The dollar is soft despite ongoing risk off impulses. DXY is trading lower near 102.742 after nearly recouping its losses and trading as high as 103.192 earlier. Global equity markets continue to give a thumbs down to the U.S. tariffs, with U.S. futures pointing to a lower open. The yen and Swiss franc continue to outperform, with USD/JPY trading lower near 146.45 and EUR/CHF trading lower near 0.93655. Elsewhere, both the euro and sterling are trading lower near $1.0970 and $1.2850, respectively. AUD has recovered a bit to trade near .6055 but weakness is expected to resume (see below). As we expected, the growth-sensitive majors and EM FX remain under pressure as risks to global growth pile up. We continue to believe that some of the post-tariff dollar weakness was due to a growing loss of confidence in U.S. policymakers. Today’s price action would seem to confirm this and so we view this current recovery as quite fragile, no matter how the U.S. data come in. We continue to downplay any notions of a Fed rescue (see below) and so risk off impulses are likely to continue.
AMERICAS
The market fallout from the tariffs continues. Miran, Bessent, and Trump have all tried to reassure markets over the weekend but to little avail, as they all signaled that there are no policy changes planned in order to address the market selloff. Given this message, equity markets continue to sell off and USTs continue to rally. It’s hard to get a handle on the dollar, as Thursday weakness was nearly reversed by Friday strength. We continue be believe that a loss of confidence in U.S. policymakers will limit dollar upside but there are hints that the dollar smile remains in play to an extent.
Don’t expect the Fed to come to the rescue anytime soon. We continue to believe that there will be no Fed put. There will be no emergency cuts. This is an entirely policy-driven market meltdown and there is no reason for the Fed to bail out the markets. If the Trump administration doesn’t like the market reaction, then it should remove the tariffs. That said, the market is pricing in nearly 55% odds of a May cut as well as 125 bp of total easing over the next 12 months.
Powell presented the latest Fed view last Friday. He spent most of the time talking about inflation risks and the need to remain on hold. However, Powell acknowledged that “While uncertainty remains elevated, it is now becoming clear that the tariff increases will be significantly larger than expected. The same is likely to be true of the economic effects, which will include higher inflation and slower growth.” Other Fed officials are also likely to maintain the wait and see approach. Kugler speaks today.
Bank of Canada Q1 business outlook survey will be reported. Initial results from recent BOC surveys indicated that trade uncertainty was prompting businesses to revise down their sales outlooks, especially in manufacturing and sectors dependent on discretionary consumer spending. Many businesses reported scaling back their investment plans and hiring intentions. Markets are pricing in nearly 60% odds of a follow-up 25 bp BOC policy rate cut at the next meeting April 16 and 75 bp of total easing over the next 12 months.
EUROPE/MIDDLE EAST/AFRICA
ECB officials are acknowledging the possible impact of U.S. tariffs. GC member Stournaras said the tariffs were "definitely a deflationary measure" and added that "A notable adverse impact on growth could lead to activity being much weaker than expected, dragging inflation below our targets." No surprise that ECB easing expectations have also picked up. The swaps market is now pricing in 75-100 bp of total easing over the next 12 months. Near-term, we expect the ECB to deliver a 25 bp cut to 2.25% at the April 17 meeting (about 95% priced in) to preempt the drag to growth from US tariffs. Cipollone also speaks today.
Bank of Israel is expected to keep rates steady at 4.5%. At the last meeting February 24, Bank of Israel kept rates steady at 4.5% and stated that “In view of the continuing war, the Monetary Committee’s policy is focused on stabilizing markets and reducing uncertainty, alongside price stability and supporting economic activity.” The bank added that “The interest rate path will be determined in accordance with the convergence of inflation to its target, continued stability in the financial markets, economic activity, and fiscal policy.” The swaps market is pricing in steady rates over the next three months followed by 25 bp of easing over the subsequent three months, followed by another 50-75 bp over the subsequent six months.
ASIA
Bank of Japan branch managers report was cautious. In its quarterly report, the bank wrote that “Many managers reported that they will carefully monitor developments closely as a branch. There were voices from businesses citing concerns about potential impacts on production and profitability from trade policies.” Other than the tariff risks, the report was generally positive as the bank kept its economic assessment for all of nine regions intact. BOJ tightening expectations have adjusted sharply downward following the U.S. tariff announcement, with no tightening priced in over the next 12 months and only 25 bp of total tightening priced in over the next three years vs. 75 bp previously. Despite this repricing, the yen continues to gain from save haven flows.
Japan reported mixed February cash earnings data. Nominal earnings came in a tick higher than expected at 3.1% y/y vs. 2.8% in January, while real earnings came in a tick higher than expected at -1.2% y/y vs. -1.8% in January. However, scheduled full-time pay came in at 1.9% y/y vs.3.0% expected and actual in January. The wage growth agreed in this year's annual spring labor-management wage negotiations so far has been somewhat higher than that agreed last year, but so far has not filtered through into the earnings data.
AUD remains under pressure. AUD traded near .5935 earlier today before recovering modestly. That is the lowest since March 2020 and on track to test that month’s low near 0.5510. AUD is the only major currency that's down YTD vs. USD but NZD and CAD are close. As global growth risks pile up, we expect the growth-sensitive dollar bloc to continue underperforming. The Scandies are outperforming YTD but we don't think this can be sustained. Similarly, more and more EM currencies are down YTD vs. USD, and more will surely be joining them in the coming weeks and months.
China may speed up stimulus measures. Reports suggest senior officials across many government entities have met in recent days to discuss moving forward some stimulus measures that were planned before the U.S. tariff announcement. Official press is also reporting that the PBOC has room to lower interest rates and reserve requirements as needed to boost the economy in the face of the latest tariffs.
