Trump’s tariff threats providing less support for USD

NZD: RBNZ signals slower pace of rate cuts after delivering final 50bps cut

The New Zealand dollar has been one of the biggest movers during the Asian trading session following the RBNZ’s latest policy meeting. NZD/USD initially fell to an intra-day low of 0.5678 after the RBZ delivered a third consecutive 50bps rate cut lowering the policy rate to 3.75% but has since fully reversed those losses rising up to a high of 0.5729. The New Zealand dollar staged a rebound after the RBNZ signalled that it plans to slow the pace rate cuts going forward. RBNZ Governor Adrian Orr stated that they are likely to deliver smaller 25bps rate cuts at the next two policy meetings in April and May. More specifically he told reporters that “we are looking at lowering the Official Cash Rate a little bit quicker than what we projected back in November, but that’s around 50 basis points by mid this year”. He went on to add that “comes broadly in two 25 basis point steps. It doesn’t stop there. We have our projection of the OCR being around 3.00% by year end”. The updated forecasts from the RBNZ show the OCR falling to an average of 3.14% by year end which was lower than the forecast set back in November of 3.55%. The RBNZ’s updated forecasts then show the OCR settling at 3.10% in early 2026 where it remains for the rest of the forecast horizon. The RBNZ has previously estimated that the long-term nominal neutral interest rate currently lies between 2.50% and 3.50% (click here). The updated guidance has triggered a hawkish repricing in the New Zealand rate market which has moved more into the line with the RBNZ’s plans for more gradual rate hikes through the rest of this year.      

The RBNZ’s decision to continue cutting rates reflects more confidence that inflation will be sustained within their 1.0% to 3.0% target range, and that core inflation will continue to converge toward the mid-point. The RBNZ believes that the period of restrictive rates has reduced demand in New Zealand and  contributed to lower inflation. Inflation is expected to pick up in the coming quarters but within the target range and is not expected to alter the RBNZ’s plans for further gradual rate cuts this year. The RBNZ’s ability to look through a temporary pick-up in inflation is supported by their updated estimates showing more economic slack in New Zealand’s economy than they had forecast back in November. The RBNZ’s estimate of the output gap at he end of last year was raised to -1.7% of GDP up from their November estimate of the output gap in Q3 2024 at -1.5% of GDP. If more economic slack continues to open up than the RBNZ is expecting it will increase pressure to lower rates below neutral in the coming years.                 

MORE AGGRESSIVE RBNZ EASING HAD WEIGHED DOWN ON NZD

Source: Bloomberg, Macrobond & MUFG GMR

USD: President Trump steps up tariff threats but muted market reaction

The US dollar has staged a modest rebound at the start of this week with the dollar index moving above the low set on Monday at 106.63. The main development overnight for the US dollar were further threats from President Trump to raise tariffs on trading partners. He told reporters that he would likely impose tariffs on automobile, semiconductors and pharmaceutical imports of around 25% with an announcement coming as soon as 2^nd April. He warned that those tariffs will go “substantially higher over a course of a year”. He added that he wanted to give companies time to prepare for the tariff hikes and hoping that the tariffs will encourage to relocate production to the US avoid the tariff hikes. Roughly 8 million passenger cars and light trucks were brought into the US last year accounting for around half of US vehicle sales. President Trump did not specify whether the new measures would target specific countries or apply to all vehicles imported into the US. It’s also unclear whether cars made under the USMCA trade deal with Canada and Mexico would be exempt from the proposed 25% tariff hikes. It is possible by that date that President Trump will already have decided to implement 25% tariffs on all imports from Canada and Mexico which have currently been delayed by one month.

It also raises the question of how these 25% tariff hikes for automobiles, semiconductors and pharmaceuticals will interact with plans to implement “reciprocal tariffs” from 1^st April. A tariff hike of 25% or more would represent much more than a levelling up of tariff rates for those products. For example, President Trump has voiced concerns that the EU implements a 10% tariff on imports of cars while the US rate is lower at 2.5%. When announcing the reciprocal tariff plans (click here) last week he did warn that he was considering additional tariff hikes on automobiles, semiconductors and pharmaceuticals as well. Bloomberg has reported that Slovakia, Mexico and South Korea have the biggest exposures with exports of passenger motor vehicles to the US accounting for 2.9%, 2.4% and 1.8% of GDP respectively. For semiconductors, the most exposed counties would be Malaysia, Singapore and Taiwan whose exports to the US account for 1.4% and 0.8% of GDP. Finally for pharmaceuticals, Switzerland, Denmark and Ireland could be amongst the most exposed. Despite the potential disruptive impact from Trump’s tariff hike plans, the US dollar has not really strengthened much overnight. It likely reflects scepticism amongst market participants that President Trump will follow through and back up his threats with such aggressive tariff hikes given a lack of concrete action so far at the start of his second term.             

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	09:00	Current Account	Dec	30.2B	27.0B	!
US	13:30	Building Permits	Jan	1.460M	1.482M	!!
US	13:30	Housing Starts	Jan	1.390M	1.499M	!!
US	19:00	FOMC Meeting Minutes	--	--	--	!!!

Source: Bloomberg