10/04/2025 Market Watch

Tariff Confusion, Dollar Weakness & Market Reversal

US markets were jolted by a sudden shift in trade policy. Just hours before announcing a postponement in reciprocal tariffs for all countries except China, President Trump publicly encouraged stock purchases. The postponement initially sparked a strong rally in US equities, but many observers were unsettled by the timing and implications. Despite the move, tariffs on Chinese goods were actually raised, resulting in a new average effective US tariff of 24%—down from the potential 27%, but still seen as a threat to both economic growth and price stability.

The market reaction was sharp. The US dollar weakened significantly, while traditional safe-haven currencies like the euro, Swiss franc, and Japanese yen all climbed more than 1%. The euro advanced to the $1.1050 region, about a full cent higher than the previous close, and sterling broke above its recent high near $1.2865.

While equities across Asia Pacific and Europe posted strong gains, US index futures slipped, with S&P 500 and Nasdaq contracts falling roughly 2%, trimming their previous gains. In the bond market, yields were mixed—UK Gilts dropped sharply, while German Bunds rose modestly. The US 10-year Treasury yield also fell by nearly six basis points.

Gold extended its dramatic surge from the previous session, rising another $30 to trade near $3113. Crude oil showed similar volatility, with WTI briefly breaking above $63 before pulling back below $61.

United States of America

Overview

Markets reacted sharply after President Trump announced a 90-day delay in reciprocal tariffs for all countries except China. The postponement initially lifted equities and pressured bond yields, but optimism quickly faded as the trade war narrative remained focused on China. While investors had been awaiting CPI data, geopolitical developments overshadowed the economic release. The dollar saw large intraday swings, and the odds of a Fed rate cut in May dropped significantly. Expectations are now shifting towards prolonged inflationary pressure from fresh tariffs, even as growth risks increase.

Economic Drivers

• Postponement of tariffs (excluding China) lifted sentiment but did not resolve underlying trade tensions.
• Continued escalation in tariffs on Chinese goods expected to raise inflationary pressures.
• Risk bias in employment trends remains tilted downward, while inflation risk is skewed higher.
• Debate continues over whether long-term yield spikes are driven by foreign selling (e.g. China) or unwinding of leveraged basis trades.
• Softer US equity performance and declining Treasury yields suggest risk aversion is building again.
• Odds of a Fed rate cut in May dropped from above 50% to around 20% following tariff delay.

Data and Events

1. 10 April 2025 – US Consumer Price Index (CPI): Headline CPI expected to slow to 2.5% YoY from 2.8%, and core CPI expected to ease to 3.0% from 3.1%.
2. 11 April 2025 – US Producer Price Index (PPI): May capture early effects of new tariffs on China, steel, and aluminum.

Price Action

• Dollar Index surged to 103.55 earlier in the week, fell below 102.00, then recovered near 103.35 before fading again.
• 10-year US Treasury yield dropped sharply from 4.51% to below 4.30%.
• US equities initially rallied but ran into selling pressure, causing futures to reverse gains.

Key Points:

• Tariff delay excluded China, maintaining pressure on bilateral relations.
• US CPI and PPI may begin reflecting inflation from recent tariff hikes.
• Dollar unable to hold gains as equity rally faded and yields softened.
• Fed rate cut odds in May dropped significantly following policy announcement.
• Markets remain volatile amid unclear inflation and policy trajectory.

Australia

Overview

The Australian dollar staged a sharp rebound after hitting a fresh five-year low, lifted by the US postponement of reciprocal tariffs. The currency had been under pressure due to global growth concerns stemming from the trade war, but the temporary policy shift sparked a rapid recovery. Technical momentum suggests further upside attempts are likely, although the broader environment remains uncertain.

Economic Drivers

• Ongoing trade war and global growth slowdown had heavily weighed on the Australian dollar.
• The US decision to delay tariffs (excluding China) improved short-term risk sentiment, boosting demand for risk-sensitive currencies like the Aussie.

Data and Events

No major economic releases scheduled during this window.

Price Action

• AUD/USD plunged to $0.5915, marking a five-year low, before rebounding.
• Postponement of tariffs drove the pair up to $0.6175, retracing 50% of losses from the April 3 high (~$0.6400).
• Further gains pushed the pair to near $0.6205, just below the 61.8% retracement level at ~$0.6210.
• Pulled back to $0.6135 before attracting renewed buying interest.
• Momentum indicators support another test of recent highs; 20-day moving average sits around $0.6250.

