Trump's tariffs send USD higher, equities lower

Good morning

The introduction of US trade tariffs over the weekend has sent the US dollar marching higher.  With Mexico and Canada hit with 25% tariffs, it is no surprise MXN and CAD have weakened since markets opened.  China have had an additional 10% tariff imposed on imports to the US although there is talk China are in the mood to negotiate to some extent..  Global equities have been hit hard.

USDCAD had closed around 1.4525 but jumped to 1.4790 earlier this morning, now back at 1.4705.  USDMXM had closed around 20.65 but hit a high around 21.28 overnight.  Trump has warned EU that they will definitely be hit by tariffs ‘pretty soon’, he has been slightly less aggressive towards the UK, perhaps because we already have a trade deficit with the US, but we are certainly not out of the firing line completely. 

EURUSD hit a low of 1.0210 overnight while GBPUSD saw 1.2450, each 150 pips or so off Friday’s close.  As I type GBPUSD has just made it back to 1.2300, EURUSD still struggling at 1.0230 which leaves GBPEUR higher at 1.2025.  ECBs Knot has since said that he’d expect tariffs to lead to higher US inflation and interest rates, and a lower Euro.   He would prefer to see no retaliation but is well aware it is quite likely as and when EU are hit with tariffs.   

AUDUSD suffered as you’d expect, trading to a low of 0.6090 against the USD, the lowest level since April 2020 when Covid was taking hold.  GBPAUD now 2.0045.  Slightly better than expected, although still gloomy Aussie retail sales data overnight did little to help AUD, overshadowed as it was by the new tariffs.

Despite the USD strength, USDJPY actually traded lower to 154.75 on the open but has since headed back up to the 155.90 area.  GBPJPY has unsurprisingly seen some volatility, trading down from a close around 192.30 to 190.10, then back up to 191.50.  BoJ minutes were released overnight which showed real concern over the weak Yen which could lead to further rate rises although BoJ are expected proceed with caution.

The tariffs will have far reaching implications for all.  Higher inflation and lower growth are likely side effects.  We do know Trump doesn’t like the US being taken advantage of but I would like to know what happens if the affected countries were to simply turn their backs on the US and start trading better together.  Whether that is even a possibility I do not know.  Therre have already been tit for tat tariffs imposed on the US by Canada, while Mexico’s President Sheinbaum is due to make a statement at midday today.

On inflation, Turkey announced their latest inflation figures this morning, coming in just around 1% above expectations at 42.12%. 

I’d warned late last week that this week could be lively with plenty of data from UK, EU and US, including the all-important US nonfarm payrolls Friday.  I’d not expected it to start quite as lively as it has, although anyone who saw my USDCAD trade idea last week will know I was concerned about possible CAD weakness.  We’ll see how that all looks at expiry time this afternoon although buyers of the straight vanilla USDCAD call have already had ample opportunity to trade spot against it. 

The weekend brought a surprise win for Spurs against Brentford, could this be the turning point?  Arsenal beat Man City heavily while Man Utd woes continue, losing to Crystal Palace.  Forest recovered from their 5-0 defeat to Bournemouth by beating Brighton 7-0, incredible.  Chelsea take on West Ham this evening, looking at Spurs position in the table I think I’ll have to be quietly cheering for Chelsea. 

England’s rugby team came up short against Ireland, once again struggling in the second half as they did in recent matches against NZ and Australia.  France took Wales apart easily, Scotland beat Italy.  Its going to be a good six nations tournament, I think.

Today brings EU inflation numbers and US ISM PMI’s, although something tells me these will be clouded to some extent by any ongoing tariff news, certainly if we see the introduction of EU tariffs.  While the UK may get off a bit easier, I read that Starmer is meeting EU leaders, the first time a UK PM has done so since Brexit.  Talks should be focussed on defence but I have no doubt trade will come up.  Be interesting to see how this pans out, whether UK has to align itself closer to the EU or whether we can remain independent enough to get the best of both worlds, ie closer relations with EU while enjoying decent trade terms with the US.

