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January 31, 2025
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Market Briefing: Tariff volatility

Read the 2025 Currency Outlook from Corpay Currency Research

  • Tariff threat. President Trump rattled FX markets this morning after reiterating tariffs could be imposed on Canada & Mexico on Saturday. USD rose.

  • Macro pulse. Overnight the data showed that US growth outpaced the Eurozone. ECB cut rates again. More moves likely to revive activity.

  • AUD vol. The Trump comments exerted downward pressure on the AUD. More headline driven volatility likely over the period ahead.


Global Trends

  • The economic data flow picked up overnight with the relative outperformance of the US once again on show with tariff-related comments by US President Trump rattling a few FX market nerves this morning. Macro-wise, while overall growth in the US decelerated in Q4 (from 3.1%saar to 2.3%saar), this reflected a steep drag from an inventory drawdown. Spending by US households quickened, though a rush to front-run potential tariffs and higher prices could have been a factor. By contrast, the Eurozone economy stagnated in Q4 with the region struggling under the weight of political uncertainty, a manufacturing malaise, and structural headwinds. Hence, it was no surprise the European Central Bank cut rates again as it looks to revive momentum. The ECB delivered a 25bp reduction, its 5th move since mid-2024. With ECB policymakers continuing to view its policy stance as ‘restrictive’ and Eurozone inflation cooling further action looks probable. Markets are pricing in another 3 ECB cuts by year-end, while just under 2 more moves are factored in for the US Fed.

  • In terms of markets, solid US data helped support sentiment with the S&P500 edging higher (+0.4%). European stockmarkets outperformed (EuroStoxx600 +0.9%) with the ‘dovish’ vibes from the ECB dragging on bond yields. Yields across Europe declined 6-7bps, with US rates steady. Across commodities, gold hit a new record high (now ~$2845/ounce) while industrial metals like copper (+0.7%) and iron ore (+2.1%) added to recent gains.

  • In FX, after consolidating overnight the USD rose this morning after US President Trump reiterated that 25% tariffs on Canada and Mexico are set to be announced on Saturday due to the flow of fentanyl and large trade deficits. He also warned that the US is “in the process of doing a China tariff” as well. The comments have seen EUR slip back below ~$1.04, USD/CAD jump up to ~1.45 (the top of its multi-year range), USD/CNH lift to ~7.2930, NZD dip to ~$0.5635, and the AUD fall towards ~$0.62. USD/JPY (now ~154.24) has also remained on the backfoot with the JPY garnering strength from the narrowing yield differentials between Japan and other major nations, as well as the pick up in volatility. The 1 February tariff threat was something President Trump warned was in the pipeline after his inauguration. We think more headline related FX and market volatility is likely over the near-term as these tariffs are actually imposed or potentially not announced if some type of deal can be reached. Overall, the lingering trade tariff risks, positive US growth pulse, and higher interest rates should keep the USD firm over Q1/Q2, in our opinion.


Global event radar: EZ CPI (3rd Feb), US ISM (4th Feb), BoE Meeting (6th Feb), US Jobs (8th Feb)


Trans-Tasman Zone

  • After being in a holding pattern overnight FX markets were awakened this morning by US President Trump’s tariff comments (see above). The threat of tariffs being imposed on Canada and Mexico on 1 February was something President Trump had warned about after his inauguration, yet the knee-jerk jolt across markets indicates a degree of complacency had crept in. NZD has dipped down to ~$0.5635, broadly inline with its ~1-month average, with the AUD declining towards ~$0.62, a bit above where it started the year. That said, outside of AUD/CAD (now ~0.90), the other major AUD-crosses have remained within overnight ranges, a sign of how USD-driven this mornings moves have been.

  • This morning’s headline driven swings in FX markets are another reminder that bursts of volatility and wider intra-day ranges in currencies like the AUD should be anticipated. Since the late-1980s the average daily trading range in the AUD has been ~1%. This hasn’t been the recent norm, and participants may have forgotten about AUD’s inherent volatility. In the last 2-years the AUD’s daily trading range has only been larger than its long run average about ~1/3 of the time.

  • In our opinion, the US tariff risks could keep risk sentiment and cyclical currencies like the AUD on the backfoot into the end of the week. But with the AUD trading at a discount to fundamentals (it is tracking ~4-5 cents below our ‘fair value’ models), an underlying bearishness already embedded (‘net short’ AUD positioning, as measured by CFTC futures, is elevated), and it 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) we believe further downside potential is somewhat limited. Although the firm USD backdrop also means that bounce backs may also be sometime away. As per our 2025 outlook we see the AUD oscillating in the low- to mid-$0.60s over coming months as domestic and offshore cross-currents play out. However, we do believe diverging macro and policy trends may give the AUD support on a few crosses. As our chart shows, AUD/EUR is currently tracking below our model estimate.

AUD & NZD event radar: AU Retail Sales (3rd Feb), EZ CPI (3rd Feb), US ISM (4th Feb), NZ Jobs (5th Feb), BoE Meeting (6th Feb), US Jobs (8th Feb)

AUD levels to watch (support / resistance): 0.6170, 0.6200 / 0.6280, 0.6320

NZD levels to watch (support / resistance): 0.5600, 0.5620 / 0.5690, 0.5720


Market Moves

Peter Dragicevich

Currency Strategist - APAC

peter.dragicevich@corpay.com


Upcoming Events

FRIDAY (31st January)

JPY Tokyo CPI Inflation (Jan) (10:30am)

JPY Industrial Production (Dec P) (10:50am)

AUD Private Sector Credit (Dec) (11:30am)

EUR France CPI Inflation (Jan P) (6:45pm)

SATURDAY (1st February)

CNY Lunar New Year

EUR Germany CPI Inflation (Jan P) (12am)

CAD GDP – Monthly (Nov) (12:30am)

USD Employment Cost Index (Q4) (12:30am)

USD PCE Deflator (Dec) (12:30am)

USD Fed’s Bowman Speaks (12:30am)

USD Chicago PMI (Jan) (1:45am)

*Note, all times/dates provided are AEDT

About the author

Peter Dragicevich

Peter Dragicevich

Currency Strategist - APAC

Peter analyses and forecasts global macroeconomic trends to draw out possible implications for interest rates, commodity pricing, and the FX markets for Australia and across Asia.

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