What has been the impact of Trump’s tariff war in the FX market?
The desk posits that President Trump's tariff policies have significantly influenced the FX market, particularly strengthening safe-haven currencies like the yen amid escalating trade tensions. Per the full note from MUFG EMEA, analysts Lee Hardman and Jack Greenslade highlight that the uncertainty surrounding tariffs has led to increased demand for currencies perceived as stable. This trend is evident as the yen has appreciated against the dollar, reflecting a flight to safety in volatile market conditions. As institutional traders navigate these dynamics, understanding the interplay between trade policy and currency movements will be crucial.
What the desk is arguing
There is a prevailing view that Trump's tariff policies will further amplify the strength of safe haven currencies such as the Japanese yen. The rationale behind this assertion lies in the historical tendency of investors to flock to stable currencies during periods of heightened economic uncertainty and geopolitical strife.
Moreover, as economic data reflects the potential adverse impacts of the tariff imposition, market participants may reassess risk, leading to increased buy-in for safe haven currencies. This perspective aligns with the broader market sentiment that prioritizes security amid oscillating trade relations between the U.S. and its partners.
Where it sits in our coverage
In our current coverage, we have a consensus target of 1.075 with a firm spread of 1.04 to 1.12. This forecast aligns well with the anticipated strength of the yen as a safe haven, especially given the backdrop of ongoing trade disputes that continue to shape market dynamics.
Specific forecasts from leading firms reflect a split in sentiment toward the yen amidst the tariff war context. Notably, the following targets have been established:
The prevailing sentiment among analysts varies, with some firms supporting the view of increasing yen strength while others express skepticism. For instance, Goldman Sachs aligns with the perspective that safe haven demand will persist amidst trade tensions, while BofA argues for a less optimistic outlook, suggesting that the yen may not maintain its recent gains.
01Tariff wars are driving demand for safe haven currencies like the yen.
02Increased economic uncertainty boosts the yen's attractiveness.
03Market sentiment is divided on future currency strength amidst tariffs.
Market implications
Should the tariff situation escalate further, we can expect increased volatility in the FX markets, particularly in pairs involving the yen. The immediate implication for investors will be the balancing of risk exposure, potentially leading to a shift towards safer assets.
Risks to this view
The primary risk lies in geopolitical developments that could either stabilize trade relations or exacerbate tensions, thus impacting currency dynamics unpredictably. Additionally, deviations in economic data may influence market sentiment, leading to sudden shifts in currency valuations.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Leigh Hardman, Senior Currency Analyst at MUFG. It's Friday, the 4th of April 2025 and joining Leigh to pose some questions on the financial market themes for the week ahead is Jack Greenslade from the Global Customer Marketing Group. The following podcast is intended for professional investors and eligible counterparties only and not for retail clients.
Any content should not be regarded as an offer to conduct investment business or an investment recommendation, but for information purposes only. Hey Leigh, how are you? Yeah, I'm good Jack.
How are you doing? Yeah, I'm good. Very, very busy.
Of course, Donald Trump keeping us on our toes again. I guess the first thing I really wanted to ask was around Liberation Day that's now come and gone. We saw the dollar strengthening into Liberation Day and now we've seen that big dollar sell-off.
I'm curious to know your thoughts as to why this might have happened. Yeah, like you say, we've seen a lot of volatility injected into the FX market since Trump's big tariff announcement the other day. Like you say, initially, the day after the tariffs were announced, we did see the dollar selling off sharply against most currencies.
I think the dollar index was down about 1.7% on the following day. And to us, we think that reflects a number of factors. One, I think the kind of reaction function in markets for the dollar to tariffs is changing.
Obviously, last year after Trump's victory, tariffs were seen as more positive for the dollar. The US economy was growing strongly and that the tariffs were expected to have more of a negative impact on growth outside of the US and that was expected to encourage a stronger dollar. But that narrative has started to change significantly at the start of this year with the US economy slowing down at the start of this year.
And obviously, since then, we've also seen leading indicators like consumer confidence, business confidence plunging in anticipation that these higher tariffs will lead to a more stagflationary environment for the US over the next 6 to 12 months. And we certainly think that the tariffs that Trump announced were a big deal. It's the highest tariff rates that we're going to see since the 1930s when we had the Great Depression in the US.
So that kind of highlights the kind of enormity of the change that potentially is going to take place if these tariffs are implemented as currently planned. And we do think that will be very disruptive for growth, not just in the US, but obviously globally as well. It increases the risk of a sharper slowdown in global growth and for the US economy.
And that's how markets have reacted. We've seen the market move to price in a higher risk of recession in the US. The market's now pricing in almost 125 basis points of cuts from the Fed by the end of this year, which if you think that if you take into consideration as well, that the tariffs will lift inflation more because they're so broad based and see higher tariff rates kind of adds to that upward pressure on prices over the next 6 to 12 months.
We could see, obviously, inflation moving well above the 2% target from the Fed. And if the Fed is going to deliver 125 basis points of cuts, it's going to have to have some serious justification to deliver that. And obviously, you'd need to see the labor market rolling over and the unemployment rate rising sharply in a kind of recession scenario for those expectations to be met.
So that's part of the story why the dollar is weakening initially in response to these tariffs, because the focus has shifted more to putting the weight on the scale of the slowdown that could happen in the US, the Fed being more active in terms of cutting rates. And that's shifted away from the potential for obviously a bigger slowdown in the rest of the world as well. That does make sense, at least initially.
