Limited FX impact as Trump repeats imminent tariff action

USD: Trump signals tariffs over the weekend

USD/CAD and USD/MXN both spiked sharply last night after President Trump repeated his plan to implement tariffs as of tomorrow as was originally stated by Trump. USD/CNH also jumped notably with Trump confirming planned action against China as well. The broader FX market reaction has been more muted and you do get a sense that investors remain sceptical that the plan will be fully implemented as outlined by Trump at this stage. USD/CAD and USD/MXN has retraced some of the spike higher.

It’s been reported that Trump is scheduled to sign executive orders at 3pm Washington time today which if related to tariffs would allow for a financial market reaction toward the close of trading for the week in New York. Liquidity in FX at that stage of the trading day is not great and certainly points to the potential for big FX swings. It is also month-end and those flows can often dilute a response to a macro event which may also partially explain the limited US dollar gains on the back of Trump’s confirmation that tariffs are indeed coming. One element of uncertainty is the speed in which the proposed tariffs could be implemented. There as some procedures involved in declaring an emergency that can then prompt tariffs. The quickest way to implement trade tariffs would be possibly through the International Emergency Economic Powers Act (IEEPA) with Trump using illegal immigration and illegal narcotics coming over the borders as a national emergency. For example, in 2019, President Trump threatened to impose tariffs on Mexico under his IEEPA powers. The proposed tariffs were announced on 30^th May 2019 with an effective date of 10^th June with a tariff rate starting at 5%, and increasing monthly. This was done under a declaration of a national emergency due to the immigration crisis at the southern border. The decision was reversed before the tariffs became effective.

So market participants may be assuming that while the tariffs could be confirmed tonight or tomorrow, there could still be a period of a week or more before the tariffs are actually activated. Whatever the logic there appears to still be a high level of scepticism. The quick turnaround after the tariff announcement on Colombia may also be curtailing the financial market impact at this stage.

We stated here earlier this week that we could quickly see USD/CAD break higher to the 1.5000-level and above quickly with a similar percentage move in USD/MXN as well. A 10% tariff on China is more in the price for USD/CNY but if this action is confirmed it will lift expectations of more to come more widely, possibly using the same IEEPA powers ahead of the completion of investigations due by 1^st April. Ultimately, we still expect Trump to be more active in implementing trade tariffs and the dollar has ample scope to rebound and the initial more pragmatic approach is unlikely to last

USD PERFORMANCE SINCE TRUMP’S ELECTION VICTORY IN 2024 MOSTLY STRONGER COMPARED TO 1ST ELECTION PERIOD IN 2016-17

Source: Bloomberg, Macrobond & MUFG GMR

GBP: Yields continue to recede ahead of BoE meeting

The ECB as expected yesterday cut the key policy rate by a further 25bps to 2.75% and as we highlighted in an ECB update piece yesterday (here), the comments from President Lagarde were broadly consistent with further rate cuts ahead with the market now well positioned for another rate cut on 6^th March. As a result bond yields in Europe declined with the 10-year bund yield down 8bps.

The focus is now set to shift to the BoE policy meeting next Thursday. OIS market pricing implies a near 100% probability of a 25bp rate cut being delivered at next week’s meeting. This expectation and the drop in European yields yesterday and global yields more generally has resulted in a notable retracement of yields in the UK as well. The 10-year Gilt yield has now retraced 35bps of the move higher to the recent closing high of 4.89% and with that move the focus on another Gilt “crisis” has abated. We are not surprised by the abatement of these concerns and while it is clear that the market risks related to bond supply are a lot higher now than in pre-covid times, we see demand condition for Gilts improving. Chancellor Reeves economic growth plans focusing on long-term investment has had limited financial market impact but nonetheless will help gradually to expand the supply-side of the economy that can help to contain long-term inflation expectations.

But nearer-term, rate cuts and slowing wage growth and underlying inflation will be more important than Gilt supply concerns. Demand for labour is clearly slowing. According to the PAYE employment data we have had an 80k drop in employment in the last two months and a decline in four of the last five months. The trend over the last 18mths is clearly pointing to softer labour demand. The KPMG/REC employment survey data also indicates slowing wage growth for full-time and part-time employees. The data in January also revealed much softer than expected services inflation that will allow the BoE to cut by 25bps as expected next week. We continue to expect the BoE to cut by 100bps this year, more than what is currently priced (70bps) and the incoming data over the coming weeks should see market pricing for rate cuts increase and help lower Gilt yields further. We expect the communications and forecasts next week from the BoE to signal the scope for the MPC being more active in cutting rates this year.

The biggest risk for Gilts and for the pound stems from the US. A renewed fear of Trump inflationary policies will see 10-year UST bond yield rebound and take Gilt yields higher. But if this weekend’s trade tariffs on Canada, Mexico and China are postponed (we think there’s a high chance of that) then US yields should fall further and help Gilt yields lower and GBP stronger.

MOVE HIGHER IN 10-YEAR UK GILT YIELD SINCE Q4 HAS COINCIDED WITH GBP TWI DECLINING

Source: Bloomberg, Macrobond & MUFG GMR

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
GE	08:55	German Unemployment Change	Jan	14K	10K	!!
GE	08:55	German Unemployment Rate	Jan	6.2%	6.1%	!!
IT	10:00	Italian PPI (YoY)	Dec	--	-0.5%	!
IT	10:00	Italian PPI (MoM)	Dec	--	1.2%	!
GE	13:00	German HICP (YoY)	Jan	2.8%	2.8%	!!
GE	13:00	German HICP (MoM)	Jan	-0.2%	0.7%	!!
US	13:30	PCE Price index (YoY)	Dec	2.6%	2.4%	!!
US	13:30	PCE price index (MoM)	Dec	0.3%	0.1%	!!
US	13:30	Core PCE Price Index (MoM)	Dec	0.2%	0.1%	!!!!
US	13:30	Core PCE Price Index (YoY)	Dec	2.8%	2.8%	!!!!
US	13:30	Employment Cost Index (QoQ)	Q4	0.9%	0.8%	!!!
US	13:30	FOMC Member Bowman Speaks	--	--	--	!!!
US	13:30	Personal Income (MoM)	Dec	0.4%	0.3%	!
US	13:30	Personal Spending (MoM)	Dec	0.5%	0.4%	!!
US	13:30	Real Personal Consumption (MoM)	Dec	--	0.3%	!
CA	13:30	GDP (MoM)	Nov	-0.1%	0.3%	!!
CA	13:31	GDP (MoM)	Dec	--	--	!!
US	14:00	Dallas Fed PCE	Dec	--	1.80%	!
US	14:45	Chicago PMI	Jan	40.6	36.9	!!

Source: Bloomberg