Commodity Currencies Decline Ahead of Trump's Tariff Policies

The market is currently witnessing a notable decline in commodity currencies against the US Dollar as the trading session in the United States develops. This drop is primarily attributed to trader nerves leading up to the inauguration of President-elect Donald Trump on Monday. Concerns are mounting about potential tariff policies that may emerge, especially since there are no major fundamental factors acting as catalysts for other market moves.

Countries like Canada, Mexico, and China are speculated to be at the forefront of the tariff discussions expected under Trump's administration. The possibility of imposing tariffs could serve as a tactic to tackle specific issues, such as managing the fentanyl drug export problem affecting the United States.

As of now, the exact nature of Trump's strategy regarding tariffs remains uncertain. Various scenarios could unfold, including possible blanket tariffs on significant trading partners, targeted tariffs for specific sectors, or the implementation of measures through executive orders. It is also likely that a combination of these strategies could be adopted over time.

This week, the British Pound has emerged as the weakest currency performer, closely followed by the Canadian Dollar (Loonie). On the flip side, the Japanese Yen is holding onto gains, with the Australian Dollar and Swiss Franc also showing positive trends. European currencies, such as the Euro and the New Zealand Dollar (Kiwi), are experiencing mixed trading results. However, current selling pressures on commodity currencies may shift these standings as the week draws to a close.

ECB Officials Weigh in on Monetary Policy

Joachim Nagel, a member of the European Central Bank (ECB) Governing Council, addressed the need for careful consideration regarding monetary policy normalization in light of service sector inflation and uncertainty related to global trade dynamics. With the imminent return of Donald Trump to the White House, he emphasized that any rush toward policy normalization should be avoided.

Nagel also defended the ECB's discussions regarding a more aggressive approach, including a potential 50-basis-point rate cut during their last meeting. He indicated that such debates are part of standard policy considerations.

Rate Setting: A Balancing Act for the ECB

Frank Elderson, another ECB Executive Board member, shared insights on how the central bank must balance its approach while setting interest rates. He cautioned that lowering interest rates too swiftly could complicate efforts to control service sector inflation. Conversely, if rates are maintained at a high level for too long, it might hinder the ECB’s goal of achieving its inflation targets.

Elderson remarked, "The markets don't think we've finished easing now that we're at 3%, and I don't believe we have either." He reiterated that setting interest rates is fundamentally about finding the right speed and magnitude of adjustments.

Eurozone Inflation Updates

Recent figures show that Eurozone inflation was finalized at 2.4% year-on-year in December, marking an increase from 2.2% in November. The core inflation rate, which excludes volatile items like energy and food, remained stable at 2.7%. The most substantial contributor to the overall inflation figure was the services sector.

In the broader European Union context, inflation rose to 2.7% in December from 2.5% the previous month. Member states such as Ireland and Italy noted the lowest inflation rates at 1.0% and 1.4%, respectively. In contrast, Romania and Hungary faced higher inflationary pressures.

Retail Sales Decline in the UK

UK retail sales saw a decrease of 0.3% month-on-month in December, falling short of forecasts that predicted a 0.4% increase. This drop was mainly due to a decline in supermarket sales, although sales in non-food sectors like clothing saw a rebound.

In a quarterly perspective, retail sales volumes fell 0.8% in Q4 compared to the previous quarter, although a year-on-year comparison showed an increase of 1.9% for Q4 relative to the same period in the previous year.

China's GDP Performance Exceeds Expectations

China concluded 2024 with robust economic performance, recording a GDP growth rate of 5.4% year-on-year in Q4, which surpassed market expectations of a 5% growth. This achievement marked a notable acceleration from Q3's 4.6% growth.

Key economic indicators from December indicated positive trends, including a 6.2% rise in industrial production and a 3.7% growth in retail sales, both exceeding forecasts.

New Zealand Manufacturing Shows Continued Contraction

The BNZ Performance of Manufacturing Index in New Zealand showed a small increase to 45.9 in December, although the manufacturing sector remains in a prolonged contraction phase. This marked the 22nd consecutive month wherein the PMI has recorded contraction, indicating ongoing challenges within the sector.

Catherine Beard, Director of Advocacy at BusinessNZ, noted this trend is unprecedented, highlighting the sector's struggle throughout 2024.

Current Market Outlook for USD/CAD

As of mid-day, the USD/CAD currency pair is closely watched as it aims to break through the 1.4466 resistance level, which could resume a larger upward trend towards long-term resistance zones of 1.4667 and 1.4689. Should the pair drop below 1.4279, it might signify a deeper correction, but it is expected that support from the 55 D EMA will help maintain the upward bias.

currencies, markets, tariffs