Bend It Like Aluminum, Stay Strong Like Steel

• President Trump plans to impose 25% tariffs on all imports of steel and aluminum into the US. Canada is the top supplier of steel and aluminum to the US. CAD is underperforming most major currencies.

• Norway inflation unexpectedly quickened in January. Norges Bank still poised to start easing in March.

• Check-out our Drivers for the Week Ahead for an in-depth look at what markets are facing this week.

USD is firmer as US protectionist policies intensify. On Sunday, President Donald Trump said he plans to impose 25% tariffs on all imports of steel and aluminum into the US starting today. Trump also said he would unveil new reciprocal tariffs this week on a wide range of countries that tax US imports. CAD is underperforming most major currencies because Canada is by far the top supplier of steel and aluminum to the US.

US

Moreover, an upward adjustment to US interest rate expectations is supporting USD and Treasury yields. Fed funds futures trimmed bets of a 50bps cut this year as the US labor market remains healthy and inflation expectations are rising. Non-farm payrolls rose less than expected in January (actual: 143k, consensus: 175k) but the gains in November and December were revised up by a combined 100k jobs. The unemployment rate unexpectedly fell one tick to 4.0% (consensus: 4.1%) on a higher participation rate and average hourly earnings increased three ticks more than anticipated to 4.1% vs. 4.1% in December. Overall, wage growth is running around sustainable rates consistent with the Fed’s 2% inflation target given non-farm productivity of 1.6% y/y in Q4 2024.

However, survey-based measures of US consumer inflation expectations have raised the possibility that progress on inflation may be stalling well above 2%. In February, 1-year consumer inflation expectations surged a full percentage point to a 13-month high at 4.3% and 5- to 10-year expectations rose one tick to 3.3% in February, the highest since June 2008. The January New York Fed survey of consumer expectations is up next (4:00pm London), followed on Wednesday by the US January CPI report.

The US economy remains in a good place which continues to underpin the fundamental USD uptrend. The Atlanta Fed GDPNow model estimates Q1 growth at an above trend pace of 2.9% SAAR while the New York Fed GDP model forecasts Q1 growth at 3.1% SAAR.

NORWAY

NOK ignored Norway’s January CPI data. Inflation unexpectedly quickened in January. Headline printed at 2.3% y/y (consensus: 2.2%) vs. 2.2% in December while underlying CPI printed at 2.8% y/y (consensus: 2.6%) vs. 2.7% in December. The Norges Bank remains on track to cut the policy rate in March but the possibility of more easing beyond that is less certain. At its January meeting, the Norges Bank kept rates steady at 4.50% and reiterated that “the policy rate will most likely be reduced in March.” Markets continue to fully price-in a 25bps cut to 4.25% at the next March 27 meeting.

JAPAN

USD/JPY firmed up on USD strength. Japan’s current account surplus narrowed in December to ¥2,732bn from ¥3033bn in November. Annually, the current account surplus totaled a record ¥29.3tn in December (4.7% of GDP) which is JPY supportive especially during periods of heightened risk aversion.

CHINA

USD/CNH is up on USD strength. China’s economy is still struggling to escape a deflationary spiral. In January, headline CPI rose one tick more than expected to 0.5% y/y vs. 0.1% in December and core CPI increased to 0.6% y/y vs. 0.4% in December. However, the pick-up in inflation is due to seasonal factors from the Lunar New Year holiday and should fade in the coming months. Indeed, PPI fell for a second consecutive month by -2.3% y/y and remains a source of downside pressure on CPI inflation. To escape the debt-deflation loop, Chinese policymakers need to ramp up fiscal measures to boost consumption.