Commodity Currencies Decline as Markets Anticipate Trump’s Tariff Policies

The market is currently witnessing a notable drop in commodity currencies in relation to the US Dollar as the US trading session progresses. Despite generally calm trading conditions, the recent decline in these currencies seems to stem from trader caution as President-elect Donald Trump’s inauguration approaches on Monday. The key factor driving this market movement appears to be concerns regarding tariff policies, particularly since there are no other significant economic drivers influencing the market at this time.

There is widespread speculation that Canada, Mexico, and China may be among the countries targeted on Trump’s tariff agenda. The potential tariffs are expected to serve as leverage in addressing various trade concerns, including issues like the export and re-export of fentanyl substances that affect the United States.

However, the details of Trump’s upcoming trade strategy are unpredictable. Analysts suggest several possible scenarios, including the implementation of blanket tariffs on major trading partners or sector-specific measures. There could also be immediate enactment of these policies through executive orders or a gradual increase in tariffs due to a staggered approach. It is likely that a combination of these strategies will be employed.

In evaluating currency performance for the week, the British Pound is noted as the weakest, followed by the Canadian Dollar (Loonie) and the US Dollar. Conversely, the Japanese Yen has shown the most strength, with the Australian Dollar and Swiss Franc also performing well. The New Zealand Dollar and Euro are experiencing mixed trading conditions. However, ongoing pressure on commodity currencies may shift these standings as the trading week concludes.

Insights from ECB Officials

In related news, German ECB Governing Council member Joachim Nagel shared insights regarding ongoing inflation issues and uncertainty in global trade dynamics as Trump prepares to take office next week. In an interview, he advised caution in monetary policy adjustments, stating, "We should therefore not rush into anything on the path to monetary policy normalization." He also defended discussions on potentially more aggressive interest rate cuts that took place during the ECB’s December meeting.

ECB’s Approach to Rate Setting

Furthermore, ECB Executive Board member Frank Elderson emphasized the careful approach the central bank must maintain when setting interest rates in an interview. He warned against reducing rates too quickly as this could complicate controlling services inflation. However, he also acknowledged the risks of keeping rates elevated too long, which could lead to missing the ECB's inflation targets.

Recent Economic Indicators

The finalized Eurozone Consumer Price Index (CPI) for December showed inflation at 2.4% year-on-year, an increase from November's 2.2%. The core CPI, which excludes volatile categories like energy and food, remained steady at 2.7%. Inflation issues are notable throughout the European Union, with annual inflation rising in the majority of member states.

In the UK, retail sales dropped by -0.3% month-on-month in December, falling significantly short of expectations for a slight increase. This indicates a slowdown in consumer activity, marking a quarterly decline of -0.8% in Q4.

Meanwhile, China reported stronger-than-expected GDP growth for Q4, reaching 5.4% year-on-year, boosting overall 2024 growth to 5%. December’s industrial output also exceeded forecasts, with production up by 6.2%. However, fixed asset investment growth lagged behind expectations, raising concerns about future consumer spending trends.

New Zealand's manufacturing sector remains in contraction, as indicated by the BNZ Performance of Manufacturing Index, which improved slightly in December but fell far below historical norms.

Outlook for USD/CAD

The immediate focus for USD/CAD shows a bullish trend with attention on the 1.4466 resistance level. A decisive break above this level could lead to an uptrend towards the long-term resistance zone of 1.4667/89. Conversely, a drop below the support level of 1.4279 would indicate a deeper correction, though the decline is expected to be limited by the 55-day exponential moving average, currently situated at 1.4187.

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