FOREX: USD Index Firms Amid Fresh Tariff Threats, Yen Marginally Outperforms

ACGBs (YM +6.0 & XM +5.0) are stronger but off session bests after business conditions improved in December.

• The NAB survey showed that conditions climbed 3 points to +6, reversing declines from the prior month and almost returning to its long-run average. Business confidence edged up 1 point to -2.
• Cash US tsys are 1-2bps cheaper in today’s Asia-Pac session after yesterday’s strong rally.
• Cash ACGBs are 5-6bps richer with the AU-US 10-year yield differential at -12bps.
• Swap rates are 5bps lower.
• The bills strip has bull-flattened, with pricing +2 to +7.
• Tomorrow’s Q4 CPI data could be pivotal in determining whether the RBA initiates a long-anticipated monetary easing cycle. It may also influence the timing of an election, which must be held by May 17. Economists predict the trimmed-mean CPI will have declined to 3.3%, marking its lowest level in three years.
• RBA-dated OIS pricing is 1-6bps softer across meetings today. A 25bp rate cut is more than fully priced for April (124%), with the probability of a February cut at 78% (based on an effective cash rate of 4.34%). 

• It has been a relatively quiet session today, following last nights sell-off in risk assets, focus is now on Wednesday FOMC meeting. Tsys futures have given back a small portion of the overnight gains, although still trade near closing levels, with TU -01⅜ at 102-27⅝, while TY is -06 at 108-31.
• Cash tsys curves have flattened a tough throughout the session, with the 2yr +1.7bps at 4.212%, while the 10yr is +1.6bps at 4.551%. The 2s10s unchanged at 33bps, while the 2s30s is -0.5bps at 58bps.
• President Trump’s Treasury pick, Scott Bessent, reportedly supports a universal tariff on US imports starting at 2.5%, with monthly increases of the same amount. Meanwhile, Trump has signaled a preference for significantly higher tariffs, stating they should be “much bigger” than 2.5%.
• Trump has also expressed eagerness to work with Congress on what he calls the largest tax cuts and reforms in US history. Speaking at a House Republican retreat in Florida, he emphasized avoiding delays in the budget process and said he is flexible on whether the changes are passed in one bill or multiple bills. Trump reiterated his campaign promises not to tax tips, Social Security, or overtime payments, stressing the goal of lowering taxes for all Americans, not just the wealthy.
• The majority of Asian markets will be out at some point this week for Chinese New Years, so expect trading to be on the quiet side, later tonight we have Durable Goods Orders, FHFA House Price Index, Conf. Board Consumer Confidence, Richmond Fed Manufact. Index as well as earnings from PACCAR, Sysco Corp, Synchrony Financial, Lockheed Martin Corp, Veradigm, Royal Caribbean, Polaris Inc., Boeing, NextEra Energy, JetBlue Airways, General Motors, Kimberly-Clark Corp, Invesco, Starbucks, Qorvo and Stryker Corp

The USD has been on the front foot for much of today's Asia Pac session. The BBDXY index was last +0.40% and trading above 1302.00. The DXY was up around 107.9, +0.50%. 

• A number of Trump related tariff headlines have crossed, which has aided broad based USD sentiment. Early comments saw Trump state tariffs would be imposed in the near future across a wide/key set of industries. These were followed by comments later on that Trump would want a much higher universal tariff rate than 2.5% (which according to the FT is what incoming Treasury Secretary Bessent is pushing for as an initial step on tariffs, before rising gradually).
• The comments reinforce that tariffs are front and centre of Trumps economic plans.
• US yields have ticked higher, although gains are not much 1-1.5bps across the key Tsy benchmarks. US equity futures are mixed, but not much beyond flat after Monday's sharp cash falls, led by the tech side (amid fresh AI competition fears from China). Regional equity markets are mixed.
• Yen is unwinding some of Monday's outperformance (off around 0.85%). USD/JPY was last 155.80/85, back above the 50-day EMA (in the low 155.00 region). Yesterday's intra-session lows were at 153.72. Earlier data showed weaker than expected PPI services, up 2.9%y/y, versus 3.2% forecast.
• AUD/USD is down 0.70%, last near 0.6250 and close to session lows. This puts us back close to the 20-day EMA support point. Earlier data showed Dec NAB business conditions rose to +6 form +3 in Nov. Confidence was weaker though and in negative territory.
• In NZ, NZD/USD is off by 0.60%, last tracking under 0.5660. ERU/USD is down 0.55% to 1.0430/35.
• Looking ahead, we have various US data points coming up, along with some Fed surveys (including the Richmond print). There is also some ECB speak.