Market Briefing: Shots fired in the trade war
Read the 2025 Currency Outlook from Corpay Currency Research
Tariff news. US announced tariffs against Canada, Mexico, & China. This had been in the pipeline for a while. Canada also unveiled retaliatory action.
USD stronger. The news has boosted the USD this morning. AUD & NZD on the backfoot. Uncertainty & macro headwinds are usually USD supportive.
Event Radar. Tariff news will be in the drivers seat. Data-wise, jobs reports are out in NZ, Canada & the US this week. Several US Fed members also speak.
Global Trends
After much talk the first actual shots were fired in the US led Trump 2.0 trade war over the weekend. Under the guise of trying to combat the flow of fentanyl/drugs and illegal migration US President Trump signed Executive Orders that will see 25% tariffs imposed on all Canadian and Mexican imports (except for a 10% tariff on oil, electricity and gas from Canada), and an extra 10% tariff on China. The measures, which were threatened repeatedly, come into effect on 4 February.
Notably, despite there being a provision in the US order that will escalate tariffs if there is a response, Canada isn’t taking things lying down. In retaliation Canada quickly announced it will place a 25% countertariff on CAD155bn (US$107bn) of US imports with CAD30bn starting on Tuesday and the remainder in a few weeks to give Canadian companies some time to “seek alternatives”. Mexico has also mentioned retaliatory tariffs and non-tariff measures could be on the table, while China stated it will take “corresponding countermeasures” though specifics haven’t been unveiled just yet.
FX markets have reacted to the news at the start of Asian trading this morning with the USD powering ahead. USD/CAD (now ~1.4725) has jumped up to be more than 2% above where it was at this time on Friday to be tracking around its highest point since 2003. EUR has tumbled down towards multi-year lows (now ~$1.0232) with participants assuming Europe, which is already struggling economically, might be next in the US’ tariff firing line given the trade imbalance that exists and President Trump’s comments that the EU is in his crosshairs. On net USD/JPY is little changed (now ~154.92) with the jolt of negative sentiment helping JPY outperform on the crosses. Elsewhere, the backdrop has exerted downward pressure on the NZD (now ~$0.5580, within 1% of its recent cyclical lows) and AUD (now ~$0.6163, a fraction above its early-January 2024 and October 2022 lows).
An economically significant ~41% of US goods imports come from Canada, Mexico, and China. As our chart shows, the announced measures will see the US’ effective tariff rate rise to where it was in the 1940’s. This is a “supply shock” for the US economy that may crimp growth given the two-way trade with the three nations (see chart 2), and/or boost inflation as tariffs are collected from US importers at the border, and hence are likely to be passed on to consumers and businesses down the line. That said, there should also be negative economic impacts on the other side via reduced demand as Canada sends ~3/4’s of its exports to the US and Mexico ships closer to ~80%. By comparison China sends ~15% of its exports directly to the US. We think the tit-for-tat trade dispute and prospect for more is likely to unnerve markets. This is set to be the market focus over the near-term and is typically an environment that is USD supportive, particularly when combined with the US’ economic strength and higher interest rates.
Global event radar: EZ CPI (Tonight), US ISM (Tonight), BoE Meeting (Thurs), US Jobs (Fri night), US CPI (13th Feb), US Retail Sales (15th Feb), RBA Meeting (18th Feb), RBNZ Meeting (19th Feb), Global PMIs (21st/22nd Feb)
Trans-Tasman Zone
Weekend trade tariff news out of the US, coupled with the responses from Canada, Mexico, and China has rattled nerves during this mornings early Asian trade. As discussed above this has boosted the USD and seen the AUD (now ~$0.6163) and NZD (now ~$0.5580) dip. That said, outside of a pullback in AUD/JPY (now ~95.58, around its lowest point since Q3 2024) the AUD has actually ticked up on most of the other major crosses.
AUD/EUR has edged back over ~0.60, AUD/GBP is hovering around ~0.50, AUD/CAD is up near its 200-day moving average (~0.9098), and AUD/NZD is tracking close to 1.1040. Diverging economic fortunes between Australia and NZ could be on show again this week with the release of the Q4 NZ jobs report (Weds). The data is expected to show the cracks in the NZ labour market are widening, which if realised could reinforce expectations for another 50bp RBNZ rate cut later this month and support AUD/NZD.
As mentioned, the jolt to global trade, potential negative ramifications for global growth, and shaky risk sentiment stemming from the weekend tariff developments are expected to be USD supportive over the near-term. This is what we had envisaged in our 2025 outlook with the USD projected to remain firm over Q1/Q2. The backdrop should in turn keep the AUD and NZD heavy, more so the latter in our view due to NZ’s weaker economic foundations. However, when it comes to markets it should be remembered that what's important isn’t if something is ‘good’ or ‘bad’ but rather if it is ‘better’ or ‘worse’ than anticipated.
