USD, JPY, AUD flows: USD under pressure

The USD has fallen back overnight after initially gaining on Trump’s announcement of reciprocal tariffs. There may have been some relief at the tariffs not being imposed immediately, but they are scheduled for April 1, which is hardly very far away, so we still see the risk of their imposition as being USD positive, particularly against the riskier currencies, although the biggest impact could well be on emerging markets. Higher tariffs will initially raise inflation and would consequently likely restrict the scope for Fed easing, but might also be negative for growth and thus could mean weaker equities and a flatter curve.

From an FX perspective this combination is JPY positive, as the JPY tends to follow 10 year yield spreads and benefits from weaker equities, while the EUR tends to be more influenced by front end yields and commodity currencies will tend to suffer from weaker equities. However, the initial equity market reaction was positive, with the S&P 500 threatening the all time highs while European equities have continued to advance and the EuroStoxx 50 index is threatening the March 2000 high. We are sceptical that the strength in equities can continue, with risk premia approaching the lows of the early 2000s, but as long as equities hold up riskier currencies can continue to perform well. For the moment the USD is under general pressure, and the JPY and AUD look best placed to benefit, with Japan and Australia also less at threat from tariff increases than most.