What to Trade this Week as Tariffs Tear Trade Relations Apart
What to Buy and What to Sell
Monday, February 03, 2025, Week 6
The forex market enters a critical week dominated by high-impact central bank decisions and economic data releases that could reshape current trends. Markets are pricing in a potential rate cut at the Bank of England's February 6th meeting that could accelerate GBP's decline. The US dollar's strength faces a key test with Friday's NFP report, while the RBNZ's anticipated 50 bps cut on February 19th continues to weigh on the kiwi. Watch for potential volatility as markets digest US tariff threats, while the euro remains pressured following the ECB's recent cut to 2.75%. The Australian dollar's trajectory hinges on Chinese economic data and the RBA's February meeting, where rate cut speculation is building despite December's strong jobs report.
Currency Strength Overview:
USD (Very Strong - Very Bullish): Still king.
JPY (Strong - Bullish): Holding its own.
CHF (Moderately Strong - Moderately Bullish): Safe-haven flows are back in vogue.
EUR (Weak - Bearish): Still struggling.
GBP (Weak - Bearish): Facing a tough road ahead.
CAD (Weak - Bearish): Vulnerable to trade winds.
AUD (Weak - Bearish): China's shadow looms large.
NZD (Very Weak - Very Bearish): Stuck in the doldrums.
NZD: Kiwi's Recession Hangover Lingers
The New Zealand dollar is still nursing a recession hangover. The Q3 contraction of -1% and weak domestic demand have painted a bleak picture, and the RBNZ's dovish stance isn't helping. The market's fully priced in a 50 bps rate cut on February 19th – no surprises there. The Luxon government's fiscal stimulus, with tax cuts and infrastructure spending, is a potential bright spot, but it's a long game.
Trump's trade sabre-rattling and anxieties about China have knocked the NZD further. The local stock market, the NZX 50, is mirroring this cautious sentiment. Even some decent retail sales figures on the 31st (up 2.6% YoY, beating forecasts) couldn't lift the Kiwi's spirits. The market's laser-focused on those rate cuts.
Looking ahead, the February 19th RBNZ meeting is D-Day for the NZD. 50 bps down seems a done deal, which will likely send the Kiwi tumbling further. The jobs data on the 4th (Employment Change and Unemployment Rate for Q4) will offer a glimpse into the labour market's health, but I wouldn't expect miracles. Keep an eye on dairy prices too – any improvement there could offer a sliver of support. But overall, it's hard to see much sunshine for the NZD in the near term. Sell. The COT report (Jan 28th) confirms the bearish sentiment – Asset Managers and Leveraged Funds are net short.
Upcoming New Zealand Economic Data
Feb 04: Employment Change QoQ (Q4). Forecast: 0.20%. Weak data would reinforce the negative outlook.
Feb 04: Unemployment Rate (Q4). Forecast: 5.10%. A rise would cement the case for more RBNZ easing.
Feb 13: Business NZ PMI (JAN). Forecast: 46. Another contraction in manufacturing would signal ongoing economic weakness.
AUD: Aussie's China Syndrome and the RBA's Balancing Act
The Aussie's dance with China continues. The AUD's been under pressure for weeks, thanks to concerns about a Chinese slowdown and the RBA's increasingly dovish tone. Q3 GDP growth was a disappointment, and the market's been whispering about rate cuts. However, that surprisingly strong jobs report in December (3.9% unemployment, 35.6k jobs added) has muddied the waters. Is the RBA really ready to ease?
The AUD got a brief lift from USD weakness, but the global risk-off mood and the prospect of RBA easing quickly brought it back down to earth. That soft Q4 inflation print on the 29th (2.4% YoY) has only strengthened the case for a rate cut.
The RBA's February meeting is the next big hurdle. A cut isn't fully priced in yet, but the market's definitely leaning that way. Keep a close watch on China's economic data – any further signs of weakness will weigh on the AUD. And don't forget Trump's trade policies – the Aussie's sensitive to those US-China tensions. For now, I'm leaning towards a sell. The COT report (Jan 28th) shows a bearish bias, with Asset Managers and Leveraged Funds net short.
Upcoming Australian Economic Data
Feb 06: Balance of Trade (DEC). Forecast: A$3.2B. A smaller surplus could add to the AUD's woes.
Feb 13: Westpac Consumer Confidence Change (FEB). A further drop would signal ongoing economic anxieties.
Feb 13: Westpac Consumer Confidence Index (FEB). A low reading would point to persistent pessimism.
Feb 13: NAB Business Confidence (JAN). Weaker business confidence would reinforce the negative outlook.
Feb 18: RBA Interest Rate Decision. A rate cut is a real possibility, which would likely send the AUD lower.
