By Bas van Geffen, Senior Macro Strategist at Rabobank
Davos got hard Trump treatment yesterday. He demanded that Saudi Arabia and OPEC lower oil prices to end the Ukraine war, and a rounded up $1 trillion in Saudi investments into the US despite those lower prices. Will Trump offer a US nuclear power and defence deal, and/or dealing with Iran, as quid pro quo?
But Trump may have another motive to encourage OPEC to lower the cost of oil: “When oil prices come down, everything is going to be cheaper for the American people.” Shortly after his demand for lower oil prices, Trump turned to the Fed, demanding that rate cuts should follow immediately after oil. And interest rates should come down “a lot.” The dollar will probably not like that: even though Trump demanded that other central banks follow suit, he has less traction over them.
The US president is certainly trying, though. Yesterday, Trump signed an executive order on digital financial technology. The decree primarily promotes private –and dollar-based– initiatives, but it also contains some sweeping actions against the efforts to develop central bank digital currencies, and not just in the US: “(v) including by prohibiting the establishment, issuance, circulation, and use of a CBDC within the jurisdiction of the United States.”
While this executive order technically does not seem to ban the offshore use of CBDC by US banks or multinationals (but I am not a lawyer!), I would certainly not want to be the one trying this first. That’s of course an attempt to stop the BRICS’ initiative to substitute central bank digital currencies for US dollars in their international trade.
Trump also had a message for global manufacturers: “Come make your product in the US, and we’ll give you among the lowest tax rates in any nation. But if you don’t – which is your prerogative – you will simply have to pay a tariff” that puts money in our Treasury.
However, markets were mostly in ebullient mood, ignoring everything Trump said to focus on one partial quote: “I’d rather not tariff China.” Just like he would rather not tariff Russia but says he will if they won’t come to the peace table. All Trump is saying is “we can do this the easy way or the hard way.” The market is either calling the US president’s bluff, or only ever understands the easy way.
Elsewhere, the Bank of Japan defied Trump’s call for lower interest rates, and hiked its policy rates by 25bp. Arguably, Japan is still Trump’s low-rates utopia, with the policy rate now at just 0.5%. That said, Japanese policymakers are more constructive on the inflation outlook: the Bank of Japan now sees CPI inflation of around 2.5% for FY2025. Governor Ueda recently also noted that real interest rates had become more negative, and today the Bank stated that they were expected to remain significantly negative. So, financial conditions are still accommodative, and this will continue to firmly support economic activity. The Bank of Japan concludes that if the forecasts presented in the January Outlook report materialise, policymakers will continue to raise policy rates and adjust the degree of monetary accommodation accordingly.
