Deals Here, Discord There

Financial markets have somewhat stabilized after a couple of dizzying trading days. Mixed US tariff headlines and confirmation the US and Iran will hold high level nuclear talks on Saturday bolstered risk sentiment. USD is down mostly against risk sensitive currencies while US and European equity futures have rebound.

US President Donald Trump threatened China with higher levies if it doesn’t withdraw its retaliatory tariffs writing “the United States will impose ADDITIONAL Tariffs on China of 50%, effective April 9th…Additionally, all talks with China concerning their requested meetings with us will be terminated!” In response, the Chinese Ministry of Commerce warned “The US threat to escalate tariffs on China is a mistake on top of a mistake. If the US insists on its own way, China will fight to the end.”

More encouragingly, the Trump administration is signaling his openness to trade deals. Treasury Secretary Scott Bessent stressed that “for countries that don’t retaliate, we are at a maximum tariff level, and it is my hope that through good negotiations all we will do is see levels come down…But that’s going to depend on the other countries.” Bessent added that Japan is expected to get priority in US tariff talks for coming forward very quickly.

Regardless, the pervasive uncertainty created by continuously changing US tariff threats and the scope of potential retaliatory measures remain a major blow to the global economy. Bottom line: relief rallies in risk assets will likely be short-lived.

Otherwise, the USD outlook is bleak for three reasons: (i) The Trump administration implicit support for a weaker dollar, (ii) Heightened risk the US falls into stagflation, (iii) Growing loss of credibility in US policymaking.

The US March NFIB small business optimism index is up next (11:00am London). Headline is expected to dip 1.7 points to 99.0, consistent with slower growth momentum.

CHINA

The Shanghai Composite Index recovered slightly today after diving by roughly 9% on Monday. China’s state fund manager, controlled by the Ministry of Finance, confirmed it had taken action to increase its holdings of stock market index funds and promised to buy more.

Moreover, the People’s Bank of China (PBOC) signaled greater tolerance for a weaker yuan. The PBOC set the USD/CNY fixing at 7.2038, the weakest since September 2023, which pushed USD/CNH higher to 7.3600. USD/CNH faces a multi-year resistance level at 7.3800.

While a weaker yuan would increase China’s external competitiveness, it would also further curtail the role consumption plays in the economy and worsen domestic imbalances. A currency depreciation is like a tax on consumption that lowers disposable household income and reduces spending. As such, a better way for China to achieve its long-overdue investment-to-consumer pivot is via a gradual revaluation of its currency.

This could be the basis for a grand bargain between the US and China. Devaluing USD versus CNY would hit two goals at once: help US President Donald Trump achieve his core goal to revitalize American manufacturing activity and help rebalance China’s economy away from investment towards consumption.

JAPAN

USD/JPY firmed up on USD strength. Japan’s current account surplus widened to ¥2,317bn from ¥1947bn in January to total a record ¥29.1tn in the twelve months to February (4.7% of GDP). Japan’s balance of payments backdrop is JPY supportive especially during periods of heightened risk aversion.

AUSTRALIA

Australia’s business survey was mixed but consumer confidence plunged. The NAB March Business conditions rose 1 point to 4 remain a little below average while business confidence fell 1 point to -3. Meanwhile, the Westpac-Melbourne Institute Consumer Sentiment index dropped to a six-month low at 90.1 in April from 95.9 in March due to the tariff turmoil.

RBA Governor Michele Bullock gives a keynote speech Thursday. Markets will look to see if Bullock pivots away from her cautious policy guidance to an outright dovish stance due to the downside risk to Australia’s economy from the US tariffs. Australia is a small open economy meaning it is heavily reliant on international trade. Cash rate futures have fully priced-in a 25bps cut at the next May 20 RBA meeting and 40% odds of an additional 25bps cut.

CANADA

USD/CAD is down on broad USD weakness. The Bank of Canada’s (BOC) business outlook survey deteriorated in Q1. The Business Outlook Survey (BOS) indicator reversed its upward trend and remains below average. The decline reflects lower balances of opinion on employment, investment, and measures of future sales.

Meanwhile, one year inflation expectations increased for a second consecutive quarter to 3.61% in March, the highest since October 2023. Still, longer-term inflation expectations remain well anchored around 2% and leaves room for the BOC to ease again next week. Markets price-in 70% odds of a follow-up 25bps BOC policy rate cut to 2.50% at the April 16 meeting and a total of almost 75bps of easing over the next 12 months.