Key Points:

• AUD hit $0.5915 before rebounding sharply on tariff delay.
• Risk sentiment improved, helping AUD recover 50% of prior losses.
• Pullbacks are attracting buyers, suggesting bullish momentum.
• Next resistance seen near $0.6210; 20-day MA around $0.6250 may cap further gains.

Canada

Overview

The Canadian dollar remains range-bound as the US dollar consolidates within a narrow band for the fifth consecutive session. While the market is closely watching the upcoming Bank of Canada meeting, expectations for a rate cut remain uncertain. Broader US dollar strength has influenced CAD movements, with a strong correlation emerging between USD/CAD and the broader Dollar Index.

Economic Drivers

• Consolidation in USD/CAD reflects broader US dollar strength and indecision around interest rate direction.
• Growing alignment between USD/CAD and the Dollar Index, with a 30-day correlation of 0.66 — the highest level this year.
• Rate cut expectations for the Bank of Canada are mixed, adding to uncertainty in CAD direction.

Data and Events

1. 16 April 2025 – Bank of Canada Policy Meeting: Market pricing shows less than 50% probability of a rate cut. The odds were 25% yesterday and about 35% at the end of March.

Price Action

• USD/CAD continues to trade within last Thursday’s range (~1.4030 to 1.4320).
• Momentum indicators are mixed, suggesting neither bulls nor bears have clear control.
• Strong correlation with the Dollar Index may drive near-term direction.

Key Points:

• USD/CAD trapped in a tight consolidation zone for the fifth session.
• Correlation with the Dollar Index hits highest point of the year at 0.66.
• Market is split on BoC rate cut next week, with odds just under 50%.
• Technical signals suggest a wait-and-see mode for traders.

China

Overview

The yuan has seen sharp movements amid escalating trade tensions and speculation about Beijing's currency strategy. While many argue that China is engineering a devaluation to counteract US tariffs, the PBOC’s recent behavior suggests a more nuanced approach. The central bank appears to be allowing greater flexibility in the exchange rate rather than pursuing an outright devaluation. Meanwhile, inflation data came in slightly softer than expected, reinforcing the case for further monetary and fiscal support.

Economic Drivers

• Increased speculation that China may allow further yuan depreciation to offset high US tariffs, though PBOC fixings show only gradual adjustments.
• Market perceptions diverge: some view PBOC moves as a response to US tariffs, others see a strategic shift toward more exchange rate flexibility.
• Beijing seems cautious about triggering instability by pursuing aggressive devaluation.
• Chinese officials are likely increasing monetary and fiscal support as domestic price pressures remain weak.
• Core inflation (ex-food and energy) showed signs of stabilization, which may support targeted stimulus rather than broad easing.

Data and Events

1. 10 April 2025 – Consumer Price Index (CPI): Fell 0.1% YoY in March after -0.7% in February; -0.4% MoM.
2. 10 April 2025 – Core CPI (ex-food & energy): Rose 0.5% YoY in March after a -0.1% dip in February.
3. 10 April 2025 – Producer Price Index (PPI): Declined -2.5% YoY from -2.2%; fell -0.4% MoM.

Price Action

• USD/CNH surged ~2.6% from ~7.24 (Friday low) to ~7.43 (Tuesday high).
• The dollar remains volatile against both onshore and offshore yuan, with the offshore pair trading between CNH7.3425 and CNH7.3715.
• The PBOC has fixed the yuan weaker for six consecutive sessions (latest fix at CNY7.2092).
• Despite the fixings, USD/CNY is lower today, threatening to end a four-day rally.

Key Points:

• PBOC allowing more exchange rate flexibility without confirming a major devaluation push.
• Yuan remains under pressure amid trade tension and weak domestic inflation.
• CPI and PPI data support the case for further stimulus.
• USD/CNH near 2007 highs but facing resistance and retracement pressures.
• Markets remain highly sensitive to US-China trade dynamics and monetary policy shifts.

Europe

Overview

The euro has seen sharp intraday swings driven largely by shifting sentiment around US trade policy. After reaching a three-day high near $1.1095, the euro reversed lower on the announcement of a delay in US reciprocal tariffs, only to rebound again as dollar momentum faded. Meanwhile, interest rate differentials between the US and Germany widened significantly before partially narrowing, reflecting volatility in bond markets and diverging policy expectations.

