Markets are preparing for the impact of Trump’s 104% tariffs on Chinese imports, effective at 12:01 a.m. Eastern US time. Hopes for a last-minute negotiation with Beijing diminished as the deadline approached.
US equity index futures fell sharply by up to 2% before stabilising. The Australian and New Zealand dollars fell to their lowest levels since 2020 amidst escalating geopolitical and trade tensions.
Trade And Currency Impacts
Trump has indicated that a new tariff on pharmaceuticals will be announced soon. The Bank of Japan’s Governor signalled a cautious approach, with officials set for trade talks in Washington.
The People’s Bank of China set a weaker USD/CNY reference rate, leading to a decline in the onshore yuan. The Reserve Bank of New Zealand reduced its cash rate by 25 basis points as anticipated.
In currency markets, EUR/USD rose above 1.1040, with AUD and NZD recovering from lows, while GBP/USD advanced. US yields continued to climb, though regional equities remained under pressure. The CNH is expected to face additional pressure post-midnight.
The US tariffs, now more than doubled, mark a clear line in the sand for trade relations. They’re not just taxes on goods—they’re a forceful escalation in a long-brewing dispute. The sudden nature of their implementation hasn’t allowed markets breathing space. It’s a shock to the rhythm. The fact that futures initially dropped by as much as 2% tells us traders were caught off guard, or at least still held out hope for de-escalation. The bounce that followed points to some short-term bargain hunting, but it doesn’t erase the underlying tension.
Currency Reactions And Market Dynamics
We’re also seeing how quickly risk-sensitive currencies react when politics overpower projections. The Aussie and Kiwi moved sharply lower, touching levels last seen during pandemic-induced volatility. The RBNZ’s rate cut had been priced in, yet coupling it with the tariff news made for an amplified move. A weaker yuan setting from the central bank—on the heels of rising trade aggression—reminds us that policy reactions are just getting started. Any further depreciation in the CNH overnight, beyond its reference level, demands monitoring. That sort of movement draws swift global response, especially in options markets.
Currency pairs like EUR/USD and GBP/USD firmed, but that strength likely stemmed more from dollar pressure and short-term repositioning than from improved outlooks in Europe or the UK. We should be careful not to treat today’s gains as a shift in trend. A move above 1.1040 in the euro presents levels not seen since earlier this spring. It’s tempting to read too much into that breakout, but momentum indicators aren’t fully aligned. That divergence means we remain sceptical of follow-through—especially with uncertainty from Asia weighing overnight.
Rising US yields continue to pressure certain developed-market assets. The spread movement on short-duration notes versus longer-dated paper suggests defensive posturing. What stood out was the resilience across some sectors in regional stocks, but only superficially. Beneath that, liquidity has thinned, and implied volatility continues to creep upward. It is not yet an outlier across the curve, but it’s no longer flat enough to ignore. Structured products are beginning to reprice their risk profiles across Asia-Pacific, which we suspect is only partially reflected in options premiums.
Traders should be particularly alert during the hours around the tariff implementation. Yen volatility overnight was less than what forwards implied, which presents a dislocation that may correct. Watching implieds into the Asian open could offer cues. Event-driven positioning is likely to widen spreads—especially around USD/CNY and regional EM pairs—so leveraging standard delta hedging practices may be poorly suited without modifications. It’s time to lean into the data, not lean on assumptions.
The Bank of Japan’s measured stance hasn’t changed the narrative, but we’ve seen the impact in cross yen trades where policy caution still underpins long-term expectations. Real rates are what matter here—not just the headlines. There’s evident stress in how markets are pricing risk among currencies typically insulated during global jitters. That tells us complacency has fully broken. Even short-dated option flows tilt toward higher skew. It’s a move that supports tactical positioning over long-theta exposure for now.
We aren’t rushing to fade these initial moves; the signals we’re seeing in short-end volatility and realised dislocation offer too much confirmation. For now, it’s about timing and alignment. When those two meet, we’ll act. But watching doesn’t mean waiting passively—it means being ready. Spread structures should be cleaner than usual and stops tighter too. Later this week, there are second-tier data releases that might feed into these cross-asset swings, especially as they tie in with fixed income expectations. Don’t overlook them; they fuel algorithms even when they lack headline appeal.
