April 09, 2025

“The market is selling dollars again today as Trump’s ‘Liberation Day’ tariffs begin, including a 104% tariff on China. Volatility remains elevated and we are seeing some unprecedented moves across the FX and bond markets.”

Sam Cornford – Head of Trading

USD

Sentiment tried to rebound yesterday on the hope of deals with some countries, but with the US and China engaged in a high stakes trade war (104% tariffs go into effect today) and ruptures in the bond markets dampening risk appetite, risk assets are caught in another sell-off. The dollar is falling further out of favour today, as a ‘fire sale’ in Treasuries has lifted 10-year yields by nearly 60bps in two days. Some investors are beginning to stray away from US government debt as their safe haven of choice and are diving back into cash instead after a notably weak 3-year auction yesterday, while hedge funds are dialling down their risk and rapidly unwinding popular leveraged bond trades.

The combination of rising yields and a falling currency is a notoriously bad sign for investor confidence, and it is something normally associated with emerging markets, or the pound during recent fiscal events. For the US dollar, that is absolutely wild – we are not trading according to the usual relationships here. Today’s ten-year auction might be important today, and we also get the minutes from the March Fed meeting. These might give some clues as to their assessment of tariffs, but they are likely to be well outdated considering Trump’s shock last week.

CNH

USD/CNH hit an all-time high yesterday as the PBoC set its weakest CNY fix in 18 months and China doubled down on its stance that it would ‘fight to the end’. There is some speculation that Chinese officials might use a weaker yuan as a release valve to offset the impact of US tariffs, though a Reuters story this morning has suggested that this will not happen immediately.

GBP

Sterling is still struggling to contain its losses amidst the market panic. It has recovered modestly against a broadly weaker dollar, but GBP/EUR continues to grind lower. It is unclear whether the pound can find some support until the equity markets find a bottom and the volatility tails off. The market has been flipping between betting on three and four further rate cuts from the Bank of England this year, but long-end yields have been rising and the 30-year has touched its highest since 1998 this morning. Weaker growth and higher yields mean a significantly higher chance that Reeves’ headroom disappears once again by the October budget, leaving tax rises as potentially the only remaining option.

EUR

The euro is one of the top performers this morning and is back above 1.10 as it latches on to the broad dollar weakness. Markets are betting on a 100% chance of an ECB rate cut at next week’s meeting now, but the euro’s newfound role as an alternative safe haven is more than offsetting that at the moment. The clearest indicator of investors selling risk and buying the euro is in EUR/NOK, which has risen more than 7% since the ‘Liberation Day’ announcement. That is a wider trading range than it had seen in the entirety of the past year. There is no predicting where EUR/USD heads for the rest of this week, but it will likely be the tariff headlines in charge.

Markets

US equities produced another historically volatile session yesterday, with the S&P 500 initially rising as much as 4% before ultimately closing 1.6% lower. Future are pointing to more pain today as Europe catches up to this downturn.

Main Economic Events (All Times CET)

4:00am: Reserve Bank of New Zealand Rate Decision
8:00pm: FOMC Meeting Minutes

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