Another Brick in the Wall

US

USD (DXY) is up roughly 1.5% from its July 1 cyclical low. Treasury yields are drifting higher across the curve towards the middle of their year-to-date range. The S&P500 is treading water after rising to a record-high Friday.

Copper prices on the Comex surged as much as 17% yesterday, a record one-day spike to an all-time high at $5.66 a pound. President Donald Trump announced plans for 50% duty on copper imports and Commerce Secretary Howard Lutnick said the copper tariff is “likely to be put in place end of July — maybe August 1.” US tariffs on copper had been well telegraphed since February as part of a review under Section 232 of the Trade Expansion Act.

On going front-loading ahead of tariff implementation will continue to put upside pressure on copper prices. Chile is by far the top supplier of refined copper to the US, accounting for over 70% of US refined copper imports in 2024. CLP reaction has so far been muted.

Moreover, Trump warned that tariffs on pharmaceuticals are “going to be tariffed at a very, very high rate, like 200 percent,” adding that the measure would be announced soon and take effect after at least a year. Finally, Lutnick signaled more tariff announcements are in the pipeline “You should expect another 15-20 letters over the next two days, setting down tariff lines for the key driving countries.”

In our view, US protectionist trade policy will continue to weigh on USD for three reasons: First, higher US levies (currently the highest since 1934) is a downside risk to US growth and upside risk to inflation. Second, the ongoing trade war threatens to accelerate the dollar’s declining role as the primary reserve currency as countries reassess their economic dependencies on the US. Third, effort to narrow the US trade deficit mean fewer dollars will flow overseas, reducing the need for those funds to be recycled back into US securities.

The fiscal thrust from the so called One Big Beautiful Bill (OBBB) will partly be offset by the drag to growth from higher tariffs. The Tax Foundation estimates OBBB will increase GDP by about 0.2% in 2025, rising to 1.2% in 2026 up to a peak of 1.5% in 2028 before falling and stabilizing at the long-run GDP increase of 1.2%. The Yale Budget Lab estimates that all 2025 US tariffs plus foreign retaliation lower real GDP growth by -0.7pp over 2025 and the level of real GDP remains persistently -0.38% smaller in the long run. It’s worth pointing out that the bulk of the US deficit blowout stems from the extension of the 2017 Tax Cut and Jobs Act (TCJA) which does not count as extra fiscal stimulus.

The FOMC June 17-18 meeting minutes takes the spotlight today (7:00pm London). At that meeting, the FOMC voted unanimously to keep the funds target rate unchanged at 4.25-4.50%. Fed Chair Jay Powell reiterated that the Fed was well positioned to wait for greater clarity before considering any adjustments to the policy stance.

Indeed, while the 2025 median Fed funds rate projection still implied 50bps of easing, the distribution of dots was more cautious with a growing number of officials (7 vs. 4 in March) projecting no change in rates this year.

Watch-out to see if the minutes show that policymakers discussed concerns about a stagflationary scenario. Remember, the 2025 median projections for PCE and core PCE inflation were revised 0.3pp higher to 3.0% and 3.1%, respectively, while real GDP growth forecast was trimmed 0.3pp to 1.4%.

NEW ZEALAND

NZD/USD is range-bound around 0.6000. RBNZ delivers a dovish hold. The RBNZ kept the Official Cash Rate (OCR) unchanged at 3.25%, as was largely anticipated, and noted that “If medium-term inflation pressures continue to ease as projected, the Committee expects to lower the Official Cash Rate further.” The guidance is in line with the RBNZ projection outlined in May which sees the OCR bottom at 2.85% over Q1 2026.

The RBNZ Committee discussed two options at today’s meeting: cutting the OCR by 25bps or keeping the OCR on hold. According to the RBNZ “The case for lowering the OCR at this meeting highlighted weak near-term growth momentum and the risk of prolonged weakness in economic activity from excess caution by households and businesses in the face of economic uncertainty…The case for keeping the OCR on hold at this meeting highlighted the elevated level of uncertainty, and the benefits of waiting until August in light of near-term inflation risks.” The swaps markets price-in 68% odds of a 25bps cut at the August 20 meeting, little changed to the pricing observed ahead of today’s meeting.

In our view, the RBNZ is near the end of its easing cycle, which is supportive of NZD. New Zealand inflation is within the target band and the OCR is close to the RBNZ mid-point estimate of the neutral range between 2% and 4%.

CHINA

USD/CNH is firmer just under key resistance at 7.2000 and China’s stock index is trading at the top-end of a multi-month range. China inflation was subdued in June. Headline CPI printed at 0.1% y/y (consensus: -0.1%) vs. -0.1% in May while core CPI rose to a multi-month high at 0.7% y/y vs. 0.6% in May. Nonetheless, deflationary pressures remain high as PPI dropped the most since July 2023 to -3.6% y/y (consensus: -3.2%) vs. -3.3% in May.

Overall, China’s economy is struggling to escape a deflationary spiral in large part because consumption spending is too weak. China's consumption-to-GDP ratio is very low at round 40%, due to high household savings, low household income levels, and high levels of household debt.

MALAYSIA

USD/MYR is holding near the middle of a two-month 4.2000 and 4.3000 range. Bank Negara Malaysia (BNN) lowered the Overnight Policy Rate (OPR) 25bps to 2.75%. This was the first cut since July 2020 and was expected by roughly half of economists surveyed. BNN noted that “the reduction in the OPR is…a pre-emptive measure aimed at preserving Malaysia’s steady growth path amid moderate inflation prospects.” As such, we doubt this is the start of a prolonged easing cycle.