Trump’s Policies Shake Global Markets: Currency Turmoil and Economic Fallout

AUD

While the Aussie dollar did post gains against the broadly weaker US dollar last week, it also lost ground against most other major currencies. Confirmation that Trump was placing an additional 10% tariff on imports from China (on top of the 10% already enforced in February) is not particularly good news for the Australian economy or its currency. The Q4 GDP report showed solid 0.6% growth in the final three months of 2024, although a soft February composite PMI number (50.6) suggests that activity likely slowed at the start of the year.

Last week’s minutes from the latest RBA meeting confirmed the bank’s hawkishness. In the minutes, policymakers said that the interest rate hike in February does not commit them to further rate increases down the road. There was an emphasis on the downside risks to the economy, but it also noted that rates could stay elevated at current levels for an extended period should inflation fail to come down. This supports our call for no more than gradual cuts during the remainder of the year, which should act to keep AUD well supported.

NZD

The enforcement of harsh tariffs from President Trump on China remains arguably the biggest downside risk for the New Zealand dollar in the near-term. The kiwi currency held up quite well last week, but we think that the path of least resistance for NZD is lower, including against its Australian counterpart.

Perhaps the biggest news on the domestic front last week was the resignation of the RBNZ’s governor Orr. This would ordinarily be headline grabbing news, but it has largely done under the radar given developments elsewhere. Actually, his resignation is probably unlikely to change the needle too much for the bank, with markets still pricing in another 25bp cut in April and a total of three more during the rest of 2025.

USD

The February payrolls report temporarily calmed fears that the chaos emanating out of the White House will damage US growth, coming in more or less as expected, and still consistent with steady though unspectacular job creation. While this report stabilised the dollar after its dramatic weekly fall, it could not get a rebound going, as US stocks continue to underperform those of the rest of the world in an apparent no confidence vote on Trump’s policies.

February inflation should be the economic focus this week, but news on tariffs, the war in Ukraine or frankly any other random occurrence in Trump’s social media timeline may well overshadow it. Once again, Trump last week delayed tariffs for Canada and Mexico that fall under USMCA, in another sign that a dilution of the levies is highly likely. This can partly explain the extent of the move lower in the greenback last week.

CNY

The Chinese yuan underperformed most major currencies last week, posting only a relatively modest 0.5% gain against the broadly-weaker US dollar. February business activity numbers were a tad better than expected, but the CPI data showed disappointingly deep decline in consumer prices (and a rare contraction in core), reinforcing growth concerns. Stimulus still seems very much needed and Trump’s tariffs only add to the urgency. The doubling of these to 20% took effect Tuesday and the country’s response was again targeted and seemingly non-escalatory.

Changes in economic targets and language of communications from China’s leadership was similar to what was hinted by the media and indicates that stimulus takes increasing importance in 2025. The growth target of around 5% was unchanged but the fiscal deficit one was increased from 3% to around 4%. Meanwhile, the inflation target was lowered from around 3% to around 2% which brings it closer to the reality of muted price pressures. China’s economic calendar is largely empty this week. Attention will be focused on communications and any signals from Chinese officials as well as the White House will be closely monitored.

The yen traded within an unusually narrow range against the US dollar last week, holding its own around the 150 level on the greenback. Last week’s Tokyo inflation numbers came in slightly weaker than anticipated, and there were also downside surprises in the latest housing, retail and monthly industrial production figures. We don’t think that this changes the narrative too much for the Bank of Japan, however. The next move in rates will undoubtedly be upwards, and the only question relates to the timing. As things stand, the next 25bp hike is not fully priced in until October, which we think is entirely too late. Communications from BoJ governor Ueda on Wednesday should shed more light on the thoughts behind the bank’s decision making. Ongoing tariff toings and froings will likely be key for the yen this week given its safe-haven status, and we could see another bout of JPY strength should Trump indeed follow through with his Canada, Mexico trade restrictions.

JPY

We saw only a relatively muted move in the USD/JPY exchange rate last week, with the low-risk yen losing ground against most of its G10 peers, with the notable exceptions of the US and Canadian dollars. This underperformance is somewhat surprising, as we think that conditions continue to remain favourable for the Japanese currency. First indications are that the annual “Shunto” wage negotiations, which are the annual salary negotiations between employers and thousands of unions, will see wage hikes in excess of 6% for 2025 – above 2024 levels (+5.85%). This should support the case for further BoJ rate hikes, and we think that current market pricing (+32bps by year-end) is too conservative.

Focus this week will be partly on the revised GDP figures for Q4 (out on Monday night European time, Tuesday local). That aside, however, the economic calendar looks relatively light. More news on the annual Shunto wage agreements, which is due on Friday, could be key for the yen.