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Market sentiment is improving, possibly due to expectations that Trump will concentrate protectionist measures on China while accelerating trade agreements with other nations. However, markets may be overly optimistic, and chasing rallies in commodity-linked currencies should be approached cautiously. The USD/CNY exchange rate has been set above 7.20, suggesting that significant yuan devaluations are unlikely despite the increased tariff threat.
The dollar continues to experience erratic movements. Equity volatility has remained high, accompanied by a bond sell-off. Initial weakness in US stocks was followed by a surge based on unsubstantiated reports of a 90-day tariff pause. Trump dismissed this as “fake news” and threatened additional tariffs on China if retaliatory duties are not removed. The S&P 500 ultimately closed slightly lower after significant fluctuations.
The Nikkei has rebounded sharply, and European/US stock futures suggest a positive opening, potentially due to the belief that Trump will limit protectionism to China and become more flexible in trade negotiations with other countries. It’s worth noting that additional tariffs often have diminishing returns.
New optimism has triggered a substantial overnight rebound in commodity currencies. AUD and NZD have outperformed other G10 currencies despite the threat of further tariffs on China, possibly due to the People’s Bank of China’s decision to fix USD/CNY above 7.20, signaling a weaker yuan and easing pressure on these proxy currencies.
However, commodity currencies face downward pressure from declining oil prices. As crude oil downside risks persist, calling a bottom in oil-sensitive Latin American currencies is premature. COP and CLP remain vulnerable due to high current account deficits, which can amplify currency losses during risk-off trading as FX liquidity diminishes.
The US dollar is regaining its safe-haven status. The recent spike in Treasury yields primarily benefited the dollar. A key risk for the dollar is an accelerated sell-off in Treasuries amid persistent equity market pressure.
This scenario, independent of other safe-haven bonds like German bunds, could signal a “sell America” trend, potentially weakening the dollar significantly. While this is not imminent, monitoring the UST-Bund 10Y spread (currently at 154bp) and the USD swap spread (-53bp on the 10Y vs SOFR) is crucial.
