Trump Targets China's Tech and Trade, Keeping Tensions High

U.S. President Donald Trump announced a new series of measures targeting China this week. Trump issued a memorandum restricting China's investments in the U.S.'s strategic sectors, such as technology and energy. He also stated that regulations regarding the listing of Chinese companies on U.S. stock exchanges would be reviewed and mentioned considering additional fees for the use of commercial ships manufactured in China.

This comes after Trump imposed an additional 10% tariff on Chinese imports, adding another layer to the most comprehensive set of actions against China to date. Furthermore, Trump is pressuring trade partners like Mexico to implement their own tariffs on China.

While global markets assess the possibility of negotiations between the two countries, there are concerns that Trump's barrage of measures could further strain bilateral relations, keeping the risk of a second trade war on the table.

Beijing, on the other hand, is maintaining a composed stance in response to Trump's successive moves. Chinese President Xi Jinping has urged officials to remain calm in the face of both domestic and global challenges, hinting at a measured response to the new trade and investment restrictions imposed by Trump.

The Chinese government's strategic approach suggests that it aims to ease tensions through negotiations, as an all-out trade war could add further complications to an already struggling Chinese economy. However, this does not mean Beijing will leave Trump's actions unanswered. Earlier this month, China retaliated against the U.S.'s 10% tariffs by imposing duties on certain American goods and signaled that it is prepared to take further action if necessary.

Trump's intent to curb China's technological advancements is evident, and additional measures targeting the semiconductor industry appear likely. China's Foreign Minister Wang Yi recently stated that Beijing would resolutely respond to Washington's unilateral actions. As long as Trump continues to implement trade restrictions against China, tensions between the two nations are expected to remain high.

Meanwhile, January inflation figures revealed that China is still struggling with deflationary pressures. Consumer prices rose by just 0.7%, falling short of expectations, while factory-gate prices dropped by 2.3%, more than anticipated. Economists continue to emphasize the need for strong stimulus measures from Beijing to counter tariff-related concerns, boost sentiment, and revive consumption.

Additionally, despite maintaining its most accommodative stance in 14 years, the People's Bank of China (PBoC) has refrained from cutting interest rates for nearly six months, effectively withholding stimulus from the economy. The central bank is currently prioritizing the stability of the yuan's value, but at some point, it will have to shift its focus.

For both Trump's trade restrictions and China's internal economic challenges, the key issue remains weak consumer demand. The solution lies in ending contractionary policies, which would be crucial to reviving economic activity.

BoJ's Hawkish Stance Strengthens Yen as Inflation Takes Hold

Japan's transition from a deflationary to an inflationary economy, followed by the Bank of Japan's (BoJ) hawkish pivot, continues to strengthen the yen against the dollar after it hit a 38-year low last year.

BoJ officials have signaled that they will proceed with rate hikes as long as economic data aligns with their expectations. As market expectations for further rate increases grow, traders are paying closer attention to Japan's economic data---signaling a shift in a mindset that had been in place for nearly a decade since the BoJ ended its negative interest rate policy.

Data released since the beginning of the month has shown that wages in Japan have risen at their fastest pace in nearly 30 years, price pressures remain persistent, and economic growth has significantly exceeded forecasts. Later in the day, traders will be closely watching Tokyo's Consumer Price Index (CPI) and retail trade data to gain further insights into inflation trends and consumer spending.

According to economists' median estimates, core CPI---excluding fresh food---is expected to have risen by 2.3%, slightly lower than the previous 2.5%. Retail trade, on the other hand, is projected to have increased to 3.9% in January, up from 3.7% previously.

These figures should keep the BoJ on track for further hikes. Growing expectations for BoJ tightening, combined with increasing bets on Federal Reserve rate cuts, could drive the yen even higher. Indeed, pricing in the options market suggests that traders are anticipating more yen gains in the coming months.

Australia's Inflation Remains Stable, But RBA Faces Uncertain Path

On Wednesday, data from Australia showed that consumer prices remained steady in January. The monthly Consumer Price Index (CPI), published by the Australian Bureau of Statistics (ABS), rose by 2.5%---slightly below economists' expectations of 2.6%---and remained unchanged from December's reading. In contrast, the trimmed mean measure, which smooths out volatile components, edged up to 2.8% from 2.7% in December.

The ABS report indicated that the slowdown in headline inflation was primarily driven by easing rent and housing prices. On the other hand, upward pressure came from food, non-alcoholic beverages, alcoholic drinks, and tobacco. Meanwhile, the government's cost-of-living measures continued to contribute to the recent cooling in inflation.

Earlier this month, the Reserve Bank of Australia (RBA) cut interest rates for the first time since 2020, lowering the cash rate to 4.1%. Policymakers cited the easing of price pressures as the reason behind the cut but maintained a cautious stance.

While U.S. President Donald Trump's tariff threats are fueling global inflation risks, government spending in Australia is expected to increase further ahead of the elections scheduled for May. Given these factors and the lingering uncertainty over whether inflation will continue to decline, the RBA is likely to remain cautious in the coming months.