Week Ahead FX outlook:
FX view: This week, as the US president’s 9 July deadline came and went, Trump announced a new set of reciprocal tariffs for more than 20 countries across the world, effective on 1 August. Particularly, a 50% tariff rate was set for Brazil, which wasn’t in the initial country list for reciprocal tariffs announced on 2 April. Brazil is a country that the US actually runs goods trade surplus with, not a goods trade deficit that Trump needs a tariff to rebalance. Trump also threatens to implement tariffs of up to 200% on foreign drugs and 50% on copper. Trump said also on Thursday that he plans to impose blanket tariffs of 15% or 20% on the remaining countries, “whether its 20% or 15%”. This new set of reciprocal tariffs came as a surprise to us. The tariffs are largely similar to the original reciprocal tariffs. An elevated 25% tariff rate was set for both South Korea and Japan. ASEAN economies in general face high tariffs as well, e.g. Indonesia (32%), Malaysia (25%), Thailand (36%), Philippines (20%) and etc.
Overall market reactions were quite calm, the SPX index actually edged slightly up. As for Asian FXs, amid a mild 0.6% US dollar appreciation, the largest depreciation in Asia came from JPY (-1.66%), KRW and other currencies depreciated mildly, CNY remained largely unchanged against the dollar. Market participants seemed largely shrugged off the latest announcement and they now expect negotiations to happen before 1 Aug or another delay. We agree that recent tariff announcements may still be Trump’s way of exerting extreme pressure, similar approach used in past months. Having said the above, we recognize that the Trump administration now has more room for exert extreme pressure, with the successful pass of Trump’s Big and American Act. This indicates that Trump administration has gradually straightened out the relationship within the Republican Party. And, the blunted market reaction towards Trump's policies and market refocusing on the narrative of a soft landing for the U.S, would provide the Trump administration room to exert extreme pressure. Tariffs likely continue to dominate the attention and impact Asia FXs in near term.
Latest Reciprocal tariff rates on respective economies
