Asian FX Open: Rising risk of a trade war between the 2 Global Powers
Snapshot
- DXY: The rush to cash and firming yields putting a bid under the dollar
- EUR/USD: Markets bet on ECB to focus on economic growth and opt for a rate cut at upcoming April meeting
- USD/JPY: Remains a rates play, as widening US10yr-Japan10yr yields boosted UsdJpy bulls
- AUD/USD: Sharp bounce in Aud yields and firming US stock futures grant Aud bulls a temporary reprieve
- OIL: Starting to stabilize above recent fresh YTD low at 62.51
- GOLD: Recent correction seeking fresh supports above it's 50 DMA
US Dollar
Dxy last Friday's sharp bounce off 101.267, along with signs of capitulation in traditional haven assets like Gold and Treasury markets is starting to resemble the March 2020 Covid lockdown liquidity event, hinting hedge funds may be under pressure to raise liquidity. Yesterday's breach of former 103.197 low (18 Mar low) now sets up for a return towards 104.392
The MOVE Index and equity VIX index remains elevated with tariff rhetoric and geopolitical risks amplifying uncertainty, akin to the pandemic’s initial shock
Initially there were newswires reporting President Trump is considering a 90-day tariff pause on all countries except China and Nasdaq reversed course, but this was soon denied, and US stock indices resumed their slide but the stock indices eventually closed up stemming recent 3 days slide
Even If he does call a pause, will it be to re-negotiate the terms of tariffs? With over 50 countries wanting to negotiate him, expect another prolonged period of uncertainty
Come April 9, if we still don’t see any news pertaining to a rolling back of these tariffs expect the upheaval to continue and liquidity event risk to mount. Meantime Trump appears to be digging his heels in saying “this is the only chance we’re going to have to reset the table on trade, and when we do, we’re going to come out, unbelievably well”. He is also urging Americans to stand tough and take the “medicine”. It does sounds like the sell off in the market is garnering his notice especially after his plea to the Fed to cut rates. Trump is also threatening to impose an additional 50% tariff on China starting Thursday if China fails to withdraw its 34% tariff on US goods
Meantime officials are trying to distance themselves from the “formula” used to determine the tariffs. White House Chief Economist Stephen Miran said the formula was suggested by someone else in the administration and if other countries are looking for new terms they should come forward with offers
US treasuries not rallying is worrying, with commodities prices also collapsing and the increasing fear of recession, we find it hard to ascribe this treasury sell off as markets pricing in inflationary risks despite tariffs likely to produce a one-time price level shock. Likely the signal the market is sending is that it is souring on USTs as a safe haven. As highlighted in a recent Bloomberg article, questions have also been raised if one of the retaliatory methods would be the scaling back of Treasury purchases. Treasuries had one of the most volatile sessions with yields 12bps to 21 bps higher across the curve. Could we be moving towards a Liz Truss situation where ALL US assets gets dumped? Equities, Bonds, Currency? Maybe we are not there yet but it’s a risk worth keeping in mind
As it is, the scorecard thus far, since the reciprocal tariffs were announced, the Chf and Jpy are relative winners. Trump’s “written on the back of a napkin” to derive his outsized tariff plan has tarnished the dollar’s status as a preferred choice in a crisis. The Eur is a surprise beneficiary to some as they face an extra 20% of tariffs on their biggest export market. The lack of alternatives has likely benefited the Eur. Risk proxies like the antipodeans were big losers, the AudUsd registered a -4.29% loss and the NzdUsd registered a -4.77% loss for the 2 Apr – 7 Apr period
Interim technical bounces could occur at market extremes but until Trump backtracks or the Fed does something, beware of shifting too quickly into a risk on mode thinking the worst is over.
Normally key data like the upcoming CPI this week becomes almost irrelevant as it dealt with data before the big bazooka tariffs. Case in point despite Fed Chair Powell's relative hawkish comments last Friday, market is still pricing in around 4 cuts for the year as they anticipate an outsized response is needed to the coming carnage that will be wrought on economic growth down the road. Future data to either confirm or dispel this view will come from how the data unfolds in the coming months. This week's data, benign or not will continue to be overwhelm by news out of Washington, which will continue to be the main driver for swings either way
Euro
EurUsd resume the uptrend off 1.0141 as rally off 1.0733 (27 Mar low/just above the 200 DMA) pushed over 18 Mar 1.0955 high to punch fresh YTD highs at 1.1144. Current easing needs to maintain stance above prior 1.0733 (27 Mar low) higher low to keep the overall bullish bias off 1.0141 (3 Feb low/also near 200 DMA) intact
Markets starting to grow more certain the ECB will opt for a rate cut at their upcoming April meeting as focus shifts to the impact on economic growth from US reciprocal tariffs. OIS Eurozone markets pricing in a 91% chance for an April cut
With Eurozone March Preliminary CPI readings edging closer to ECB’s target, and with the tariffs announced on the worst end of the scale, it may not be farfetched to think some ECB officials who were formally ready to pause may now swing back to a easing mindset
Meantime EU trade ministers are set to convene this week to discuss Europe’s countermeasures to the tariffs. Chair of the European Parliament Trade Committee, Bernd Lange said that a response is possible in a month
Germany and France are pushing for a stronger response to US tariff measures, including targeting US tech and services. Italy and Spain though caution against too aggressive a response.