But as we've seen, I think that kind of reaction function can easily shift around again. To us, we'd certainly be very skeptical about the dollar continuing to weaken in an environment where global growth could slow sharply, especially against currencies where there's more kind of higher risk currencies, which are more linked to global growth, such as commodity currencies in G10 like Aussie, Kiwi, CAD, NOK, and then obviously emerging market currencies. There's kind of LATAM currencies where they're more commodity linked.
Those could be hit quite hard. It's a general kind of retrenchment from risk could see the dollar kind of bouncing back more strongly against those kind of higher risk currencies. And already, even today, we're starting to see that kind of playing out.
I think the area where the dollar may continue to struggle on those kind of slowdown fears in the US and Fed rate could expectations would be maybe more narrowly against the kind of other major currencies. So we could see dollars still weakening against the safe haven currencies of Yen, Swiss franc, and perhaps to some extent, the euro as well. I guess my next question is around, do you see these tariffs being in place for a long time?
Obviously, Donald Trump rolled back a lot of the tariff measures that he's previously implemented. So do you think this is more of a bargaining tool or do you think these heavy tariffs are around for the long haul? Yeah, I think that's a difficult question to answer with any kind of certainty.
And I think that just kind of highlights one of the big negatives for global growth, even despite the tariffs that are coming into play, it's just a huge level of policy uncertainty we have right now with Trump kind of changing his policies every other day. That makes it very difficult for businesses, households to plan. And when you have that uncertainty, there's a tendency to delay spending, which in itself is the recipe for a slow down in growth.
So yeah, for us, we're just kind of like everyone else in just waiting to see what happens. Obviously, in an optimistic scenario, you'd hope that Trump doesn't really want to go ahead and put these kind of huge tariffs in place for too long, because like you say, it's a recipe for a significant slowdown in US and global growth, which benefits no one in the long run. As we can see, markets are already kind of taking fright at the prospect of that kind of downturn going forward.
You'd hope as well that if the market selloff was to intensify, it would also put pressure on Trump to water down or reverse some of those tariff measures. He has indicated that he would be willing and open to negotiation with other countries to lower those tariff rates if they're willing to put forward a deal to lower tariff rates on imports of US goods or lower non-tariff barriers. So from that perspective, he's always open to a deal, but it obviously takes other countries.
They have to step up to the plate as well. And I guess worryingly today, we did see China come out with new plans to significantly raise tariffs on the US goods. So clearly a big step up in terms of retaliation from China today, almost doubling the average tariff rate that they'll apply on all imported US goods.
So yeah, I think that obviously wasn't taken well by President Trump today. And people were now waiting to see whether he'll raise rates or raise tariffs further on goods from China. That's the kind of worst case scenario, I think, for the global economy that we see kind of escalating trade war between major economies in the US like China and the EU.
In that scenario, the downturn in global growth would be even worse and we'd be staring at certainly even more distress, I think, in financial markets and retrenchment from risk. Yeah. So you mentioned, obviously, tariffs have weighed on the dollar and now, you know, this escalating trade war with China.
How do you think that plays into dollar CNH, for example, if both countries are in this escalating scenario? Yeah, like obviously, recently, we have seen communication from Chinese policymakers that one of their priorities is to try to keep the remnant be relatively stable against the dollar. And that's what's happened so far this year is that we have seen all the CNY trading, kind of consolidating around current levels.
The risk, I'd still say, going forward is at some point, China could allow their currency to devalue. Like we're looking at now, you look at the overall kind of average tariff rate on goods imported from China in the US now, after the latest step from Trump, the tariff rate is closer to, say, 64%. So it's already making, if these are implemented, it's very difficult for China to continue to trade competitively in US markets.
I mean, in some ways, maybe going forward, the threat of further tariffs from here, from the US, it doesn't have the same negative impact on deterring China. And as we've seen today, maybe that's starting to come into their thinking that they're not so worried about further tariffs from current levels and that they want to kind of hit back at the US and hurt them as well. So that's a real kind of danger.
So to us, overall, we still think one of the key takeaways from the tariff announcements this week is that China and other Asian economies were hit the hardest by these tariff measures from Trump. And ultimately, that's negative for growth in the Asian region. And we think that should lead to the underperformance of those Asian currencies going forward.
And obviously, if China does devalue their currency at some point, that would just kind of reinforce the selloff in Asian currencies more broadly. Okay. And just finally, to go back on your point around the deterioration in softer data for the US, in terms of hard data, we had the non-farm payrolls out today.
What did you make of the print? Yeah, like we did see our payrolls, obviously, surprised to the upside in March. Obviously, part of that upward surprise was then offset by sizable downward revisions to payrolls in previous months.
So the overall net positive surprise wasn't as maybe as big as the headlines suggested. I think overall, it still points towards softening of employment growth overall in the first quarter. That's actually amidst the high level of policy uncertainty that we've seen at the start of Trump's terms.
Does that really give us much insight, though, into what happens next? I'd have my doubts on that. I think, obviously, if these tariffs do go into play, like Trump's suggesting, then they'll see the risk at some point that we would see in the coming months, a bigger slowdown in US employment growth as well as businesses become more uncertain over the future and slowdown hiring would be the first step you would imagine before potentially laying off workers.
So yeah, I think the risk is going forward that we'll see further weakness in the US labor market, which would then open up room for the Fed to cut rates this year. So today's upside surprise, I think you'd have to view that as a bit more maybe backdated than the normal. It's not really kind of looking in the rear view mirror, so to speak.
And we've had this big negative shock coming up from the tariffs on the horizon. And I personally would probably look through today's upside print. I don't think that in itself is a good indicator of what's going to happen next.
Interesting. Okay. Thank you very much for your speech, Lee.
No problem. Good to speak to you. Thank you for listening to this MUFG Global Markets podcast.
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