Have a great day

-  09.00 German manufacturing PMI

-  10.00 EU HICP, CPI

-  14.30 CAD S&P manufacturing PMI

-  15.00 US manufacturing ISM

-  17.30 Feds Bostic speaks

-  21.45 NZ building permits

-  23.30 Feds Musalem speaks

-  00.01 UK BRC sales

Trump's tariffs could upset the calm into month-end

Good morning

Month end is here.  January always feels like a long month to me but if anything I think this one has gone pretty quickly.  

Barring a short-lived bout of USD buying overnight, we’ve seen reasonably stable currency markets over the past day or so.  EUR was pretty much unchanged after the ECB cut rates by 25bps to 2.75%, a move that had been widely expected and priced in, while impact from yesterday’s disappointing US Q4 GDP barely registered. 

Once again, Lagarde gave little away with regard to forward guidance, although she did mention that an uptick in inflation is likely due to energy pricing.  Another 25bps cut is likely but there is talk that the next cut would come with a change of tone from ECB, perhaps removing references to rates being restrictive.  EURUSD is holding around the 1.0400 region. 

Lagarde also mentioned that Bitcoin would not become part of the ECB’s reserves, which I have to say i heartily agree with.  Still, this didn’t stop Bitcoin hitting a high of just over $106,000.   Also making new highs was Gold, which touched $2,800/oz this morning.

Focus remains fully on Trump’s tariffs given tomorrow is 1st Feb, when tariffs are due to be introduced.  Plenty of talk that Canada and Mexico are firmly in the firing line, with threats of 25% being cited as the likely number.  Trump has also threatened BRICS nations with 100% tariffs should they look to replace USD as a reserve currency.  It will be interesting to see how that pans out.  He seems less certain on the rate and/or timing of China tariffs.  An announcement before the US close this evening looks possible and could give a month-end shock to the markets.

Today brings US Core PCE and CAD GDP.  USDCAD is currently 1.4465 having had a brief spike up to almost 1.4600 late yesterday on tariff talk.  I’m looking for cheap upside options just in case we do get a tariff shock this evening, for example a Monday expiry USDCAD 1.4650 call costs around 35 cad pips, should give something to trade spot against.  Paying a few pips more can extend that expiry by a few days.

One other thought would be to sell the Monday 1.4700 call and buy the one week 1.4600 call.  Net cost around 50 cad pips.  If the 1.4700 is exercised into a short spot position, it is covered by the long 1.4600 call, locking in a guaranteed minimum profit.  If the 1.4700 is not exercised you remain long the 1.4600 call expiry next Friday.  Just a thought, not had long to play around with the strikes on that one but hopefully you get the idea.

 Looking ahead to next week it’s a pretty full calendar.  We have the latest UK rate announcement on Thursday where a 25bps cut to 4.5% is possible but not fully priced I feel.  EU inflation and retail sales are also out next week, Aussie trade and NZD unemployment are also on the agenda.  Ah, let’s not forget ISM PMIs and employment numbers from the US with JOLTS, ADP, Challenger all leading up to Fridays nonfarm payrolls.  Could be a busy start to February, that’s for sure.

Turning to sport, Spurs finally got a decent win and, along with Man Utd, earned a top eight Europe league positon, helped by a load of young players.  They might be good enough for the Europa League, but whether they are yet up to the rigours of the premier league remains to be seen.  Perhaps we’ll find out on Sunday when Spurs take on Brentford.  Bournemouth v Liverpool should be a good match, Arsenal v Man City likely to be the highlight of the weekend I think. 

Today marks the start of the Six Nations rugby, with hosts France taking on Wales.  England make the trip to Ireland on Saturday.  Quite a lot of expectation on England.  France and Ireland are favourites, but if England can just turn the heat up a little I reckon they are win with a chance.  A small flutter on them at 5-1 may not be bad.  Any Scottish readers fancy their chances at 10-1?