With this in mind we continue to believe that barring an acute deterioration in risk sentiment further downside potential in the AUD could be somewhat constrained. This is because the AUD is already trading at a steep discount to fundamentals (it is tracking ~4-5 cents below our ‘fair value’ models), an underlying bearishness is already embedded (‘net short’ AUD positioning, as measured by CFTC futures, is elevated), and it has not sustainably trading much below where it is in recent times (the AUD has only been sub-$0.62 ~1% of the time since 2015). Moreover, as per during President Trump’s first term, we think any tariff induced export pain in China is likely to be countered via steps to bolster commodity-intensive infrastructure investment. This is where Australia’s key exports are plugged into. Added to that Australia’s export basket looks rather tariff-insulated due to minimal domestic manufacturing and with it running a trade surplus with the US. This may help the AUD pick up ground against currencies like the EUR, CAD, NZD and CNH, in our opinion.
AUD & NZD event radar: AU Retail Sales (Today), EZ CPI (Tonight), US ISM (Tonight), NZ Jobs (Weds), BoE Meeting (Thurs), US Jobs (Fri night), US CPI (13th Feb), US Retail Sales (15th Feb), RBA Meeting (18th Feb), RBNZ Meeting (19th Feb), Global PMIs (21st/22nd Feb)
AUD levels to watch (support / resistance): 0.6090, 0.6130 / 0.6200, 0.6270
NZD levels to watch (support / resistance): 0.5510, 0.5540 / 0.5630, 0.5690
SGD Corner
The upswing in the USD has received a kick along this morning via the weekend trade tariff developments between the US, Canada, Mexico, and China (see above). This looks set to push USD/SGD (now ~1.3664) back up towards its early-January cyclical highs in the short-term, in our opinion.
On net, we believe that the global trade-related uncertainty should support USD/SGD. In addition to the positive USD impulses, the SGD might also be undermined via the weakness in the EUR, as well as expectations the Monetary Authority of Singapore may shift to a more accommodative stance in order to support growth in the trade-exposed Singapore economy.
SGD event radar: EZ CPI (Tonight), US ISM (Tonight), US Jobs (Fri night), US CPI (13th Feb), US Retail Sales (15th Feb), Global PMIs (21st/22nd Feb)
SGD levels to watch (support / resistance): 1.3560, 1.3610 / 1.3700, 1.3750
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
MONDAY (3rd February) AUD Job Ads (Jan) (11:30am)
AUD Retail Sales (Dec/Q4) (11:30am)
AUD Building Approvals (Dec) (11:30am)
CNY Caixin PMI – Manufacturing (Jan) (12:45pm)
EUR ECB’s Simkus Speaks (7pm)
EUR CPI Inflation (Jan P) (9pm)
TUESDAY (4th February)
USD ISM Manufacturing (Jan) (2am)
USD Fed’s Bostic Speaks (4:30am)
WEDNESDAY (5th February)
EUR ECB’s Villeroy Speaks (12:30am)
USD JOLTS Job Openings (Dec) (2am)
USD Fed’s Bostic Speaks (3am)
USD Fed’s Daly Speaks (6am)
NZD Jobs Report (Q4) (8:45am)
JPY Labor Cash Earnings (Dec) (10:30am)
USD Fed’s Jefferson Speaks (11:30am)
CNY Caixin PMI – Services (Jan) (12:45pm)
EUR ECB Wage Tracker (8pm)
THURSDAY (6th February)
USD ADP Employment (Jan) (12:15am)
EUR ECB’s Lane Speaks (1am)
USD Fed’s Barkin Speaks (1am)
USD ISM Services (Jan) (2am)
USD Fed’s Goolsbee Speaks (6:30am)
USD Fed’s Bowman Speaks (7am)
USD Fed’s Jefferson Speaks (11:30am)
AUD Trade Balance (Dec) (11:30am)
JPY BoJ’s Tamura Speaks (12:30pm)
EUR Germany Factory Orders (Dec) (6pm)
USD Fed’s Waller Speaks (6:30pm)
GBP Bank of England Decision (11pm)
FRIDAY (7th February)
USD Initial Jobless Claims (12:30am)
EUR ECB’s Nagel Speaks (3:15am)
USD Fed's Logan Speaks (9:10am)
EUR Germany Industrial Production (Dec) (6pm)
EUR ECB’s Guindos Speaks (7:45pm)
GBP BoE’s Pill Speaks (11:15pm)
SATURDAY (8th February) USD Jobs Report (Jan) (12:30am)
CAD Jobs Report (Jan) (12:30am)
USD Fed’s Bowman Speaks (1:25am)
USD Uni. of Michigan Sentiment (Feb P) (2am)
USD Fed’s Kugler Speaks (4am)
*Note, all times/dates provided are AEDT
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