21/01/2025 Market Watch

Market Watch: Market Turmoil Amid Renewed Tariff Threats

The foreign exchange market experienced significant volatility following the renewed threat of 25% tariffs on Canada and Mexico, set to take effect on February 1. This announcement spurred a rebound in the US dollar, which had initially pulled back due to a lack of emphasis on tariffs the previous day. The Canadian dollar and the Mexican peso were the most adversely affected, leading losses among G10 and emerging market currencies, respectively. Overall, the greenback strengthened broadly, with all G10 currencies, except the yen and Swiss franc, dropping at least 0.5%. While a few Asia Pacific currencies managed to resist the dollar's surge, most other currencies saw declines.

Gold prices reached a two-month high near $2733 before stabilizing, while March WTI crude oil fell to last week's low near $75.65, down from a mid-week high of almost $79.40. The primary catalyst for these market movements was the "energy emergency" and potential trade war threats from former President Trump, targeting Canada and Mexico.

Despite the market upheaval, equities remained resilient. Major equity markets in the Asia Pacific region rallied, with mainland shares in Hong Kong leading with a 1.2% gain. In Europe, the Stoxx 600 extended its rally for a fifth consecutive session with minor gains. US index futures also rose by about 0.5%.

Bond markets were generally firmer, with benchmark yields in Europe slightly softer, except for UK Gilts, which edged higher. The 10-year US Treasury yield dropped six basis points to 4.57%, nearing the month's low set on January 2. It had settled slightly above 4.61% before the weekend.

United States of America

The US dollar faced selling pressure yesterday as it became evident that new tariffs would not be implemented on "day one." However, former President Trump's threat of imposing 25% tariffs on Mexico and Canada by February 1 kept the greenback under strain, especially in the Asia Pacific region early today.

Today’s economic focus includes the Philadelphia Fed's non-manufacturing survey. This follows the notable surge in the manufacturing survey, which jumped to 44.3 from a revised -10.9, marking the highest level since April 2021. Meanwhile, the Federal Reserve has entered its quiet period ahead of next week's FOMC meeting, limiting further commentary from Fed officials.

Key Points:

• The US dollar is under pressure due to tariff uncertainty.
• Trump's 25% tariff threat on Mexico and Canada affects market sentiment.
• The Philadelphia Fed's manufacturing survey reached its highest level since April 2021.
• The Federal Reserve is in a quiet period before the upcoming FOMC meeting.

Australia

The Australian dollar surged by 1.3% yesterday, marking its strongest performance since November 7, following the Federal Reserve's rate cut shortly after the US election. This rally came after a 0.55% decline last Thursday and Friday. On January 13, the Aussie reached nearly four-year lows around $0.6130 but managed to push briefly above $0.6285 yesterday before retreating to about $0.6210.

Notably, the five-day moving average crossed above the 20-day moving average for the first time in over three months, signaling a potential shift in momentum. The Australian dollar also closed above the downtrend line, which had been drawn from last September’s high near $0.6940 and the November high around $0.6690, catching subsequent highs in December and earlier this month. This trendline was approximately $0.6230 yesterday and $0.6220 today. Local economic activity remains light, with key data expected from the flash PMI at the end of the week.

Key Points:

• The Australian dollar rallied 1.3%, its best performance since November 7.
• The Aussie hit nearly four-year lows at $0.6130 on January 13.
• The five-day moving average crossed above the 20-day moving average for the first time in over three months.
• The Australian dollar closed above a significant downtrend line.
• Local economic data is limited until the flash PMI release later this week.

Canada

The US dollar fell by approximately 1.15% against the Canadian dollar yesterday, marking its most significant single-day decline since May 2023. This drop followed a 0.95% gain in the previous two sessions. The greenback briefly touched nearly CAD1.4260, its lowest level since mid-December, before recovering to settle above last week's low of around CAD1.4300. Earlier, the tariff threat had propelled the US dollar to a new four-year high of CAD1.4515, approaching levels seen during the early pandemic and nine years prior.

The Bank of Canada's Q4 survey indicated improved business sentiment, though today's CPI data will be more critical. Expectations are for a 0.4% decline in headline CPI, potentially easing the year-over-year rate to 1.8% from 1.9%, following a September low of 1.6%. The impact of a temporary sales tax holiday that began on December 14 may also factor in. Despite strong employment figures, aggregate hours worked, and compensation, the focus remains on the underlying core measures, expected to have decreased to an average of 2.45% from 2.65% in November. These developments could influence expectations for a possible rate cut next week.