The weather here is, once again, pretty bad but with some decent football and rugby to watch I’m quietly hoping this rain continues and I’ll be ‘forced’ to stay indoors.

Have a great weekend as and when it comes. 

-  13.00 German HICP

-  13.30 US Core PCE, ECI, personal income/spending

-  13.30 CAD GDP

-  14.45 US Chicago PMI

-  20.00 Possible US tariff announcement

Fed leaves rates unchanged, BoC cuts 25bps, ECB likely to cut today

Good morning

All was pretty much as expected yesterday, Fed kept rates unchanged at 4.5% while BoC cut rates 25bps to 3%.  USDCAD traded up to 1.4470 yesterday, around the upside level that has been tested several times since mid-Dec but so far has held, save for one brief spike last week which saw a high of 1.4515.  BoCs Macklem says that although CAD is weak it is not dysfunctional and it is the threat of tariffs that is having a greater impact on CAD than interest rate divergence.

Meanwhile the Feds decision to keep rates unchanged seems down to the ongoing strength in the US economy together with persistent inflation, despite Powell seeing the economic outlook as uncertain.  Fed are in no rush to cut rates and will continue to watch inflation and employment when deciding rates.  This comes as Trump has criticised the Fed for how they have dealt with inflation, saying he will lower inflation by rebalancing international trade, boosting US manufacturing and energy production, and slashing regulation.  He did add that the Fed has done a terrible job on bank regulation, but did draw the line at demanding rate cuts from the Fed.

GBPUSD has been trading in a reasonably tight range over the past couple of days, it did dip just below 1.2400 briefly yesterday but is now back up at the 1.2445 area.  EUR has underperformed ahead of todays ECB rate announcement, with EURUSD now 1.0405 and GBPEUR up at 1.1960, the highest level for three weeks.  Disappointing German GDP numbers this morning did nothing to help EUR, EU data is due out later this morning and then ECB are widely expected to cut rates 25bps this afternoon. Lagarde’s comments rarely offer anything of real interest but I think it could be more interesting this time, particularly any reference to inflation which is looking rather sticky.

BoJs DepGov Himino was speaking overnight, there was much hype ahead of his speech which did err on the hawkish side but perhaps not as much as some were hoping.  He did say that BoJ would be raising rates again at some point if the economy and inflation move in line with forecasts.  USDJPY has drifted lower over the past day or so, now 154.45, not quite down to the lows we saw post-BoJ earlier in the week but I’m sure Japanese officials will be pleased Yen has not weakened after the Fed kept rates on hold. 

South Africa’s SARB are expected to cut rates 25bps to 7.5% at todays meeting.  ZAR has been a bit volatile recently, with USDZAR trading as high as 19.22 and then down to 18.30 in the last couple of weeks, while GBPZAR has traded from a low just last week of 22.70 up to nearly 23.50 on Tuesday, now back to 23.02.

In sport, out of the four English teams playing in the Champions League yesterday, only Liverpool failed to win although they were already assured of a top eight finish and indeed finished top of the group.  Arsenal and Villa both made the top eight, Man City scraped into the top 24 on goal difference. 

This evening Spurs will be taking on the mighty Elfsborg, Spurs looking to retain their top eight position in the Europa League.  I’d usually be confident but we’ve all seen Spurs form over the past few weeks.  Transfer deadline is Monday, no sign so far of Spurs getting the cheque book out so hopefully we’ll soon have some players back from their long-term injuries.  Man Utd also play this evening, with 15 points it would take a defeat and a series of other results to go against them for them to drop out of the top eight. 

That’s all for now.  Main focus is on ECB rates and US GDP this afternoon.

Have a great day

-  09.00 German GDP

-  10.00 EU GDP, unemployment rate, consumer confidence

-  13.00 SARB rate announcement

-  13.15 ECB rate announcement

-  13.30 US GDP, initial jobless claims

-  13.45 ECB press conference

-  15.00 US pending home sales

-  23.30 Japan Tokyo CPI, unemployment rate, retail trade

-  00.30 AUS PPI