USD: Rethinking FX reaction functions after the trade drama - ING

To sum up yesterday's events, the US struck a deal with Mexico first and Canada and all parties agreed to delay tariffs by at least a month. Trump managed to obtain greater commitment to border security from both countries, although there seemed to be limited discussion on trade, ING's FX analysts Francesco Pesole notes.

Case for a structural flow against USD appears weak

"The US Dollar (USD) may not experience big rallies against directly and indirectly impacted currencies simply on the back of a tariff announcement, but only after duties effectively come to place and there are indications that they will stay. Let's look at AUD, NZD and the China tariffs for instance. US tariffs on China are due to come into effect today, and Beijing has already announced a retaliatory 10-15% duties on US energy exports and farm equipment, coming into effect on 10 February. "

"Markets are not fully pricing out the tariff threat just yet. That's because tariffs have been only delayed by a month, and secondly because the rollercoaster of trade news in the past few days does leave markets with a higher degree of uncertainty and unpredictability that harms high-beta currencies both due to direct protectionism exposures and due to risk sentiment implications."

"We can reasonably expect another correction in the dollar across the board if the US and China move towards a de-escalation in the coming days. But now that Trump has more concretely introduced the tariff threat into daily market news, the case for a structural flow against the dollar appears weak, and we would still expect support to DXY around 108.0. Today, the highlight in the US calendar will be December JOLTS jobs figures, although readjustments after the tariff scare should still dominate."