Time To Talk FX Valuations

WHERE WE STAND – It’s time to talk about currency valuations.

I appreciate that might not sound like the most exciting subject in the world, but it’s slim pickings this morning given yesterday’s lack of fundamental developments, and it could be about to become a very hot topic indeed.

My reason for bringing this up stems from reports yesterday that the US and South Korea have discussed the matter of FX in recent talks, having agreed to share a “mutual understanding” of how each seeks to operate FX markets, while further noting that the two parties will “continue discussions” on FX policy. This all sounds rather bland, however, the mere fact that exchange rate policy has been talked about should be enough to set a few alarm bells ringing, and clearly did given the chunky USD weakness seen through trade on Wednesday, though losses were pared late on.

It's not exactly new information that both President Trump and Treasury Secretary Bessent are in favour of a weaker dollar, with both having alluded to this bias on numerous occasions of late. This, coupled with yesterday’s news that FX is being discussed more openly, naturally leads participants to ponder whether Trump’s next focus will be the FX market?

Clearly, there are a fair few unknowns that remain here, but one fact is obvious – if the US wants to engineer a weaker USD, everyone else will have to accept a strengthening in their own currency.

Herein potentially lies an issue. It’s relatively easy to envisage a lot of APAC policymakers (think KRW, TWD, VND, and obviously the CNY) accepting that their currencies trade cheaply and thus being at least somewhat comfortable with accepting a degree of strength. Japan are probably an exception  here. For China, in particular, a stronger CNY would result in cheaper imports, a more stable currency, and likely a boost to consumer confidence/spending as well.

The problem may lie in Europe. I find it difficult to believe that the ECB would be comfortable with the EUR at 1.20, and the BoE would be panic-stricken if cable got anywhere near 1.40. We’re obviously still a hell of a long way off those levels, but it just shows how difficult it would be for the Trump Admin to engineer an outright, global, weak USD environment.

If they did, you can probably wave goodbye to the idea of any rate cuts from the Fed in the near future. The equation is simple, with a weaker USD on a broad basis causing a notable increase in the cost of imports into the US, a cost which is already being heightened by tariffs. Once more, we see a degree of incoherence in the overall economic policy agenda.

Clearly, these are all longer-run considerations. Back in the ‘here and now’, I shan’t use the ‘Q word’, but Wednesday was a subdued day. Stocks trod water for the most part, though I remain bullish in terms of the Wall Street benchmarks; gold softened albeit remaining above the 50-day moving average, leaving me as a dip buyer still; while Treasuries sold-off across a steeper curve, as the 30-year rose back towards 5.00% once more – we’ll see if that remains a ‘line in the sand’ for the Trump Admin.

LOOK AHEAD – A deluge of US data awaits today though, frankly, it’s tough to argue that any of it matters especially much, with the FOMC firmly in ‘wait and see’ mode, and with market participants operating with a mindset of good news being good news, and bad news being there for ignoring.

Last month’s retail sales figures highlight the docket, though sales are set to have stagnated in April, a fairly chunky slowdown compared to the 1.4% MoM rise seen at the back end of Q1. Also due today are PPI, industrial production, the weekly jobless claims figures, and manufacturing sentiment surveys from both the NY and Philly Feds. Of all that, I’d say the jobless claims data is probably of most interest, given the potential for a DOGE- or tariff-related layoff spike, though neither the initial nor the continuing prints pertain to the May NFP survey week.

Besides that, Fed Chair Powell is due to make remarks this afternoon, though will be speaking on the ongoing framework review, hence comments on the policy outlook may well be lacking. A fair few other central bank speakers, including BoE uber-dove Dhingra, are also due to speak.

Rounding things out, we have Q1 GDP prints due from the UK and eurozone, with the former set to be skewed higher by a surge in exports amid tariff front-running, and the latter merely a revision of already released figures. The earnings slate, lastly, features Q1 numbers from Walmart, whose outlook and comments on tariffs are likely to be of particular interest.