FX Talking: Waiting on Storm Trump
To mash up a popular phrase of a former US Treasury Secretary, it looks like the incoming Trump Administration might as well say to the rest of the world: ‘Our policies, your problem’. As such, the world waits on January’s arrival of Donald Trump and the avowed intention to grow the US economy at the expense of trading partners.
In Trump’s defence, trading partners are having to consider boosting domestic demand such as fiscal stimulus. That is coming in China, but the governmental impasse in France and Germany means that the European Central Bank will be under increasing pressure to cut rates into accommodative territory. That is why EUR/USD should get close to parity next year.
The steady increase in US trade tariffs through 2025 stands to weigh on the currencies of the smaller, open economies and the commodity producers. The outperformers in the G10 space (within a broadly stronger dollar environment) will be the undervalued Japanese yen and – for the first quarter – probably sterling, too.
2025 will be a tough year for emerging markets as pressure on trade volumes builds and – one of ING’s key calls – longer-dated US Treasury yields move progressively higher through the year. In heavy focus will be China’s FX policy. Will China devalue and fire up a new currency war? Our baseline view is that China holds the line in USD/CNY to preserve financial stability and avoid even more tariffs were they to devalue.
In Asia, the Korean won looks vulnerable for a number of reasons and the region as a whole will stay pressured. Within the CEE region, we continue to look for outperformance of the Czech koruna. And in Latam, all currencies look vulnerable to tariffs and higher US yields. And certainly, the Mexican peso could have a tougher time than during Trump 1.0.