Economic Drivers

• Euro initially pressured by US decision to postpone tariffs for most countries, excluding China.
• Widening yield spread between US and German two-year bonds signaled renewed rate divergence concerns.
• Recent volatility suggests the euro remains highly sensitive to US policy announcements and shifting risk sentiment.

Data and Events

No major economic releases during this window.

Price Action

• EUR/USD rose to $1.1095 (three-day high), then fell sharply to $1.0915 on tariff news.
• Support held near $1.0880; euro recovered to $1.1070 in European trading.
• Momentum indicators show stretched conditions, suggesting caution around current levels.
• US-German two-year yield spread jumped over 30 bp to 230 bp, now easing back near 200 bp after peaking above 230 bp.

Key Points:

• Euro remains volatile amid US trade policy shifts.
• Short-term support held near $1.0880; resistance seen around $1.1145.
• US-German yield spread widened sharply before retracing, influencing EUR/USD moves.
• Momentum looks stretched after quick rebound; near-term consolidation possible.

Japan

Overview

The yen’s exchange rate continues to show sensitivity to movements in US Treasury yields, though the relationship is not perfectly aligned. As US yields spiked, USD/JPY initially rose, reaching a four-day high above JPY148.25. However, a deeper look at recent capital flows suggests more complex dynamics. While Japanese investors had been net buyers of US bonds earlier in the year, recent data shows a sharp reversal, with substantial foreign bond selling. Despite this, US yields dropped, pointing to factors beyond Japanese flows — possibly including the unwinding of leveraged basis trades.

Economic Drivers

• USD/JPY remains influenced by shifts in the US 10-year yield, though the correlation is not exact.
• Market narratives blaming foreign investors for US imbalances are politically convenient but oversimplified.
• Japanese investors were net buyers of US bonds in February (JPY1.4 trillion).
• Since late February, Japanese investors have turned net sellers, including a record JPY2.57 trillion in foreign bond sales in the week through April 4.
• The shift in flows suggests caution or profit-taking ahead of increased volatility.

Data and Events

1. 10 April 2025 – Japan MOF Portfolio Flows (Week Ending April 4): Japanese investors sold JPY2.57 trillion in foreign bonds, the most since June 2024.

Price Action

• USD/JPY climbed above JPY148.25 (four-day high) despite a retreat in US 10-year yields to ~4.35%.
• US yields had previously surged from ~3.85% to above 4.50% before easing.
• Yen weakness appears tied to broader rate volatility and technical adjustments.
• The relationship between USD/JPY and yields is intact but distorted by cross-border flows and risk positioning.

Key Points:

• USD/JPY rose to four-day high even as US yields declined.
• Japanese investors sold record JPY2.57 trillion in foreign bonds last week.
• Earlier bond purchases in February contrast with recent aggressive selling.
• Yield-driven yen dynamics still dominate but are influenced by external positioning shifts.
• Unwinding of basis trades may be impacting rates more than foreign bond flows alone.

United Kingdom

Overview

Sterling is recovering after Monday’s sharp drop, supported by improving risk sentiment and expectations for a modest GDP rebound. The upcoming February GDP report will be closely watched, especially as the ongoing trade war adds pressure to the UK’s already fragile growth outlook. The Bank of England’s policy stance remains data-dependent, with external trade tensions likely to influence its direction going forward.

Economic Drivers

• Trade war presents an external threat to UK growth, adding downside risks to the economic outlook.
• Bank of England remains in a wait-and-see mode, with policy likely influenced by incoming growth and inflation data.
• Sentiment around sterling has improved as technical support held and risk appetite returned.

Data and Events

1. 11 April 2025 – February GDP: Expected to rise by 0.1% following a 0.1% contraction in January.

Price Action

• GBP/USD rose nearly 0.75% over two sessions and gained another 0.5% today.
• The rebound has nearly erased Monday’s 1.25% drop.
• Monday’s low was just above $1.2700; current high near $1.2880.
• Key resistance levels:
• 38.2% retracement of the pullback at ~$1.2900
• 20-day moving average at ~$1.2925
• 50% retracement near ~$1.2960
• Sterling peaked above $1.32 last Thursday before the correction began.

Key Points:

• February GDP expected to show modest rebound; critical for BOE policy path.
• Sterling has retraced nearly all of Monday’s losses with momentum intact.
• Price approaching technical resistance near $1.2900–$1.2960 zone.
• BOE likely to remain cautious amid trade war risks and fragile growth signals.