CHF: Safe-Haven Shimmer Returns to the Franc
The Swiss franc is gleaming again. Global jitters, fuelled by the South Korean political drama, the French government collapse, and Trump's tariff threats, have sent investors scurrying for safety. This safe-haven bid has been the dominant theme for the CHF over the past six weeks, and it's showing no signs of fading. The SNB's dovish stance, with that surprise 50bps rate cut in December, is a countervailing force, but for now, safe-haven flows are winning out.
The past ten days have seen the CHF appreciate steadily. The political turmoil in South Korea and France, coupled with Trump's trade pronouncements, has boosted the Franc's appeal. The SNB's easing bias is a concern, but it hasn't been enough to derail the CHF's upward momentum.
Looking ahead, the global risk landscape will be key. Trump's trade policies and the US-China rivalry are the big unknowns. Any escalation in tensions will likely send the CHF higher. The SNB's next policy assessment isn't until March, but any hints about further easing or intervention could temper the Franc's strength. Watch for the KOF Leading Indicators and retail sales data for clues about the Swiss economy's health. I'm leaning towards a buy, despite the SNB's dovishness. The COT report (Jan 28th) shows Leveraged Funds net long, suggesting some bullish conviction.
Upcoming Swiss Economic Data
Feb 03: procure.ch Manufacturing PMI (JAN). Forecast: 48.8. A reading above 50 would signal unexpected strength in the manufacturing sector.
Feb 06: Unemployment Rate (JAN). Forecast: 2.90%. A stable or declining rate would be a positive sign.
Feb 07: Consumer Confidence (JAN). Forecast: -29. An improvement would suggest increasing optimism.
Feb 13: Inflation Rate YoY (JAN). This data will provide further insights into price pressures in Switzerland.
EUR: Euro's Struggle Continues Amidst ECB Doves and Political Uncertainty
The Euro is still stuck in a rut. The ECB's dovish stance, with rates at 3.15% and more cuts on the horizon, is the main culprit. The Eurozone economy is sending mixed signals – stagnation in Q4, weak manufacturing data, and political headaches in Germany and France aren't exactly inspiring confidence.
The ECB's dovishness, combined with disappointing German data and the political turmoil in France, has kept the pressure on.
The ECB meeting on January 30th was a key event. The widely anticipated 25 bps rate cut, bringing the deposit rate to 2.75%, sent the Euro lower. The market's now pricing in at least three more cuts this year. Keep an eye on the flash inflation data for January (due on the 3rd) – any surprises there could move the market. The political dramas in Germany and France are ongoing risks. I'm bearish on the EUR for now. The COT report (Jan 28th) shows Leveraged Funds net short, reflecting the prevailing negative sentiment.
Upcoming Euro Area Economic Data
Feb 03: Inflation Rate YoY Flash (JAN). Higher-than-expected inflation could add to the ECB's challenges.
Feb 04: Unemployment Rate (JAN). A rising rate would reinforce concerns about the Eurozone economy.
Feb 06: ECB Interest Rate Decision. While the January cut is already priced in, the accompanying statement and any forward guidance will be crucial.
Feb 06: ECB Press Conference. Lagarde's comments will be closely scrutinized for clues about the ECB's policy outlook.
GBP: Sterling Braces for BoE Decision Amidst Economic Gloom
The British pound is on shaky ground. The BoE's cautious approach, the UK's economic slowdown, and persistent inflation are weighing heavily on Sterling. The market's increasingly convinced that a rate cut is coming, possibly as soon as the February 6th meeting.
Weak retail sales, plummeting consumer confidence (GfK down to -22 in January), and a mixed bag of PMI data have all contributed to the negative sentiment.
The BoE meeting on the 6th is the main event. A rate cut would likely send the GBP tumbling further. The preliminary Q4 GDP data on the 13th will also be crucial. The new Labour government's fiscal policies are adding to the uncertainty. I'm bearish on the GBP. The COT report (Jan 28th) shows Asset Managers net short, reflecting the prevailing pessimism.
Upcoming United Kingdom Economic Data
Feb 06: BoE Interest Rate Decision. Forecast: 4.50%. A rate cut would likely trigger further GBP weakness.
Feb 13: GDP Growth Rate QoQ Prel (Q4). Weaker-than-expected growth would reinforce the negative outlook.
Feb 13: GDP Growth Rate YoY Prel (Q4). A low reading would signal persistent economic weakness.
Feb 13: GDP MoM (DEC). A contraction in monthly GDP would add to concerns.
Feb 13: GDP YoY (DEC). Weak annual growth would further weigh on the GBP.
Feb 18: Unemployment Rate (DEC). A rising rate would reinforce the negative sentiment.
Feb 19: Inflation Rate YoY (JAN). Higher-than-expected inflation could complicate the BoE's policy decisions.
