Investors are nervously waiting on the announcement of US President Donald Trump’s tariffs. With reports that deliberations on the tariffs are still ongoing, even with hours left to their unveiling, as well as speculation about the form they will take, investors remain uncertain.
At the time of writing, S&P500 futures were trading in the red and most Asian bourses in the green. The Antipodean currencies were the best performing currencies in the G10 and the JPY the worst performing.
Today, at 16:00 EDT/ 21:00 BST, US President Donald Trump is expected to announce fresh tariffs as part of “Liberation Day”. Ahead of that, US officials, including President Trump, have suggested that any new trade levies would be reciprocal to the tariffs and non-tariff barriers to trade used by the US trading partners. That being said, recent media reports have added to the market unease, suggesting that the US could use aggressive blanket tariffs instead. We should further keep in mind the possibility that the Trump administration could use any tariffs as a negotiation tool. Ahead of all that, focus today would be on the ADP for March as well as the Durable and Capital Goods orders for February. Also on the docket is a speech by the Fed’s Adriana Kugler.
The FX market impact of “Liberation Day” would be complicated by the threat of retaliatory action by US trading partners and the risks that this would pose to the US economic outlook, in our view. In particular, while aggressive, blanket tariffs have traditionally been seen as negative for risk sentiment and positive for thesafe- haven USD, the impact of such tariffs today should be mitigated by market fears of a US recession. By the same token, while country-specific US tariffs with a phase- in period should be less negative for the markets and thus could be less supportive for the USD, their impact could be softened by easing fears about the US outlook. In the absence of significant surprises today, FX investors would be also quick to shift their attention to the incoming US data releases – the services ISM tomorrow and the all-important Non-Farm payrolls on Friday.
Among G10 economies, Japan has relatively low direct exposure to US President Donald Trump’s reciprocal tariffs, if the President levies tariffs based on the tariffs countries levy on US goods. Japan has relatively low tariffs. Even taking into account Japan’s VAT, Japan’s exposure is relatively smaller. There are risks for Japan around its non-tariff barriers, however. But, it is the indirect tariffs that Japanese exporters, especially automakers, face via tariffs on Canada and Mexico that are the most significant for Japan. Trump has already announced these tariffs and so the JPY has technically already reacted. And we noted that while Japanese carmakers with plants in Mexico and Canada are hit by these tariffs, so too are US auto companies that import completed cars and car parts from plants in Canada and Mexico. So we see the auto tariffs as broadly neutral for USD/JPY.
We continue to think the main impact of Trump’s tariffs on USD/JPY will be their effect on global risk sentiment and demand for JPY-funded carry trades. According to our models, the strongest driver of the exchange rate remains the US-Japan short-term rates spread followed by global equity markets. We note that last week, the impact of Trump’s auto tariffs was overran by the President suggesting he would be “lenient” on reciprocal tariffs, which led to a rally in global equity markets and USD/JPY appreciation. The exchange rate was also helped along by hawkish FOMC speak suggesting some members on the FOMC were more concerned about the potentially positive inflation effect the tariffs than the negative growth effects, especially if inflation expectations were driven higher by tariffs and their effect on inflation did not prove transitory. So on “Liberation Day” USD/JPY traders will have to watch not only the tariff announcement and the reaction of global equity markets, but also the US economic data as well as Fedspeak.
