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FX Update: Trump tariff headlines roil markets
John J. Hardy
Chief Macro Strategist
Résumé: The USD is all over the map today on a story that Trump will dial back his broad-based approach on tariffs, which Trump later specifically denied.
Breaking news 1: Just before I was about to post today's week-ahead outlook for FX, the Washington Post put out a story citing sources close to the incoming Trump administration that the Trump team may only be looking at tariffs targeted at critical imports rather than broad-based tariffs, which would mean considerable relief on multiple fronts (the pressure on the US dollar would be lower as the inflation threat would likewise be lower and therefore less need for a hawkish Fed, etc.). This would be very USD negative relative to current Trump tariff policy fears.
Breaking news 2! Within two hours of publishing the below article and the above breaking news, Trump was out specifically denying the Washington Post article on not seeking broad tariffs. This just goes to show the risks of trading in a new era of Trump headline risk, much like his tweeting behaviour roiled markets early in his first administration. What might be going on here is that his advisers do want to do exactly what the article in WaPo says, but that Trump himself has yet to sign on for their approach or any approach and wants to maintain maximum leverage by appearing to be ready to administer enormous tariffs if that is what it will take to make his point.
The US dollar jumped out of the gates to start 2025 last Thursday, posting new cycle highs in thin trading conditions against the euro, sterling and the Swiss franc most impressively, but even before the breaking tariff news noted above, the USD surge had stumbled and entirely reversed, perhaps as market participants are reluctant to extend already very long USD positioning before Trump even takes office two weeks from now, given the many uncertainties (as today’s breaking news made clear!) and some of the self-conflicting components in his agenda. A hold lower in the US dollar today could suggest we are in rangebound mode for the next couple of weeks or more. Of course, key US labor market and other data is also up this week, and market participants will have to decide the degree to which it is worth reacting to, given that the arrival of Trump 2.0 will dominate the focus from here.
Chart: USDCNH
The critical exchange rate for the world this year may be USDCNH as we await how the US-China relationship takes shape in the wake of Trump’s inauguration two weeks from now. Over the last week, the exchange rate has approached the critical 7.3750 level that was the high in both 2022 and 2023. How will China treat this level ahead of and after Trump’s inauguration? Will it allow any fresh USD strength to push it to new highs to serve as a kind of warning that it is willing to allow continued weakness as a counter-policy against tariffs, or will it defend the level for now in hopes that the Trump administration will take a more measured approach or even signal that a deal-making approach is preferred. Recall during the first Trump administration that after a long serious of headline risks through 2017, Trump settled into deal-making mode in 2018 until the “Phase 1” trade deal was hammered out in October of 2019 and signed in January of 2020. China promptly reneged on the terms of the deal after the outbreak of the pandemic. Interesting to note how little USDCNH moved on the breaking news about Trump’s narrower tariff plans, perhaps as China could yet be the target of the strongest tariff measures Trump has planned.
CAD rallies on Trudeau’s potential exit
Elsewhere, Canada’s Globe and Mail suggested in a piece overnight that Canadian prime minister and Liberal party leader Justin Trudeau is set to step down as party leader, which would lead to a contest for his replacement and an eventual snap election. CAD jumped overnight and is following through to the strong side on the general USD weakness in the early European session Monday. Given Trump’s contentious relationship at times with Trudeau and Trump’s transactional approach, Canada would look far better positioned with a new PM (the Conservative’s Pierre Poilievre) that is on the “right” side of the political spectrum and is already appealing to Trump’s nature with language on making a “great deal” with the US president. Looking at US FX futures positioning, the CAD short is enormous and if Trudeau follows through and resigns, this could feed a sizeable sentiment shift on the Loonie.
Even risk highlights for the week ahead:
- Canadian politics: Will CAD follow through stronger on an actual Trudeau resignation this week. Canadian snap elections could be on the calendar in less than two months on a Trudeau exit.
- US Earnings season kicks off at end of week. Always interesting to track the US economy through the patchwork of companies that are reporting earnings in the coming weeks, with the major US banks kicking off earnings season on Friday and early next week.
Today:
- Germany Flash Dec. CPI – CPI expected to pick up again for December to 2.6% YoY and the trajectory has been flat at above 2.0% on average since early 2024 unless 2025 brings fresh disinflationary trends.
