FX market in wait and see mode ahead of tariffs & Powell testimony

USD: Trump outlines plans for steel & aluminium tariff hikes

The major foreign exchange rates have remained stable overnight with the US dollar holding on to modest gains at the start of this week encouraged by the stronger nonfarm payrolls report for January and President Trump’s tariff hike plans. The main development overnight was confirmation from the White House that the new tariff rates of 25% on steel and aluminium will go into effect on 12^th March at 12.01am Washington time. President Trump stated that “essentially, we’re putting on a 25% tariff, without exception, on all aluminium and all steel, and it’s going to mean a lot of businesses are going to be opening in the United States. While the measures unveiled yesterday didn’t include any exemptions for trading partners, President Trump did indicate that he may consider a break for Australia crediting the country’s imports of US-made aircraft following a phone call with Australian Prime Minister Anthony Albanese. The Australian prime minister told local reporters after the call that he had presented Australia’s case for tariff exemptions and that he and President Trump had “agreed on wording” to state publicly that “an exemption was under consideration in the interests of both of our countries”. It comes head of the election in Australia to be held by 17^th May. He added that “our steel is an important input for US manufacturing. BlueScope is the US’s fifth-largest steelmaker. They’ve invested AUD5 billion in the US across a range of states. Our steel and aluminium are both key inputs for the US-Australia defence industries”. The potential exemption for Australia has not had a significant impact on the performance of the Australian dollar overnight. It is already one of the best performing G10 currencies so far this year supported by the rebound in commodity prices.            

President Trump authorized the new tariffs under Section 232 of the Trade Expansion Act which gives the president broad authority to impose trade restrictions on domestic security grounds. A senior administration officials has been reported by Bloomberg stating that the new tariffs were necessary because steel and aluminium exporters abused exceptions under previous policy. The decision to include downstream finished products differs from the steel and aluminium tariffs implemented in 2018 which mostly focused on raw steelmaking and primary aluminium production. The new tariffs will include things like extrusions and slabs that are turned into value-added products which could impact US consumers more broadly. It’s unclear how countries will respond to the new tariffs. In 2018, the EU responded by imposing tariffs on iconic American goods such as Harley-Davidson and Levi Strauss. President Trump also eventually granted exemptions for several major exporters including Brazil, Canada and Mexico.   

A report from the Tax Foundation (click here) found that the steel and aluminium tariffs implemented in 2018 raised the costs of production for manufacturers, reducing employment in those industries, raising prices for consumers and hurting exports. The jobs “saved” in the steel-producing industries from the tariffs came at a high cost to consumers, at roughly USD650k per job saved according to the Peterson Institute for International Economics. A recent report from the US International Trade Commission found that the tariffs increased the average prices of steel and aluminium by 2.4% and 1.6% respectively disproportionately hurting downstream industries that use steel and aluminium in production.   

LONG USD POSITIONS REMAIN ELEVATED EVEN AFTER RECENT PULLBACK

Source: Bloomberg, Macrobond & MUFG GMR

EM FX: A strong start to the year but how long will it last?

Emerging market currencies have continued to outperform at the start of this year following the heavy sell-off in the final three months of last year. It has been the strongest period of performance for emerging market currencies since April and May of last year. The best performers last week were the COP (+2.1% vs. USD), RUB (+1.7%), CLP (+1.7%) and ZAR (+1.5%). All four currencies are also amongst the best performing emerging market currencies year to date which also includes the BRL and PLN. In contrast, the TRY (-1.8% vs. USD), IDR (-1.7%) and INR (-1.3%) have underperformed so far this year.    

Latam currencies and the ZAR have outperformed alongside the rebound in commodity prices at the start of this year. Bloomberg’s commodity price index has risen to its highest levels since May of last year. The price action reflects some initial relief that the President Trump’s tariff hikes have not been as disruptive as feared at the start of his second term. The decision to delay 25% tariff hikes on Canada and Mexico by a month has brought some relief in the near-term. However, President Trump has since announced he plans to impose 25% tariffs on imports of steel and aluminium that would hit Canada and Mexico more than other countries. Furthermore, he also plans to implement “reciprocal tariffs” on all countries who currently impose higher tariff rates on goods imported from the US than on comparable goods imported into the US. It remains to be seen how comprehensive these tariff hikes will prove to be and how other countries will respond, but it has the potential to be more widely disruptive to global trade posing downside risks to emerging market currencies. Emerging market countries have set higher tariffs on imports in general than developed economies so could be hurt more if President Trump takes action to equalize tariffs including India, Thailand, Argentina, South Africa, and Brazil.   At the same time, the release of another solid nonfarm payrolls report supports our view that the Fed will not be in a hurry to cut rates again. Recent developments highlight why we remain sceptical that emerging market currencies can sustain gains recorded so far this year.  

The Central European currencies of the CZK, HUF and PLN have all benefitted from the broad-based rebound in emerging market currencies strengthening against both the USD and EUR. The relatively hawkish stances of regional central banks are making the CZK, HUF and PLN more attractive than the EUR while the ECB continues to cut rates at the start of this year. At last week’s policy meeting, the CNB delivered another 25bps rate cut lowering the policy rate to 3.75% but Governor Michl called the move “hawkish”. He emphasized that the bank board must be very careful about further rate cuts. The updated forecasts showed only a modest further decline before rates stabilize from mid-2025 onwards. The CNB has moved closer to the NBP and NBH in becoming more reluctant to lower rates in the near-term. At the same time regional currencies could be benefitting as well at the start of this year from cautious optimism related to resolving the ongoing Ukraine conflict. The Trump administration is expected to privately share plans for ending the Ukraine conflict at this week’s Munich Security Conference. Please see our latest EM EMEA Weekly for more details (click here).   

EM ECONOMIES POTENTIALLY MORE EXPOSED TO RECIPROCAL TARIFFS

Source: Bloomberg, UNCTAD TRAINS & Office of US Trade Representative

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
UK	08:45	BoE MPC Member Mann	--	--	--	!!
UK	12:15	BoE Gov Bailey Speaks	--	--	--	!!!
US	15:00	Fed Chair Powell Testifies	--	--	--	!!!
EC	17:00	ECB's Schnabel Speaks	--	--	--	!!
US	20:30	FOMC Member Williams Speaks	--	--	--	!!

Source: Bloomberg