Ahead Today
G3: Germany IFO Business Expectations, US New Home Sales
Asia: China Manufacturing and Non-Manufacturing PMI, Singapore Unemployment rate
Market Highlights
President Trump imposed tariffs and sanctions on Colombia after Colombia’s president refused to allow two military planes carrying deported migrants to land. President Trump ordered an emergency 25% tariff on all Colombian goods coming into US, which will be raised to 50% in a week, with oil, gold, coffee and flowers topping the list of US exports. While the past week has certainly brought some adjustment in stretched long Dollar positionings with the Dollar weakening meaningfully during the 1st week of Trump’s term, we are somewhat skeptical that Dollar weakness and with that Asian currency strength can continue. It’s certainly still early days, but it does seem like Trump 2.0 will use tariffs to achieve both economic and non-economic policy goals as the Colombia example exemplifies, and perhaps in a more aggressive way compared with the 1st term.
What’s going to be important moving forward as well for Asian currencies is the relationship between US and China, which has reached a temporary détente and honeymoon for now, given the presumable prospect of a deal. Onshore USD/CNY has reached 7.2411 right now from closer to the top of the FX band of 7.33 earlier this month given these developments and a slower than expected implementation of tariffs. We think tariffs between US and China are likely delayed and not denied and hence we think USD/CNY is still likely to rise over the medium-term through 2025.
Regional FX
Asian currencies were somewhat mixed to start the week given the news on Trump’s tariffs on Colombia, with CNH (-0.13%), MYR (-0.28%), and SGD (-0.1%) underperforming. The key development last week was the decision by the Bank of Japan to hike rates by 0.25% bringing its policy rate to 0.5%, which was decently well telegraphed ahead of the announcement, with JPY strengthening by 0.35% and USD/JPY at 155.46 to start the week. The press conference by Governor Ueda after the decision was neutral, but the key messages of rates still below neutral and also with gradual rate hikes the path of least resistance if the economy performs as expected including with further wage hikes to come remains the same. We continue to expect BOJ to hike rates further and likely in the July meeting next. Meanwhile, Singapore’s central bank eased its exchange rate policy by reducing the slope of its policy band slightly, in a decision that had been expected by us for sometime (see MAS eases policy, next move depends on Trump’s tariff plans). One of the key drivers was a downward revision in the Singapore central bank’s core inflation forecast to 1-2% from 1.5-2.5% previously, and also certainly coupled with uncertainty around Trump’s tariff plans.
