifting political climates and ongoing trade conflicts with the US, which could affect the domestic economy.
Inflation readings and rate cut speculations are influencing market reactions amidst broader economic pressures, possibly signaling future adjustments.
### Australia
The Australian and New Zealand dollars suffered significant devaluation recently, interpreted as a mini-flash crash, highlighting increasing market fragmentation fears. As market confidence points towards accelerating monetary easing, employment figures depict a weakening labor market.
Australia’s recent currency rebounds remain within broad year-long ranges, reflecting potential for both upward momentum and lingering volatility.
### Mexico
Mexico is navigating the implications of US reshoring strategies, which pose challenges to development plans. The absence of immediate market-moving data parallels with strategic shifts in trade relations while balancing economic pressures.
The peso’s volatility continues amidst potential interest rate adjustments and economic uncertainties tied to US tariff policies, requiring careful monitoring of exchange rate levels and support indicators.
