Asia FX muted, dollar nurses losses as Trump tariffs take effect
President Trump hinted that Kevin Warsh, Kevin Hassett and two others are leading the race for the next Fed Chair and might be announced soon after Governor Adriana Kugler’s early exit. We think the US dollar would welcome Warsh, but would get hit by Hassett’s nomination. We retain a short-term US dollar bearish bias as FX has room to catch up with Fed pricing swings
USD: Fed Chair Nominee Could Be Announced Soon
A few headlines emerged from President Trump’s CNBC interview yesterday. First, Treasury Secretary Scott Bessent is off the shortlist to replace Federal Reserve Chair Jay Powell. Trump pointed to four frontrunners - Kevin Warsh and Kevin Hassett by name, with Chris Waller and David Malpass possibly rounding out the group. Betting websites currently place Hassett slightly ahead of Warsh.
Trump hinted that the new chairman might be announced soon to replace resigning member Adriana Kugler, rather than waiting until January. Trump’s open attacks on the Bureau of Labor Statistics over payroll revisions have not had much market impact, but it will be interesting to see whether the selected Fed chair candidate echoes that narrative. If so, it could ignite fears of a disconnect between Fed policy and official data- a scenario we see as decidedly US dollar-negative.
Warsh stands out as the most USD-friendly candidate at this stage. He is generally considered more hawkish than the others, and in this May conversation with the Hoover Institute, he laid out a Friedman-style view of inflation as a strictly monetary phenomenon, and that restoring price stability is the Fed’s path back to credibility. We could see the US dollar gain support on his nomination.
Waller may be the second-best option from a US dollar perspective, while Hassett and Malpass lean more dovish and may be perceived as more prone to giving way to Trump’s will. Their nomination would be a worse outcome for the US dollar, in our view.
Trump also discussed trade yesterday, with two highlights: he said semiconductor and pharma tariffs will be announced next week, and that he is “getting very close” to extending the China trade truce. Markets priced little risk of the truce not being extended, but the imminence (and some uncertainty on the size) of sectoral tariffs is having a net negative impact – albeit moderate - on the yuan.
We have not seen huge FX moves since Friday’s post-payrolls large swings. The US dollar had started to recover some ground yesterday but a soft ISM services reading sent it back to Monday’s levels. We don’t have major data to monitor today, but there are speeches from the FOMC’s Lisa Cook and Susan Collins.
They are both voters and dovish-leaning, so there is some risk they’ll put a September cut on the table after the weak jobs report. We retain a bias for a weaker US dollar this week, as we expect the dovish repricing in Fed expectations to show more clearly in FX dynamics and because an earlier-than-expected FOMC nominee by Trump risks swinging the balance more to the dovish side for the remaining three Fed meetings this year.
EUR: Fully USD-Dependent
The eurozone’s July PMIs were revised marginally lower yesterday, but that is hardly meaningful for a market that isn’t receiving any input from the euro side. EUR/USD remains almost entirely driven by the US dollar leg, and we continue to see decent upside potential mostly on the back of the Fed’s dovish repricing rather than any supportive eurozone story.
Looking only at post-’Liberation Day’ trading, EUR/USD looks cheap. The two-year EUR:USD swap rate gap (-140bp) is 5bp narrower than it was at the end of June, when the pair was trading at 1.180. If we broaden the scope, the story is different. In September 2024, the spread was at -85bp, yet EUR/USD traded just below 1.12. The force that might be pulling the pair from trading higher could be a partial reassessment of the US dollar risk premium, specifically from a growth angle. While the US payrolls now make a September Fed cut more likely, the US-EU trade deal partly dents the euro’s attractiveness as an alternative.
Our view is that markets aren’t ready to take that USD risk premium reassessment much further, with Trump’s trade policies and his pressure on the Fed keeping the medium-term bearish USD narrative compelling. Our near-term target remains 1.17, and we see further gains later this year, but we have to acknowledge that the EUR/USD’s ability to rally within the 1.15-1.20 region is not as smooth as it was a couple of months ago.
NZD: We Expect Two RBNZ Cuts by Year-End
New Zealand’s 2Q jobs data released overnight showed some slack is building, although not at an alarming pace. Unemployment rose from 5.1% to 5.2%, less than the consensus 5.3%, with employment declining 0.1% quarter-on-quarter, in line with expectations. Wages accelerated slightly more than expected, though.
For now, benign CPI figures for 2Q justify a cut on 20 August, and we remain of the view that further inflation moderation and growth uncertainty could lead to another 25bp reduction in November. Markets are fully pricing in an August move, and 42bp in total by year-end.
In line with our call that the Reserve Bank of New Zealand won’t materially outpace the rate-cutting trajectory embedded into swaps, we continue to see upside room for NZD/USD into year-end on the back of our bearish USD call, with a return above 0.60 being our base case.
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