The EM market has been in standby mode with high uncertainties ahead of the US tariff announcement at 16:00 ET on 2 April. The EM market seems to have partially priced in the US tariffs, but there could be more market reactions when the details are released.
The Nikkei Index can be estimated using nominal GDP, net domestic fund demand (corporate savings rate + fiscal balance), Abenomics dummy and Economic Policy Uncertainty Index. For the current Q225, if we place nominal GDP at around JPY624trn and net domestic fund demand at +1.3%, and assume that global uncertainty continues, the macro fair value would be around JPY34,800, roughly in line with the prevailing Nikkei index
Investors are nervously waiting on the announcement of US President Donald Trump’s tariffs. With reports that deliberations on the tariffs are still ongoing, even with hours left to their unveiling, as well as speculation about the form they will take, investors remain uncertain.
At 0.76 (vs 0.25 last week) our Risk Index has jumped decisively back into risk-averse territory. The Index bounced off its 100-day moving average suggesting a sustained reduction in investor risk appetite.
Japan: the weak JPY has turned from a problem to a nest egg . The level of JPY weakness has changed from a ‘problem’ to a ‘nest egg’ as the Trump administration’s tariff rate hikes require a buffer. With the buffer of a weaker JPY, the auto industry may be able to continue domestic production without having to raise prices significantly in the US in response to higher tariff rates.
There have been reports on social media that Australian PM, Anthony Albanese, will call an election Friday morning placing the polling date probably on 3 May. Other possible polling dates are 10 May and the last possible date 17 May, but the incumbent Australian Labor Party (ALP) likely wants as short a campaign period as possible having recently overtaken the opposition Liberal-National party coalition (LNP) in the polls and having momentum in its favour.
The announcement by US President, Donald Trump, of 25% tariffs on all car and car part imports into the US weighed on sentiment in Asia. Trump also threatened more tariffs on the EU and Canada if they work against the US. Sentiment received some support from Trump continuing to say he will be lenient on reciprocal tariffs.
We expect Trump’s reciprocal tariffs to impact Vietnam, India, China, Taiwan and Thailand the most among EM Asian economies. The hit on growth might be stronger for Vietnam, Taiwan and Thailand, given their relatively larger exposure to trade with the US (as measured as a % of GDP).
We are one week out from Japan’s financial year-end. An often-asked question is whether there is any seasonality in USD/JPY running into FY-end. The theory goes that Japanese companies may repatriate foreign earnings to dress up their balance sheets for the FY.
Sentiment was given a lift in Asia by newswire reports that US President Donald Trump’s reciprocal tariffs may be of narrower scope than envisaged by investors. Trump’s National Economic Council director, Kevin Hassett, said markets are overestimating the scope of the tariffs.
As a new fiscal discipline, we need a new fiscal target that can take into account macroeconomic conditions, guiding net domestic fund demand to be around -5%. The previous fiscal target of achieving a primary balance surplus was flawed because it aimed to achieve a surplus regardless of macroeconomic conditions, making it impossible to sustainably expand the size of the economy.
Until the corporate savings rate attains a normal negative level and structural deflationary pressures are eliminated, the policy mix of monetary and fiscal policies should maintain the expanding power of the Japanese economy. The increased predictability of firms’ sustained nominal GDP expansion would cause firms to shift their management strategies from cost cutting to investment.
The disruptive agenda of the US administration, including the greater initial emphasis on tariffs and anti-immigration measures rather than pro-growth tax measures and significant uncertainty around US relations with allies & adversaries alike has undermined the US exceptionalism thesis.
Safe-haven bids briefly returned to the CHF due to localised EM turmoil yesterday, while overall EUR/CHF was still able to hold up near 0.96. That is the highest level since last June going into today’s SNB meeting, while in contrast, USD/CHF has fallen to three-month lows.
At the time of writing, UK rates markets are expecting the BoE to keep the bank rate unchanged at its March policy meeting and to ease a total of c.53bp by the end of 2025. The view is broadly consistent with our own view that foresees two additional BoE rate cuts in the coming months.
The Fed left its dot plot unchanged and revised down its growth forecasts while revising up its inflation forecasts. But Fed Chair Jerome Powell said that he still saw room for rate cuts given that the effect of tariffs on inflation will be transitory. He also said the probability of recession was not high.
At 0.61 (vs 0.77 last week) our Risk Index has retreated, indicating a little less investor risk aversion. The Index remains above its 100-day moving average, suggesting a sustained increase in risk aversion.
A strong finish to last week by US equities helped buoy investor sentiment at the start of this week in Asia. Upside surprises in China’s cyclical data also helped boost investor sentiment. Holding back sentiment, however, were US Treasury Scott Bessent suggesting the recent US equity market rout was a healthy correction and weak Chinese house prices data showing the sector was still in a slump.
The SEK remains the G10 FX outperformer MTD, although the NOK and EUR have closed the gap to the top this week. Of special note, EUR/SEK has failed to extend the multi-year lows reached a week ago in spite of EUR/USD having rallied past last November’s peak of c.1.0937.
US inflation print failed to provide a sustained improvement in investor sentiment in Asia. Investors potentially view the inflation data as not being weak enough to immediately change the outlook for the Fed. US President Donald Trump’s threats of retaliatory tariffs against the EU’s counter tariffs to the US steel and aluminium tariffs are also weighing on sentiment.
