Absence of Immediate Tariff Action Suits Risk Assets, BOJ Meeting Up Next

However, the overall takeaway was that Trump appeared to have a more measured approach to new tariffs than was witnessed during the election campaign. This apparently more-considered tact with regards to tariffs had the effect of bringing down the anxiety level for investors, and risk assets responded accordingly. US equities experienced a solid day of gains following Trump’s first day back in office.

But whilst the implementation of tariffs was not a day one priority for the President, the story of how international trade will take shape is far from done, with the ‘t’ word (i.e. tariffs) likely to remain a potential sticking point for investors. Particularly with talk of the new US administration creating an External Revenue Service (to complement the existing Internal Revenue Service). But at the very least, the fact that no new sweeping tariffs were introduced on Inauguration Day does give the idea time to breath and allows time for negotiations to take place behind the scenes. This increases the chances of the US and its trading partners arriving at an arrangement or tariff level which is more palatable to financial markets and may cause less volatility. Let’s see.

‍

In FX, the Dollar Index has been facing selling pressure as a consequence of the lack on new tariff action by the new US President. Following a strong run which started in October 2024, the USD has slipped lower on profit taking, with the Dollar Index now trading just below the 108 level. Yield differentials still favour the USD, which may limit the extent of USD weakness in the short term.

Gold has enjoyed a good week so far, with the precious metal taking advantage of the softer USD. Trading at $2744 (as of early trading hours on Wednesday), moderate resistance awaits at $2760 and then at $2782, a breach of which would open the door for gold to attempt a move past its all-time high of $2790 and set up a possible run at the $3k level. Support awaits at $2700 and $2683. Continued uncertainty about international trade and lingering inflationary concerns is keeping gold in favour with investors. However, any rebound from the USD could slow the momentum for gold.

‍

The Bank of Japan (BOJ) interest rate decision (which is due on Friday this week) is another noteworthy event. Reading between the lines of what the BOJ Governor said last week regarding wage growth and the fact that Japan’s current CPI of 2.9% remains above the long-term average of 2.43%, the central bank seems to have the justification needed to pull the trigger on a rate rise to 0.5% (from 0.25%). This would be the first rate rise by the BOJ since late July in 2024, when they caught the market off-guard and sent global markets into a panic mode during the first week of August 2024.

However, a rate rise by the BOJ this time may not create quite the same level of volatility. US yields are higher now than they were last time (approximately 4.6% now on the 10-year bond verses 4.1% last July) so there is less incentive for traders to immediately unwind the carry trade. Also, last time the BOJ cut rates, it coincided with a weak US jobs report which exaggerated the market moves. Whereas this time, the most recent US non-farm payrolls (NFP) report was solid (256k for December).

So, while it’s possible that any BOJ rate hike could again stir up a dose of market volatility, particularly if it is accompanied by a hawkish outlook on monetary policy, higher US yields (due to a less-dovish FOMC compared to last time) could dampen the impact of any BOJ interest rate action this week. The BOJ will be keen to alleviate pressure on the yen (to reduce imported inflation effects), but at the same time, they will not want to rattle global markets with an overly hawkish signal or see a repeat of the rout on the Nikkei. As such, the messaging from the BOJ may be more nuanced this time around if we do witness a rate hike.

‍