April 2nd is shaping up as one of the more layered market riddles in recent memory

Markets

We’re seeing textbook position-squaring across Asia today—offloading some of the most stretched bearish exposure into the open, with equities catching a bid in what feels like a temporary exhale.—call it the calm before what could be either Thor’s tariff hammer or just a ball-peen tap tomorrow.

April 2nd is shaping up as one of the more layered market riddles in recent memory. The tariff rhetoric has reached full crescendo—deafening in volume, yet maddeningly vague in detail. Markets are flush with speculation, but real pricing clarity is MIA, and the uncertainty premium is sky-high.

The chatter on the Street has leaned toward doom and gloom, but from where I sit, a lot of the damage is already baked into equities. If you're feeling bold, you could argue there's a window here to punch your ticket for the next volatility coaster and attempt to front-run the event. Markets may be bruised and bloodied, but risk has a funny way of getting back on its feet when everyone least expects it.

Meanwhile, the Trump administration appears to be in its own state of flux—scrambling behind the scenes to finalize tomorrow’s “Liberation Day” tariff rollout. The internal tug-of-war? Whether to apply bespoke tariff rates for each trading partner (a softer, more nuanced approach) or unleash a campaign-era sledgehammer with broad-based across-the-board tariffs. The outcome will set the tone for the next phase of global market reaction.

Forex markets

My best guess is that elements of the G-10 complex—especially CAD—and parts of Asia FX ( CNH ) are underpricing the sheer magnitude of these tariffs if they hit full throttle. It's hard not to wonder: what do the banks know that the rest of us don’t? Frankly, it feels like we’re all flying blind. Research notes have become vague exercises because nobody knows how bonds will digest tomorrow’s tariff storm. The policy fog is thick, and with reciprocal levies looming, pricing clarity is in short supply.

The biggest reason we've been more selective about expressing any dollar view? U.S. Treasuries are still trying to price the implications of a looming tariff wall around the U.S. economy. On balance, the tariff chatter has pulled yields lower—but not in a way that screams "recession." The rates market is discounting damage, not collapse.

Roughly 75bps of Fed cuts are priced in, but the terminal funds rate is still expected to floor around 3.5%. That’s not a recessionary signal—it’s more in line with a "growth recession": sub-trend expansion, but still expansion. If Treasuries are going to gap materially lower from here, it likely requires the market to price in more rate cuts than currently expected, hence more economic damage via the hard data. Without that, it’s arguable that yields are already too low—leaving the door open for the dollar to stabilize or even grind higher on the back of relative yield support.

On the euro side of the dollar equation, today’s EU inflation prints will matter—but not as much as the broader tariff drag narrative hanging over the European economy. Markets have quietly started to reprice the ECB’s terminal rate lower—toward 1.75%—on concerns that the EU will wear the brunt of the economic hit from Trump’s reciprocal tariffs. That’s taken some steam out of the EUR ahead of "Tariff D-Day."

As for France, headlines that Le Pen is being barred from the 2027 election barely made a ripple in French government bonds or EURI pricing. If anything, one could argue that the court’s ruling reduces the probability of a more populist, fiscally unpredictable direction—which from a market perspective, is actually supportive.

For now, it’s less about big directional trades and more about navigating the cross-currents.

Over in Japan, the latest data continue to support the narrative of a slow but steady recovery. Industrial production, retail sales, and labour market figures remain constructive. While the Tankan survey was somewhat mixed, the broader tone was cautiously upbeat—remarkable, really, given the overhang from U.S. trade policy noise.

This backdrop keeps a 25bp BoJ hike in May firmly in play.

USDJPY briefly popped above 150 overnight, but it's proving difficult to get a clean read on the pair. Algos are dominating flows, with USDJPY now the epicenter of RORO (risk-on, risk-off) FX modeling. Yen has become the market's go-to beta for shifting global risk sentiment.

What we’re watching closely now is the GPIF repatriation flow window—timing, size, and directional impact could be significant, particularly if they coincide with renewed BoJ hawkish signals or broader dollar softness. Stay nimble—this one’s moving fast.

Reserve data

What is the simplest explanation for the weak demand for Treasuries in Q4? Dollar reserve holdings fell by roughly $50 billion. When global central banks pull back—even modestly—from accumulating dollar assets, it shows up fast in Treasury demand. And this time, it wasn’t about a sudden policy pivot or FX intervention surge. It was plain and simple: reserve managers were trimming exposure, likely due to valuation effects, portfolio rebalancing, and a bit of preemptive positioning ahead of tariff turbulence.

In short, when the world's dollar cushion gets lighter, Treasury demand naturally softens.

Bond inflows have recently diverged from FX reserve growth, but reserve dynamics are still a key underlying driver of global capital flows. The Q4 weakness in non-Chinese reserves led to a noticeable pickup in official dollar selling, even as the dollar index held firm.

Interestingly, the dollar’s share of global reserves actually ticked higher in Q4. But that bump wasn’t about new buying—it stemmed from absolute declines in total reserves and portfolio rebalancing. When the dollar rallies, reserve managers targeting a constant USD share need to sell to rebalance.

So, while quarterly shifts in dollar holdings can explain near-term variations, the bigger story is harder to ignore: the level of dollar reserves has remained essentially flat over the past decade. That underscores the quiet resilience of the greenback’s reserve status, even as louder debates around de-dollarization rage on.