Tariffs and Trade: Impact on Global Currencies and Economies
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27 May 2025
Markets are increasingly concerned with the prospects of endless fiscal deficits and rising government debt, particularly in the US. The US lower chamber just approved a budget bill that implies yet another gusher of red ink, and investors reacted by selling US Treasuries and the dollar. The latter typically rose in response to higher US rates, but the polarity of that correlation has reversed since “liberation day”. Long bonds sold off worldwide, but US moves were generally sharper. The dollar fell against every major currency worldwide, though it remains some way off post “liberation day” lows. The week’s start was the Japanese Yen, which appears to be benefiting the most from the ongoing global repricing in interest rates.
AUD
As anticipated, the Reserve Bank of Australia lowered rates by another 25 basis points last week. The tone of the bank’s communications was more dovish than we had anticipated. According to the RBA, upside risks to inflation had eased and the bank had room for aggressive interest rate cuts if required. Interestingly, policymakers also debated the possibility of a larger, 50 basis point rate reduction at this month’s meeting in response to the downside growth risks posed by US tariffs, and markets subsequently see a more than 50/50 shot of another cut at the next meeting in July. Trade headlines aside, we will be keeping an eye on a couple of key economic data releases in Australia this week. The monthly inflation print for April on Wednesday could be key in guiding RBA policy. April retail sales data on Friday will also give a snapshot as to the strength of domestic demand.
NZD
The Reserve Bank of New Zealand appears likely to follow in the footsteps of its Australian counterpart in lowering rates by another 25 basis points on Wednesday. With inflation now under control, the domestic economy weak and risks mounting from Trump’s trade policies, it seems unthinkable that the RBNZ will stand pat this week – indeed, swap markets are all but fully pricing in another cut. Focus will be on the bank’s communications, particularly with regards to how rate-setters expect the tariffs to impact the New Zealand economy. Baring any surprises here, we suspect that the kiwi will be driven largely by global risk appetite. Domestic economic data is light, aside from the latest business and consumer confidence indices on Thursday, which tend not to be a market mover.
USD
The selloff in bond markets on fiscal fears is pushing the US dollar down, in yet another reversal of currency correlations that had held for decades. On the positive side for the greenback, economic data shows little tariff-related damage, and now even business activity surveys are normalizing. Paradoxically, sharply rising tariff revenue is providing the only positive fiscal news. The latter, together with sharply higher US Treasury yields and a very one-sided market where positioning data shows that speculators are significantly short the dollar may provide some short term relief for the currency,. by the longer trend is probably down.
CNY
The broadly weaker US dollar allowed the yuan to rally against it, to its strongest position since November, with USD/CNY now hovering below the 7.2 mark. The April data dump came out mixed last week. Retail sales disappointed, highlighting concerns over consumption, but industrial production showed more resilience. As expected, the 10bp reduction to the policy rate announced earlier in the month led to a decline in loan prime rates on Tuesday, with 1-year down to 3% and 5-year to 3.5%. Attention regarding China in the near term is still on the tariff impact and signals regarding the future of Sino-American relations. As for the former, we’ll get some more data in the coming days, including May PMIs, out Saturday.
JPY
The yen performed well last week, rallying to its strongest position on the dollar in more than two weeks on Friday as markets reacted to the fresh tariff news by seeking refuge in the safe-havens. US-Japan trade negotiations continue to rumble on. The main focus has been whether or not any deal would include stipulations surrounding the exchange rate. Thus far, this doesn’t appear to be the case, as officials on both sides indicated last week that currency rates should be set by market forces. We continue to contest that markets are underpricing the extent of Bank of Japan interest rate hikes this year. The April inflation report supported this view, as while the main inflation rate remained unchanged at 3.6%, the core rate (excluding fresh food) unexpectedly jumped to 3.5%, its highest level in more than two years. BoJ Governor Ueda will be speaking on Tuesday, and while we don’t expect any change in the tone of his rhetoric just yet, we do think that swap pricing for BoJ hikes (15bps by year-end) is too conservative.
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