CAD: Loonie on the Ropes as Trudeau's Departure and Tariffs Bite
The Canadian dollar is taking a beating. Trudeau's surprise resignation, the US tariff threat, and a dovish BoC have created a perfect storm for the Loonie. It's been a rough six weeks, and the past ten days have only gotten worse. The CAD is trading near multi-year lows against the USD.
The BoC's rate cut to 3.00% on the 29th, along with the end of QT and the resumption of asset purchases, was a clear sign of their concern. The continued weakness in oil prices is another blow for the CAD.
Looking ahead, the Canadian political scene is a wild card. Who will replace Trudeau? What will their policies be? The US tariff situation is also a major risk. And let's not forget the BoC – they're clearly worried about the economy. I'm bearish on the CAD. The COT report (Jan 28th) shows Asset Managers and Leveraged Funds heavily net short.
Upcoming Canadian Economic Data
Feb 05: Balance of Trade (DEC). Forecast: C$-1.3B. A wider deficit would reinforce concerns about the Canadian economy.
Feb 06: Ivey PMI s.a (JAN). Forecast: 54.2. A weaker reading would signal further economic weakness.
Feb 07: Unemployment Rate (JAN). Forecast: 6.80%. A rising rate would add to the negative outlook.
Feb 18: Inflation Rate YoY (JAN). This data will be crucial for gauging inflationary pressures.
USD: King Dollar's Reign Continues, But Challenges Lie Ahead
The US dollar is still strong, benefiting from safe-haven demand and a relatively hawkish Fed. But it's not all smooth sailing. Trump's unpredictable trade policies and the potential for a US economic slowdown are creating uncertainty.
The FOMC minutes initially boosted the USD, but Trump's mixed messages on tariffs and his calls for lower rates have injected volatility.
Looking ahead, Trump's trade policies are the biggest wildcard. Will he escalate the trade war with China? What about those tariffs on Mexico and Canada? The Fed's path is also uncertain. While they're holding steady for now, the market is still pricing in at least one more rate cut this year. Keep a close eye on the upcoming economic data, including the ISM PMIs, non-farm payrolls, and PCE inflation. Geopolitical risks, particularly US-China relations and tensions in the Middle East, will also play a role. For now, I'm holding. The COT report (Jan 28th) shows a mixed bag, with Dealers net short and Asset Managers/Leveraged Funds net long.
Upcoming US Economic Data
Feb 03: ISM Manufacturing PMI (JAN). Forecast: 49.5. A reading above 50 would signal expansion.
Feb 04: JOLTs Job Openings (DEC). This will provide insights into the labour market.
Feb 05: ISM Services PMI (JAN). Forecast: 54.3. A strong reading would indicate continued expansion.
Feb 07: Non-Farm Payrolls (JAN). Forecast: 170K. Stronger-than-expected job growth would boost the USD.
Feb 07: Unemployment Rate (JAN). Forecast: 4.10%. A stable or declining rate would be positive.
Feb 07: Michigan Consumer Sentiment Prel (FEB). An improvement would suggest increasing optimism.
Feb 12: Core Inflation Rate MoM (JAN). Higher-than-expected inflation could strengthen the USD.
Feb 12: Core Inflation Rate YoY (JAN). This will offer insights into inflationary pressures.
Feb 12: Inflation Rate MoM (JAN). This data will reveal price changes.
Feb 12: Inflation Rate YoY (JAN). This will provide insights into annual inflation trends.
Feb 12: Fed Chair Powell Testimony. Powell's comments will be closely watched.
Feb 13: PPI MoM (JAN). This will reveal producer price changes.
Feb 14: Retail Sales MoM (JAN). Forecast: 0.40%. Stronger retail sales would support the USD.
Key Takeaways and Indicators
The next ten days are packed with central bank action and crucial economic data. The divergence in monetary policy, particularly between the Fed and other major central banks, will be a key driver of forex volatility. Trump's trade policies and their impact on global risk sentiment are another critical factor to watch.
Top 5 Economic Indicators (Upcoming 10 Days):
Feb 06: BoE Interest Rate Decision: A potential rate cut could significantly impact the GBP.
Feb 06: AU Balance of Trade (DEC): A weaker-than-expected surplus could weigh on the AUD.
Feb 07: US Non-Farm Payrolls (JAN): A strong jobs report could boost the USD.
Feb 13: NZ Business NZ PMI (JAN): Continued contraction would reinforce the NZD's weakness.
Feb 19: RBNZ Interest Rate Decision: The anticipated rate cut could pressure the NZD.
Sources
Bloomberg, Reuters, Trading Economics, ForexLive, Federal Reserve, ECB, BOJ, BOE, RBA, RBNZ, SNB, BOC, US Bureau of Labor Statistics, Eurostat, Statistics Canada, Australian Bureau of Statistics, Statistics New Zealand, Swiss Federal Statistical Office, Office for National Statistics, Cabinet Office Japan, Ministry of Internal Affairs and Communications, Ministry of Finance Japan.