When asked by a reporter if EU’s proposed concession on cars and industrial goods was enough, Trump replied “No, It’s not”. He also said “EU was formed to really do damage to the United States in trade. They formed together to create a little bit of monopoly situation to create a unified force against the United States”
Japanese Yen
UsdJpy broke under 146.54 (11 Mar low) to resume the broader bear trend off 10 Jan 158.87 YTD high, posting fresh YTD lows at 144.56 (4 Apr low), just above 76.4% retrace (144.13) of the September 2024 – January 2025, 139.58-158.87 rally. Recovery off there now taking market back towards former 20 Mar low at 148.18 which now reverts to cap. Over there delays downside for another attempt on 150.49 (2 Apr minor lower high)
The sharp bounce off 144.56 came off the back of widening US10yr-Japan10yr yields spread. This continues to show this pair mainly takes it’s cue from rates
Brandywine Global Investment predicts UsdJpy could fall towards 135-138 in 2025 on repatriation flows. Their view is based on a shrinking US-Japan interest rate gap amid a growing risk the US economy will fall into recession. They also said that If US backs down on the trade tariffs or Japan managed to negotiate for a better outcome, the BOJ could come back in to hike rates , which should underpin Yen bulls
PM Ishiba was reportedly said to have set up a call with President Trump, which according to Treasury Secretary Bessent was very, very productive. Whatever that means is yet to be seen, a better tariffs outcome could put Yen bulls back in play
Meantime, Nikkei is the worst performer amongst all other major Asian indices this month, It’s losses from it’s December peak is now well over 20% taking it to bear market territory
Australian Dollar
AudUsd plunged sharply taking out 3 February’s .6088 low to post fresh YTD lows at .5933 (7 Apr low). Market attempting to stabilize in Asian opening hours. Former lows at .6187-.6219 (4 Mar-31 Mar lows) should now cap bounces
Aud getting some relief off sharp bounces in Aussie yields and a recovery in US stock futures which is opening firm in Asian hours. Treat this as a pause and temporary reprieve for bulls as the Trump reciprocal tariffs situation continues to unfold
With the seismic Trump tariffs, markets are now certain RBA will cut rates in the upcoming May meeting and another 3 cuts after that. With Australia's largest trading partner China, bearing the brunt of the reciprocal tariffs, and with news that China is retaliating with 34% tariffs on US goods and Trump in turn threatening to increase Chinese tariffs by an additional 50%, Australia's economy will likely face the spill over negative overtones
One of the more serious hits to Australia’s economy will be on iron ore prices. US tariffs will likely hurt Chinese steel exports. Goldman Sachs expect this to drag iron ore prices below $90 a ton by the end of this year
As trade tensions escalate, continue to keep a close look on the CNY fix to see if they will allow further depreciation in CNY as that will also weigh down on Aud, being the liquid yuan proxy
With about $1.5 trillion of the $2.64 trillion managed by superannuation funds deployed in listed Australian and global equity markets, Australians have also lost an estimated $90 billion in superannuation wealth in the recent share market rout triggered by the “Liberation Day” tariffs
Oil and Other Commodities Movement
Brent Crude Oil fell for a 3rd straight session yesterday, hitting fresh YTD lows at 62.51. Next downside target seen towards 5 Apr 2021 61.25 low. Former low at 68.33 now reverts to resist. Market opening firmer in Asian hours as global risk off sentiments seem to recede a little
Trump threatening an additional 50% tariffs on China was not good news for Oil. Neither was the larger OPEC+ output increase planned for May and Saudi Arabia slashing it's official selling prices for next month. Remains to be seen if all the negativity have been priced in. Speculators who loaded up on longs just before Trump's Liberation Day announcements, only to get ambushed by a worst end of the scale tariffs rollout, should be close to unwinding their positions, easing downside momentum for now
Gold relapsed from it’s recent 3167.84 record high (just short of our 3171.27 target – 76.4% projection of 2832.71-3057.49 off 2999.54), to breach below 21 Mar 2999.54 higher low. Market currently trying to stabilize above it's 50 DMA~2947. Main uptrend remains very much intact though and higher lows could now be sought above the 50 DAM - 11 Mar 2880.46 reaction low
With Gold being one of the liquid assets to have gained significantly this quarter, recent sell off could have been a short term impact move as, investors sell assets which have gained significantly to cover their margin calls in other assets
The longer term bullish underpinnings remain very much intact and it remains the ultimate haven asset in difficult times. Funds on the prowl for “tariff proof” assets should soon see the yellow metal regain it’s footing
CBOE Gold Volatility Index recently spiked to over 22, first time since September 2024, if global equities markets continue to melt down, and we face a liquidity event, even Gold may not be a safe place to hide initially as has been shown in past liquidity events when investors prioritize cash over all other assets. But then it tends to recover strongly as fear subsides. Currently Gold Volatility Index is starting to subside.
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