Wax On, Wax Off

January 22, 2025
6 min read

Wax On, Wax Off

  • Financial markets are brushing-off noise around US tariff threats. There are no policy-relevant data releases today to trigger big financial market moves.
  • New Zealand inflation unexpectedly fails to slow in Q4. But RBNZ has room to keep easing.
  • Bank Negara Malaysia kept rates steady at 3.00% and suggests cuts are not in the pipeline just yet.

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Financial markets are brushing-off noise around US tariff threats. USD gave up yesterday’s gains and is trading on the weaker side, futures market point to additional gains in stocks, and long-term government bond yields are holding near recent lows. After threatening to impose tariffs of as much as 25% on Mexico and Canada by February 1, US President Donald Trump said he was considering imposing 10% tariffs on imports from China as soon as February 1. Chinese stocks sold-off a bit and USD/CNH ticked-up.

The USD positive backdrop from Trump’s “America First Trade Policy” is offset by other policies expected to support risk assets. For instance, Trump’s focus toward deregulation and lower energy prices have the potential to generate non-inflationary growth that bodes well for both the bond and equity markets. Meanwhile, US economic outperformance remains a key theme underpinning a stronger USD. The January PMI figures for major economies, due Thursday/Friday, will offer a timely update on relative growth momentum trends.

EUR/USD is holding on to recent gains above 1.0400. ECB Governing Council member Klaas Knot signaled alignment with market expectation for ECB rate cuts in January and March. Knot also echoed comments from other ECB policymakers warning “I’m not convinced yet that we need to go into stimulative mode”, which ios estimated to be below 2%. Markets agree and price-in 100bps of total ECB easing over next 12 months that would see the policy rate bottom at 2%. Bottom line: ECB/Fed policy trend is an ongoing drag for EUR/USD.

GBP/USD and gilts face renewed downside pressure due to the UK’s deteriorating fiscal prospects. The UK budget deficit rose to -£17.8bn in December vs. -£11.8bn in November. This was more than expected (-£14.2bn) and the highest December borrowing for four years. Moreover, public sector borrowing for the 2024-2025 financial year is so far tracking £4.1bn higher than the Office for Budget Responsibility forecasted in October (£125.9bn). The implication is the government may have to announce tax hikes and/or spending cuts when it publishes its Spring economic and fiscal forecast on March 26, further dampening economic activity.

NZD is underperforming against all major currencies. New Zealand inflation was stickier than anticipated in Q4 but will not derail the RBNZ’s easing trajectory. Headline CPI printed at 2.2% (consensus and RBNZ projection: 2.1%) vs. 2.2% in Q3. More importantly, inflation is converging towards the 2% target mid-point and measures of core inflation have declined to within the 1-3% target range. The RBNZ inflation sectoral factor model declined 0.2pts to 3.1%, the lowest since Q2 2021. The RBNZ has penciled-in another 50bps rate cut to 3.75% in February but warned of a slower pace of easing after that, adding it does not forecast to slash the policy rate below neutral (around 3%) throughout 2027. Markets agree and price in the Official Cash Rate to bottom between 3.00% and 3.25% over the next 12 months.

USD/CAD is trading in a choppy range between 1.4300 and 1.4500. Canada’s disinflationary process is intact. In December, headline CPI unexpectedly dipped to 1.8% (consensus: 1.9%) vs. 1.9% in November reflecting the temporary GST/HST exemption on certain goods in December. Core CPI (average of trim and median CPI), which adjust for tax changes, matched consensus at 2.45% y/y vs. 2.6% in November but tracking a little higher than the Bank of Canada’s (BOC) Q4 projection of 2.3%. This reinforces the BOC’s guidance to slow the pace of easing following two consecutive 50bps rate reductions. The market implies 80% odds of a 25bps rate cut to 3.00% next week’s meeting. Bottom line: FED/BOC policy trend and risk of all-out trade war between Canada and the US suggest USD/CAD has scope to overshoot.

MYR is outperforming most major currencies. As was widely expected, Bank Negara Malaysia kept rates steady at 3.00%. The bank suggested again that cuts are not in the pipeline just yet. The post-meeting statement highlighted that “the strength in economic activity is expected to be sustained in 2025” while “inflation is expected to remain manageable.” The swaps market still price-in just one 25bps cut in the next 12 months.

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