Key Points:

• The US dollar dropped 1.15% against the Canadian dollar, its biggest decline since May 2023.
• The greenback hit a low of CAD1.4260 before recovering to above CAD1.4300.
• A tariff threat previously drove the US dollar to a four-year high of CAD1.4515.
• Canada's CPI is expected to decline, which may support rate cut expectations.
• Core inflation measures are anticipated to average 2.45%, down from 2.65% in November.

China

The US dollar saw a sharp decline against the Chinese yuan yesterday amid a broad pullback. The yuan's recovery was linked to a call between Trump and Xi, which initially seemed routine and had little impact when first reported before the weekend. The dollar dropped to about CNY7.2615, its lowest level since mid-December, before recovering to CNY7.2840 today. The People's Bank of China (PBOC) set the dollar's reference rate at CNY7.1703 today, down from CNY7.1886 yesterday.

In offshore trading, the dollar fell to CNH7.2600, with the decline pushing the five-day moving average below the 20-day moving average for the first time since early November. The greenback further dropped to CNH7.2525 before bouncing back to almost CNH7.2940. Meanwhile, China held its loan prime rates steady as expected, maintaining 3.10% for the one-year and 3.60% for the five-year rates.

Key Points:

• The US dollar fell sharply against the Chinese yuan, touching a new low of CNY7.2615.
• The PBOC set the dollar's reference rate lower at CNY7.1703 today.
• Offshore, the dollar declined to CNH7.2525 before recovering.
• China's loan prime rates remained steady at 3.10% for the one-year and 3.60% for the five-year.

Europe

The euro extended its recovery from last Monday's two-year low near $1.0170, climbing to $1.0430, supported by relief that the US did not impose new tariffs immediately. This month’s high of approximately $1.0435 was tested earlier in the Asia Pacific session before retreating to nearly $1.0340 following Trump's tariff threat. The $1.0330 level, marking the 61.8% retracement of yesterday's bounce, serves as a critical support. A break below this level could signal a return to yesterday’s low near $1.0265.

Amid a subdued economic data week, Germany's ZEW survey offered preliminary signs of stabilizing sentiment. The current situation index improved to -90.4 from -93.1 in December, halting a decline that began in July. Meanwhile, the expectations component, which has fluctuated since bottoming in September, retreated to 10.3 in January after more than doubling to 15.7 in December.

Key Points:

• The euro rose to $1.0430, recovering from a two-year low near $1.0170.
• Resistance at $1.0435 was tested before falling to $1.0340 due to tariff concerns.
• A break below $1.0330 could lead to a decline toward $1.0265.
• Germany’s ZEW survey showed improvement in the current situation and a slight drop in expectations for January.

Japan

The yen underperformed against the dollar yesterday, rising by less than 0.5%. The dollar initially climbed slightly above last Thursday's high of around JPY156.50 but reversed to fall to nearly JPY155.40. It further declined to approximately JPY154.75 today, marking a new low for the month. The five-day moving average around JPY155.90 slipped below the 20-day moving average of approximately JPY157.20 last week, the first occurrence since mid-December. The market remains confident that the Bank of Japan (BOJ) will implement a 25 basis point hike at its meeting later this week, potentially doubling the target rate to 0.50%.

Key Points:

• Yen underperformed, with the dollar falling to a new monthly low near JPY154.75.
• The five-day moving average fell below the 20-day moving average last week.
• Market anticipates a 25 basis point hike from the BOJ, increasing the target rate to 0.50%.

United Kingdom

Sterling briefly traded above last week's high during yesterday's broad dollar pullback, reaching nearly $1.2345. After starting its descent from the January 7 high near $1.2575, sterling had fallen to $1.2100 within a week. Yesterday’s rally brought it to the 50% retracement level of the decline, around $1.2280, but it was sold off to $1.2235 today, retracing 61.8% of yesterday’s gains.

The UK reported a mixed bag of labor market data earlier today: labor earnings accelerated to a six-month high of 5.6%, job growth slowed, and the unemployment rate ticked up to 4.4% from 4.3%. Despite these mixed signals, the market remains confident, with a 92% chance of a quarter-point rate cut when the Bank of England meets on February 6.

Key Points:

• Sterling briefly hit $1.2345 amid the dollar pullback.
• It retraced 50% of its recent decline, then fell to $1.2235 today.
• UK labor earnings increased to 5.6%, unemployment rose slightly to 4.4%.
• Market anticipates a 92% likelihood of a 25-basis-point BOE rate cut in February.