Safe-Haven Currencies Gain as Equity Markets Brace for More Pain, Says Mitsubishi UFG

07:13 AM EDT, 04/07/2025 (MT Newswires) -- The safe-haven currencies of the Swiss franc (CHF) and yen (JPY) have continued to outperform at the start of this week, driven by the intensifying retrenchment from risk assets from global investors, said MUFG.

Asian equity markets have fallen sharply across the board overnight Sunday, reflecting heightened concerns over the risk of a global recession in response to a more disruptive trade war, wrote the bank in a note to clients. The Nikkei 225 index has fallen by almost 8%, extending its decline to around 19% from the high in late March as it moves closer to falling into bear market territory.

Market participants are braced for the global equity market sell-off to extend further when the United States markets open up Monday, stated MUFG. The sell-off in risk assets was encouraged at the end of last week when China retaliated forcefully by outlining plans to match the reciprocal tariff rate to be applied by President Donald Trump on imports of Chinese goods into the U.S.

China also plans to impose an additional 34% tariff on all imports from the U.S. into China. According to Bloomberg, it will lift the total average tariff rate applied on imported goods from the U.S. into China up to 52,% which compares with the total average tariff on imported goods from China into the U.S. of around 64%. Chinese imports from the U.S. are smaller at US$164 billion when compared with China's exports to the U.S. of US$525 billion.

At the same time, China will immediately restrict exports of seven types of rare earths, start an anti-dumping probe in medical CT x-ray tubes from the U.S. and India, halt imports of poultry products from two U.S. companies, and add 11 U.S. defence companies to an unreliable entity list. China's decision to retaliate forcefully was quickly criticized by President Trump, who stated that China had "panicked" and "played it wrong."

According to media reports, Chinese policymakers met over the weekend to discuss stabilizing the economy and markets, and considered moving forward some measures that were planned even before President Trump's tariffs, according to people familiar with the matter. Under plans outlined in the People's Daily, China appears more committed to making bolstering domestic demand its "long-term strategy" and to turn consumption into a "major driver and ballast" for economic growth.

The Chinese government will look to boost consumer spending with "extraordinary strength," cut rates and pump more long-term liquidity into the banking system whenever needed. The article went on to add that China has room to raise the fiscal deficit and sell more bonds to expand public spending. Stepped-up efforts to boost domestic demand could be one silver lining from the trade war that would help to rebalance the global economy alongside recent plans from Germany to significantly loosen fiscal policy.

The Shanghai Composite equity index has fallen sharply by 7% overnight Sunday and USD/CNH has hit a high of 7.3311.

The PBoC set the daily fixing rate for USD/CNY at a stronger level than expected in an attempt to preserve stability in the renminbi and dampen building speculation over the risk of a bigger devaluation in response to the worsening negative fallout from the trade war with the US, pointed out the bank.

Concerns among market participants over a bigger negative hit to global growth from the trade war haven't been helped either by comments from the Trump administration over the weekend, added MUFG. President Trump stated that "I don't want to go down, but sometimes you have to take medicine to fix something" when he told reporters to "forget markets for a second."

In addition, in a post on Truth Social, Trump reiterated that the massive trade deficits with China, the European Union and many others can only be cured with tariffs. It was backed up by comments from Commerce Secretary Howard Lutnick, who added that the "tariffs are coming" and that President Trump "was not kidding." Trade advisor Peter Navarro, one the key intellectual architects of the shift to protectionist U.S. trade policies, even confidently claimed over the weekend that "the market will find a bottom. It will be soon, and from there, we're going to have a bullish boom, and the Dow is going to hit 50,000 during Trump's term."

The comments have dampened hopes for now that there could be a quick climb down on "reciprocal tariff" plans from the Trump administration to help restore stability to financial markets, according to MUFG. The latest developments firmly suggest that the trade hawks are now in control in the White House. Navarro was vocally criticized by Elon Musk over the weekend, who objects to the direction of U.S. trade policy and is leaving the government.

As a result, the bank continues to favor defensive positioning in the foreign exchange markets in the near term.

MT Newswires does not provide investment advice. Unauthorized reproduction is strictly prohibited.