USD: USD Higher Amid Further Tariff Threats, NZD Softer Post Q4 CPI
The USD index holds in positive territory, last above 1303, supported by earlier headlines around additional tariff threats from US President Trump (this time extending to China and the EU). Aggregate shifts haven't been large though, with the BBDXY index still fairly close to recent lows.
- Trump stated China could be hit with 10% tariffs, potentially from Feb 1, while Trump also stated that the EU could see tariffs imposed as well. The tariffs on China would be in response to fentanyl flows from the country. Trump also added that tariff threats on Mexico and Canada of 25% had nothing to do with renegotiating the USMCA treaty, but was also related to drug flows (per BBG). At the start of the session a WSJ article suggested that the tariff threat on these economies was designed to push for an earlier renegotiation of this treaty.
- Aggregate FX moves weren't large, but the market is likely to remain sensitive to on-going tariff speculation.
- NZD/USD is down 0.30%, last near 0.5660/65. Earlier lows were at 0.5650. The Q4 CPI data was close to expectations, but the further cooling in non-tradables inflation, albeit at a moderate pace, has added to 50bps pricing for the Feb RBNZ meeting. NZ-US yield differentials are also lower.
- AUD/USD is down a touch, but at 0.6265/70, remains within recent ranges. The AUD/NZD cross is higher, but hasn't been able to breach 1.1100.
- USD/JPY is higher, last near 155.80, but also is sticking to recent ranges. US yields have ticked higher, but gains are not much beyond 1bps at this stage.
- US equity futures are higher, led by tech, as earlier remarks from Trump around a $100b AI focused investment supporting sentiment. This has likely helped trim the risk off move for FX from the earlier tariff threats.
- Regional equities are mostly higher, but China/HK markets are weaker.
- Later US December leading index prints and ECB President Lagarde and Bundesbank’s Nagel speak.
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FOREX: Firmer Equities Aids FX Risk Appetite, But Muted Moves
G10 FX markets have started the holiday impacted week in fairly muted fashion. There has been a slight risk on tone in early trade, but follow through has been very limited for the likes of AUD and NZD. The USD BBDXY index was last little changed near the 1297 level.
- AUD/USD has found resistance near 0.6270, which marked highs from late last week (post softer US data outcomes). On the downside, moves sub 0.6250 have been supported, and we last tracked close to this level. This leaves us little changed for the session. The NZD has followed a similar trajectory, last near 0.5650/55, also little changed for the session.
- USD/JPY has drifted a little higher, last in the 156.50/55 region, not too far from session highs (156.69). Lows for the session were in the first part of trade and at 156.14, above intra-session lows from Friday (just under 156.00).
- We do have some event risks on the calendar for Japan this week, the mins of the BoJ Oct meeting are out tomorrow, services PPI on Wednesday (Christmas day), along with a Ueda speech. On Friday the Tokyo CPI for Dec prints.
- EUR/USD is a touch higher, last near 1.0440/45.
- In the cross asset space, US equity futures are higher, led by the tech side, up nearly 0.60% for the Nasdaq. Regional equity markets are mostly higher, led by the tech side.
- US yields are close to flat at this stage, retreating from recent highs on Friday post the softer core PCE inflation reading. This is likely helping broader risk appetite in the equity space as week.
- Looking ahead, we have UK GDP revisions later, along with US durable good orders and building permits.
EQUITIES: Nvidia To Establish Headquarters In Taiwan, Semiconductor Stocks Surge
Nvidia is planning to establish overseas headquarters in Taipei, Taiwan, requiring 3 hectares of land, with local government support to facilitate the process, according to the Commercial Times. CEO Jensen Huang previously announced plans to boost investment in Taiwan by building a major R&D center and hiring at least 1,000 engineers over the next five years.
- Taiwan equities have benefitted from these headlines, with the TAIEX trading 2.50% higher. The large semiconductor stocks in the region have surged higher today with TSMC now trading 3.90% higher, while Hon Hai is up 3%.
- The Philadelphia SE Semiconductor Index closed 1.46% higher on Friday, while the BBG Asia Pac Semiconductor Index is trading 3.45% higher today.
FOREX: J.P. Morgan - FX Carry Trades Back In Vogue
J.P Morgan: "USD is ending December on a strong note even before tariff risks have crystallized, defying usual seasonal patterns on a mix of positive growth (flash PMIs) and yield (Fed vs. BoJ / BoE / Norges Bank) divergences this week.
The less dovish Fed posture unveiled at the December FOMC can continue to reverberate bullishly for the dollar through early’25, as markets anticipate additional follow-through shifts on core PCE upgrades in Trump 2.0, and potentially even question the longevity of the easing cycle.
The surprisingly dovish December BoJ MPM biases risks towards later and more gradual monetary policy normalization in 2025 than our baseline. FX markets are on heightened intervention watch however that may forestall an extrapolation of the outsized BoJ day USD/JPY strength. Continue to hold cross-Yen shorts.
One artefact of DM central bank divergence is that G10 FX carry (USD,GBP vs. CHF, JPY) is back in vogue, having reversed nearly all of its July drawdown. With yield dispersion still holding in around historical highs, rotation into value may have to wait.
Trades: Stay long USD & short EUR as the election trade is not finished. Other macro themes include services/mfg r.v., policy r.v., EUR-specific weakness, flows r.v. and ongoing carry rotation. Short EUR vs USD, JPY, CHF, Scandis. Long NOK vs SEK, GBP, PLN. Short CHF/JPY, hold CAD/JPY put spread.
The last liquid trading week of the year proved to be a statement week for the USD. A packed calendar of top-tier economic data and central bank events culminated in a 1%+ DXY rally on the week, with the dollar blanking every G10 and EM comer in sight. The drivers were straightforwardly cyclical — continued signs of US growth exceptionalism on flash PMIs, buttressed by classical G4 monetary divergence (hawkish Fed vs. dovish BoJ /BoE) — that turned out to be the polar opposite of the (weak) data / (dovish Fed) policy inflections responsible for outsized late 4Q dollar sell-offs in recent years; no surprise then that seasonal dollar weakness in December has not come to pass this year, and goes to show that price seasonality, unless driven by recurring seasonal BoP flows, is often just a coincidental artefact of macro circumstances."
