Asia FX Talk - Tariffs are still likely in the pipeline

Ahead Today

G3: US mortgage applications

Asia: BNM policy rate decision, Malaysia CPI

Market Highlights

President Donald Trump has signed several key executive orders on Day 1 in office. He granted pardons for those people involved in the US Capitol attack on 6 January 2021. A national emergency at the US-Mexico border was declared to clamp down on illegal immigration. Trump will pull US out of the Paris Climate Agreement and the World Health Organization, support oil production, and withdraw support for renewable energy. He has also put a freeze on government hiring, except for the military and other unnamed parts of the government.

The good news is that Trump did not raise tariffs on Day 1. This has provided some respite for the rest of G10 and Asian currencies. Given markets have been piling into the long USD trade heading into Trump’s inauguration, those bets are susceptible to a potentially less aggressive pace of tariff hikes.

Nonetheless, some form of tariff hikes is still likely in the pipeline. Trump has repeated his threat of imposing 25% tariff on Canada and Mexico on 1 February. Canadian Prime Minister Trudeau has said he will retaliate in kind if Trump imposes tariffs. Amidst heightened global trade uncertainties, the US dollar’s latest decline could be contained.

Meanwhile, Trump has announced up to $500bn worth of private sector investment in building artificial intelligence infrastructure. A joint venture involving OpenAI, SoftBank, and Oracle will be set up. 

Regional FX

Asian currencies have strengthened against the US dollar, as Donald Trump was surprisingly light on details about tariffs on Day 1 in office. Instead, he has ordered federal agencies to review existing tariffs and trade relationships with China, Mexico, and Canada. The review is set to report on 1 April. Notably, these trade reviews will include checking for China’s compliance with the Phase 1 trade deal that Trump struck with China during his first presidential term. Ultimately, Trump will look to narrow the trade deficits that US have with other trading partners, notably China, raise tariffs to offset the cost of tax cuts, and impede China’s tech advancement. Global trade uncertainty looks set to persist, which will be a drag on Asian currencies.

The key highlight for today is the policy rate decision by Bank Negara Malaysia (BNM). We expect BNM to keep the policy rate unchanged at 3.00% in today’s meeting. Advance GDP estimates show Malaysia’s Q4 GDP growth slowed to 4.8%yoy, from 5.3%yoy in Q3. But economic growth was still in line with the pre-covid pace of increase. In addition, Malaysia inflation will also likely remain contained at 1.8%yoy in December. We expect BNM to adopt a dovish tone to reflect potential US tariff hikes.