- US Treasury auctions 3-year notes - the market may be sensitive to US treasury auction dynamics, given that yields are near recent highs.
Tuesday
- Switzerland Dec. CPI. Expected to drop to 0.6% YoY, encouraging the anticipation that the Swiss policy rate is headed to zero by mid-year.
- Eurozone Dec. Flash CPI. Expected to tick higher to 2.4% YoY after 2.2% in Nov.
- US Nov. JOLTS job openings. Ticked up strongly in October, but the trend is lower. It’s a month slower than other US labor market data points.
- US Dec. ISM Services. The survey dropped in November after an odd Sep-Oct surge. Expected at 53.5 after 52.1 in November.
- US Treasury auctions 10-year notes The key 10-year rate near recent cycle peaks above 4.60% to start the week, key for the USD outlook.
Wednesday
- Australia Nov. CPI. The trimmed mean rose to 3.5% YoY in September, supporting the RBA’s hawkish hold on rates.
- Sweden Dec. Flash CPI – the core YoY figure expected at 2.2% after 2.4% in Nov. Market is trying to time whether Riksbank only eyeing one last 50 basis point cut for the cycle – about 40 basis points of cutting priced for the Jan 29 meeting.
- US Dec. ADP Employment change. Expected at +133k after +146k in Nov.
- US Weekly Initial- and Continuing Jobless Claims – nothing seems to change here, with very low initial claims while continuing claims have been elevated (big drop last week in continuing claims, however), suggesting a labor market in which few are being fired, but those out of work are having a hard time finding jobs.
- US Treasury auctions 30-year T-bonds. A measure of the demand for the longest term US treasury debt.
- FOMC meeting minutes – some nuances in the discussion could prove interesting, but the Fed task has largely been one of unwinding forward guidance, a necessity in an age of increasing fiscal dominance.
Thursday:
- Japan Nov. Labor Cash Earnings. BoJ governor Ueda has noted the focus on earnings in trying to understand inflation dynamics, although the bigger key is the spring round of wage negotiations in Japan.
- China Dec. CPI and PPI. China’s PPI has dropped into deeply negative territory at -2.5% in November and the CPI is barely above zero – expected at +0.1% YoY in November as the country is in the throes of a balance sheet recession. The Chinese 10-year sovereign bond yield has collapsed to 1.6% from above 2.0% over the last two months. Domestic demand stimulus is a must to drive reflation.
- Germany Nov. Industrial Production. Germany’s industry is in decline and will remain that way until cheaper energy is available to revive it as a minimum prerequisite. October saw a -4.5% YoY print and the country’s overall industrial output is down nearly 17% from the 2017 peak in volume terms.
- US markets closed Thursday to mark day of mourning for former president Jimmy Carter, who died last week.
Friday
- Norway Dec. CPI. Core CPI popped back up to 3.0% in November after a post-pandemic low of 2.7% in October. December expected at 2.8%.
- Canada Dec. Jobs data. Focus in Canada is now much more on domestic politics and whether Trump will follow through with tariff threats. The CAD short is very extended. Canada’s economy is in bad shape and the unemployment rate expected to hit a new cycle high of 6.9% after 6.8% in November
- US Dec. Jobs Report. The trend has been lower in private payrolls, but got extremely choppy over the lasts three months, in part on possible storm impacts in October, but we should be clear of these now. The market will respond to strong surprises (for example 4.1 o4 4.3% in Unemployment Rate vs. 4.2% expected or strong payrolls surprise), but focus is on politics and policy.
Table: FX Board of G10 and CNH trend evolution and strength.
Note: the FX Board trend indicators are only on a relative scale and are volatility adjusted. Readings below an absolute value of 2 are fairly weak, while a reading above 3 is quite strong and above 6 very strong.
A possible big shakeup here as the US dollar has been sent reeling on the Trump tariff news - bears tracking in coming sessions to say the least as USD strength has been the dominant trend.
Table: FX Board Trend Scoreboard for individual pairs.
Some spectacular trend readings in the USD/commodity dollar pairs – these are looking very stretched, but if the current bout of risk aversion deepens badly, the US dollar can continue to extend before something gives.
The long USD trends far from being unwound in any of the USD pairs, although spot gold in USD has flipped back to positive and silver won't be far behind if it holds above 30 per ounce.