The foreign exchange market continues to remain volatile overnight with the high beta G10 currencies staging strong rebounds after heavy losses since last week. The best performing currencies have been the Australian and New Zealand dollars alongside the Norwegian krone which have all strengthened by 1% or more against the US dollar.
In contrast Asian currencies have remained at weaker levels overnight. The rebound for high beta G10 currencies has been driven by the tentative improvement in global investor risk sentiment. Asian equity markets have risen overnight most notably in Japan where the Nikkei 225 index is up by 6%. Even after strong gains today the Nikkei 225 index still hasn’t fully retraced losses from yesterday. The Japanese equity market has outperformed overnight following comments from the Trump administration indicating that the country is likely to get priority in US trade talks moving it to the front of the line of countries seeking to water down/rollback plans to put in place a “reciprocal tariff” of 24% on Japan alongside the 25% tariff on autos and certain parts. US Treasury Secretary Scott Bessent stated that “I would expect Japan is going to get priority” among trade partners for coming forward very quickly.
He went on to add that Japan maintains “quite high” non-tariff barriers but he expects a very productive set of negotiations. Alongside negotiations with Japan, Treasury Secretary Bessent stated that “there are 50, 60, maybe almost 70 countries now who have approached us. So its going to be a busy April, May, maybe into June”. Overall, the comments have helped to encourage some optimism amongst market participants that negotiations will take place quickly and will potentially help dampen disruption from tariffs beyond the near- term if they lead to a significant watering down/rolling back of tariffs on major trading partners. However, the White House did quickly deny a speculative report that the “reciprocal tariff” plans could be put on hold for 90-days while the negotiations take place. The yen has weakened overnight undermined by the improvement in global investor risk sentiment.
Quick progress on trade talk between the US and Japan would help to ease downside risks for Japan’s economy and encourage Japanese rate market participants to bring forward expectations for BoJ rate hikes. Recent negative trade developments have resulted in the Japanese rate market pricing out further rate hikes this year in a anticipation of a bigger hit to growth in Japan and globally.
In contrast, the trade war between the US and China continues to escalate helping to explain the relative underperformance of Asian currencies overnight. USD/CNH hit a fresh high overnight of 7.3651 moving back closer to the year to date high from in early February at 7.3734. It follows the PBoC’s decision to set the daily fixing rate above the 7.2000-level for the first time since September 2023 which has added to building speculation amongst market participants that China could allow a bigger devaluation of the renminbi to offset the negative impact on external demand form the worsening trade war with the US. It would require a change in strategy from Chinese policymakers who have been prioritizing keeping the renminbi stable. As we highlighted in yesterday’s daily report (click here), China is also reportedly considering bringing forward pans to stimulate domestic demand to provide more support for growth in the near-term. Bigger stimulus measures alongside retaliatory tariffs would help to reduce the need for a bigger devaluation for the renminbi.
In addition, the renminbi remains under selling pressure in response to yesterday’s threat from President Trump to raise tariffs by a further 50% on all imports from China if they do not withdraw their plans to match President Trump’s “reciprocal tariff” plans by imposing further 34% tariffs on all good imported from the US into China. Another tit-for-tat tariff hike of 50% on imports of Chinese goods into the US if implemented today as threatened by President Trump would raise the average US tariff rate on Chinese goods to around 114%. It does not appear that China will back down to President Trump’s tariff threats. The Chinese Ministry of Commerce stated that “if the US insists on its own way, China will fight to the end”. At the same time, they called for dialogue to resolve trade disputes despite President Trump posting yesterday that “all talks with China” will be terminated if they don’t cancel plans to put in place 34% tariffs on imports of US goods.
