Written by the Market Insights Team
The US has implemented its steepest tariffs on trade partners in over a century, with rates varying significantly across regions. The most striking development is the 104% tariff imposed on Chinese goods, signalling a major escalation in trade tensions. If these measures remain in place, they could effectively isolate the world’s two largest economies from one another. But this trade war is not just about tariffs; it reflects a broader geopolitical rivalry that could reshape global trade dynamics for years to come. Wild swings in markets continue as traders grapple with pricing the impact of a the conflict.
Tariffs kick in, confidence in US assets eroded
George Vessey – Lead FX & Macro Strategist
The ‘sell America’ narrative is gaining traction once more, with US equities and Treasuries facing renewed pressure. This creates a challenging environment for the dollar. US assets are being hit hard as the 104% China tariffs take effect, and without signs of de-escalation, the dollar is likely to weaken further.
Hopes for market stability were short-lived yesterday. The 4% rebound in the S&P 500 evaporated to end with a loss of 1.6% – its biggest U-turn since at least 1978. The tech-heavy Nasdaq suffered its biggest blowdown since at least 1982 – falling deeper into bear market territory. The VIX fear index closed above 50 for the first time in over four years and is now almost four standard deviations above the long-term average. This marks a level of volatility most recently seen in 2020 (pandemic) and 2008 (GFC). Oil prices have also sunk to fresh 4-year lows on global growth and demand concerns.
The selloff in longer-dated Treasuries also gained momentum, with the US 10-year yield climbing above 4.5% and the 30-year yield briefly surpassing 5%. Investors appear to be stepping away from what was once considered the world’s safest asset, driven by expectations of weakening foreign demand as tariffs take hold. If the current pace of these bond moves persists, it could prompt central banks, including the Federal Reserve, to reassess their positions, even amid lingering concerns about persistent inflation pressures.
What’s up with Mar-a-Lago?
Kevin Ford – FX & Macro Strategist
We’ve been cautious about weighing in on the Mar-a-Lago Accord, a proposed framework by Stephen Miran, current chair of the Council of Economic Advisers, aimed at restructuring the global trading system—a proposal that has sparked keen interest and speculation within financial circles.
While the plan remains questionable, somewhat incongruent, and lacking a solid foundation in today’s geopolitical realities, it no longer feels like a long shot. Some of its key propositions are already unfolding in the current market landscape. Additionally, the current administration appears to be welcoming the recent dollar weakness—a notable departure from Trump 45’s tenure, during which the dollar strengthened amidst the U.S.-China trade war.
The accord proposes devaluing the U.S. dollar to boost exports while maintaining its status as the world’s reserve currency. These objectives are inherently at odds, as a weaker dollar could undermine its global reserve status. While the accord suggests that tariffs would not significantly impact U.S. prices, historical evidence, including Miran’s own examples, indicates that tariffs often lead to higher prices for both imported and domestic goods. The plan oscillates between using tariffs as temporary pressure tactics and as a permanent revenue source, creating ambiguity about their true purpose.
Also, by shielding domestic industries with tariffs, the accord risks reducing the pressure on American companies to innovate and improve, potentially harming long-term competitiveness. Finally, the plan’s unilateral approach to currency adjustments and trade policies isn’t grounded in geopolitical feasibility, making it difficult to achieve the intended global economic reordering.
What we’re witnessing in the markets may align closely with the plan’s primary objectives for America. The administration’s push for a weaker dollar, lower interest rates, and reduced yields appears to be yielding results. However, this progress comes at the expense of credibility in U.S. policymaking, with potential unintended economic repercussions that could reverberate through the U.S. economy and stock markets, directly impacting Americans.
Turbulence to persist in FX
George Vessey – Lead FX & Macro Strategist
In FX, currency traders are positioning for turbulence to get even worse with hedging costs to protect against large swings surging. The dollar’s status as a post-pandemic safe haven is unravelling under the weight of President Trump’s tariffs, which risk triggering stagflation in the US economy. These measures are also undermining the narrative of US exceptionalism that has shaped the investment landscape for decades.
Meanwhile, China has set its currency at its weakest since 2007. the offshore yuan is a record lows. The safe haven Swiss franc remains the top haven of choice in the FX market. But Swiss officials will be eying this closely with rate cuts and FX intervention measures up their sleeve to rein in the currency. Antipodeans remain vulnerable – the Aussie and Kiwi dollars near multi-year lows.
While there were hints that President Trump might consider tariff deals, the path to negotiations remains fraught. Globally, investors are increasingly anxious about potential cracks in the financial system amid heightened volatility. This uncertainty has sparked speculation that the Fed may need to accelerate rate cuts to stabilize the situation.
Meanwhile, flying under the radar but still important to note – small US businesses foresee business conditions worsening ahead, a result of domestic and global policy choices. The NFIB’s small-business optimism index fell more than expected in March. A drop in business conditions and sales expectations was mostly behind the headline decline. Ultimately, uncertainty remains too high for small businesses to plan ahead.
Euro surges again
George Vessey – Lead FX & Macro Strategist
EUR/USD has shot back above $1.10 today and is now up 10% from March lows. Momentum looks to be in the euro’s favour and we wouldn’t be surprised to see $1.12 trade soon given the price action over the last few days. Options markets are sending mixed signals though, with one-week risk reversals still leaning euro-bullish, but moving sharply lower versus a week ago.
The euro’s high liquidity continues to shield it from the heightened volatility seen in high beta G10 peers. As the second most liquid global currency, the euro is enjoying a surge of increased flows as traders dump the dollar. It stands as a favored alternative for FX reserves. meanwhile, the lack of stresses showing up in USD funding markets may also be a sign that investors are much less eager to pile into dollars this time round.
While the European Union has expressed readiness to negotiate tariff-free options with the US, such discussions are likely to take time. In the meantime, the EU is proceeding with measured retaliation against US tariffs, including 25% duties on various US products. A vote on such measures is expected today.
Sterling caught in the crossfire
George Vessey – Lead FX & Macro Strategist
Amidst the broad-based dollar weakness, GBP/USD is back above $1.28, bouncing of its 50-day moving average this week. However, the euro’s strength has dragged GBP/EUR to fresh 6-month lows, with the pair fighting to stay afloat the €1.16 handle.
There may be scope for a more protracted recovery in the likes of GBP/USD as investors continue to shun US assets, though we’re unsure whether it has legs to, or if the pound is attractive enough in this environment to allow the $1.32 peak of this year to trade again any time soon. There are dislocations aplenty across financial markets, most strikingly between bonds and FX. The pain is most pronounced in the 30-year space, where gilt yields rose as much as 16 basis points to 5.51%, the highest since 1998. Two-year yields are dropping though, pushing the 2-, 30-year spread above 150 basis points for the first time since 2017.
Cutting through the noise, rate differentials suggests the current $1.28-$1.29 is fair value at present. Markets are pricing in more rate cuts by the Bank of England this year – but to pick up the pace of easing the BoE would likely need to see inflation moderate below its February forecasts.
As for sterling versus the euro, the pair has dropped for four days straight – with a cumulative decline of over 3% despite rate differentials pointing to €1.19 fair value. The pair is heavily oversold on the daily relative strength index, meaning it may be unwise to chase the trend much lower from here.
Mexican peso losing as Emerging Markets get hit
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: April 7-11
All times are in ET
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
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