The USD’s momentum is strong against most currencies a fortnight away from Donald Trump’s inauguration as the 47th President of the United States on January 20.
Trump has proposed several tariffs at the start of his second term, such as a 25% tariff on Canada and Mexico to address drug trafficking and illegal immigration, tariffs on the EU unless it imports more US oil and natural gas, an additional 10% tariff on Chinese goods, and a 100% tariff on BRICS countries if they pursue policies that undermine the USD’s status as the global reserve currency. Apart from Mexico and Canada, most of America’s trade deficits were with Asian and European currencies. While Trump’s policies are considered transactional in design, his tactics also appear predatory due to their coercive, unilateral, and zero-sum nature to push his America First doctrine globally.
USD/CNY finally broke above its multi-week cap at 7.30 last Friday, indicating that China would partially allow depreciation to offset the potential tariffs. Although USD/JPY has stabilized around 156-158 since December 20, the JPY will not find support at the Bank of Japan meeting on January 24, where inadequate guidance has reduced the odds for a hike to below 50%.
The futures market’s odds are significantly low at 11% for the Fed to reduce interest rates at its January 29 meeting. At last month’s FOMC meeting, the Fed projected only two rate cuts in 2025, fewer than the four cuts forecasted three months earlier. Fed Governor Adriana Kugler reckoned monetary policy had moved to a more moderate level of restrictiveness after 100 bps of Fed cuts in September-December. This week, Fed speakers will likely stay optimistic about the US economy outperforming its Developed Market peers. Upside surprises in US ISM services and jobs data will lift the USD. Fed officials should be vigilant of inflation risks from an escalating trade war with reciprocal tariffs.
Conversely, the bets for a 25 bps cut are larger at other central bank meetings, i.e., the European Central Bank (107%) on January 30, the Bank of Canada (80%) on January 29, and the Bank of England (71%) on February 6. ECB President Christine Lagarde was hopeful about the inflation target hitting the 2% target in 2025, with some ECB members optimistic about lowering rates to 2% by autumn. Unlike the Fed, the ECB sees disinflation risks from Trump’s tariffs, leading China to divert more competitive exports to the bloc.
Political crises took their toll on some currencies. No single party is expected to win Germany’s elections on February 23 amid doubts that the next coalition government would be stable enough to last a full four-year term. France faces challenges in forming and maintaining a stable government after the 2024 snap elections led to a fragmented parliament. Canada could hold snap elections ahead of schedule (October 25) if Prime Minister Justin Trudeau steps down from internal party pressure to resign or a no-confidence motion led by the opposition. South Korea is facing a leadership vacuum after suspended President Yoon Suk Yeol’s failed martial law declaration last month led to an impeachment that has yet to be finalized by the Constitutional Court. EUR/USD is eyeing parity again. USD/KRW is at its highest level since 2009. USD/CAD may hit its loftiest levels since 2003.
Quote of the Day
“Life is 10% what happens to you and 90% how you react to it.”
Charles R. Swindoll
January 6 in history
Village People's "Y.M.C.A." became their only UK #1 single in 1979. The song is widely recognised as a hallmark of Trump’s political rallies.
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