Forex: A state of “wait and watch”

It's been a surprisingly quiet FX session today, much quieter than expected. This may be due, in part, to President Trump keeping a low profile on social media, leaving the FX markets in a state of “ wait and watch.” The recent unwinding of some USD longs, bolstered by another risk-positive session for US Treasuries overnight, suggests tentative optimism as we await further tariff announcements.

Following Monday's warning of potential 25% tariffs, the spotlight remains on Canada and Mexico. Despite this, the Canadian dollar and the Mexican peso have strengthened markedly off the recent lows, indicating that markets are hesitant to fully factor in these tariffs' potential impacts. This could be a sign that there's still hope tariffs might be further delayed.

The EUR/USD found some support from the dollar's decline for the second consecutive day, yet it stopped short of triggering any significant stop-loss levels. A breakthrough of 1.0450=50 might stir the markets, but I expect sellers to emerge around 1.0500-50, and I'll be among them if we approach that threshold.

Asian currencies have also strengthened against the dollar, buoyed by Trump’s surprisingly mild approach toward China despite widespread expectations of impending tariffs. However, I now suspect the first wave of tariffs might be lighter and more measured than initially thought, which could theoretically allow the dollar to soften further.

Today, the CNY emerged as the distinct laggard among Asian currencies, influenced heavily by the broader market dynamics. The CSI 300 index shed 1.0%, and the Hang Seng index took a steeper dive, plummeting nearly 2.0%. Contrarily, other Asian equity markets found solace in technology stocks, which rallied robustly following President Trump's announcement of a groundbreaking AI joint venture initiative. This ambitious project, spearheaded by industry giants Softbank, OpenAI, and Oracle Corp, involves a staggering initial investment of USD 100 billion. This surge in tech enthusiasm bolstered positive risk sentiment across equity markets, contributing to the curtailment of the US dollar's rebound in the region.

Nonetheless, with the US economy remaining strong and the Fed on pause, it's unlikely we'll see the dollar dip significantly to DXY 107.25-30 with tariffs still looming.

Remember, the immediate large-scale tariff increases may not materialize as soon as anticipated, but the threat of gradual, drip-fed tariff hikes could still disrupt currency market stability and drive demand for dollars. As mentioned in my commentary yesterday, while it's wise to maintain dollar positions, it’s crucial to tread lightly and stay agile in these unpredictable waters.