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BoJ Deputy Governor Shinichi Uchida reinforced today that interest rates will continue to rise if the bank’s economic projections hold. He highlighted in a speech that BoJ expects inflation to stabilize around the 2% target in the second half of fiscal 2025 to fiscal 2026, with "effects of the cost-push wane" while underlying inflation strengthens with wages growth.

"The policy interest rate at that time is considered to approach an interest rate level that is neutral to economic activity and prices," he added.

However, Uchida acknowledged that determining the "neutral" interest rate level remains uncertain. While in theory, it should be around 2% plus Japan’s natural rate of interest, estimates for the latter vary significantly from -1% to +0.5%.

Given this wide range and estimation errors, BoJ will avoid relying solely on theoretical models and instead "examine the response of economic activity and prices as it raises the policy interest rate"

Full speech of BoJ's Uchida here.

Japan's PMI Services was finalized at 53.7 in February, up from January's 53.0, marking a six-month high. PMI Composite also improved from 51.1 to 52.0, the strongest reading since September 2024.

According to Usamah Bhatti, Economist at S&P Global Market Intelligence, service sector businesses saw higher sales volumes, with export demand contributing to the expansion. Meanwhile, the broader private sector recorded its steepest rise in activity in five months, supported by a milder contraction in manufacturing.

Despite the growth, overall business confidence showed signs of softening. Bhatti noted Firms expressed concerns over labor shortages and uncertainty stemming from US trade policies, leading to the weakest sentiment since January 2021.

Full Japan PMI final release here.

RBA Deputy Governor Andrew Hauser emphasized in a speech today that monetary policy is set to ensure inflation returns to the midpoint of the target range, which is crucial for maintaining price stability over the long run.

He justified the February rate cut, stating that it “reduces the risks of inflation undershooting that midpoint.”

However, Hauser pushed back against market expectations of a sustained easing cycle, saying the "Board does not currently share the market’s confidence that a sequence of further cuts will be required".

While Hauser acknowledged that interest rates will go where they need to go to balance inflation control with full employment, he made it clear that progress so far does not warrant complacency.

He stressed that RBA will continue to assess economic developments on a “meeting by meeting” basis.

Full speech of RBA's Hauser here.

Australia’s GDP grew by 0.6% qoq in Q4, exceeding expectations of 0.5% qoq, while annual growth stood at 1.3% yoy. A key highlight was the 0.1% qoq per capita GDP growth, marking the first increase after seven consecutive quarters of contraction.

According to Katherine Keenan, head of national accounts at the ABS, "Modest growth was seen broadly across the economy this quarter." She noted that both public and private spending contributed positively, alongside a rise in exports of goods and services.

Full Australia GDP release here.

New York Fed President John Williams acknowledged that tariffs could contribute to inflation pressures later this year, noting that consumer goods could likely see immediate price increases while other sectors may experience a more gradual impact.

However, he emphasized the high level of uncertainty surrounding trade policies, stating, “We don’t know how long the tariffs will apply. We don’t know what other countries may do in response to this.”

Beyond tariffs, Williams pointed out that fiscal and regulatory policies under the Trump administration would also play a key role in shaping the economic outlook and monetary policy decisions.

Williams also reiterated that the current policy stance remains appropriate. “I think the current place for policy is good. I don’t see any need to change it right away," he noted.

While acknowledging that rate cuts could be a possibility later this year, he was noncommittal, adding that it’s “really hard to know” if further easing will be necessary.

The U.S. administration has implemented blanket tariffs on Canada and Mexico after a 30-day reprieve with 25% on all imports except 10% on Canadian energy. An additional 10% tariff on China is also planned.

Canada has been hit with its largest trade shock in nearly 100 years and responded promptly with 25% tariffs on $30 billion of U.S. goods, rising to $155 billion in 21 days. Evolving trade policies and government responses still remain highly uncertain as we highlighted in our first economic takeaways a month ago.

But, as we assess the implications of the implementation of tariffs on our forecasts—to be released in our Financial Markets Monthly next week—here is a cheat sheet summary of what we know and are incorporating into our outlook.

Lack of precedence for economic shock

This is not 2018 and we have a limited experience for this magnitude of a trade shock. In 2018-19, tariff policies raised the average import duty from 1.5% to approximately 3%. As of March 4, the average tariff rate quadruples to nearly 12%. That’s the largest trade shock to the U.S. and Canada since the 1930s.

Interestingly, these tariffs apply to double the share of U.S. imports (Canada + Mexico = 30%) than China-only tariffs (15%). The U.S. economy, in particular, has experienced a sizeable economic shock since 2018—prices are up 29% since Donald Trump’s first day in office eight years ago and we suspect the sensitivity to inflation is much higher now than before.

Impact is highly variable depending on duration

The ultimate impact of these tariffs on Canada and the U.S. will depend on how long they—and retaliatory measures—remain in place. Those are political decisions and difficult to economically forecast. The movement of currencies is key as well, because it can buffer some of the impact on inflation and growth on both sides of the border.

As a specific timeline, we previously delineated a duration of three to six months to show material mark downs in growth for the Canadian and U.S. economies. Tariffs would likely reduce real gross domestic product growth to zero in 2025 if implemented beyond a year and lead to a 2% contraction in 2026 with a peak unemployment rate more than 8%.

Canada’s deeply U.S-integrated manufacturing sector (about 10% of GDP) is particularly vulnerable, along with its heartland in Ontario and Quebec. Alberta and New Brunswick are also among the vulnerable provinces due to their commodity exposure, but the lower tariff rate implies an easier adjustment. Again, these scenarios make many assumptions about the path of currencies, retaliatory measures, central bank responses and fiscal packages. Read more on our scenario analysis here.

The damage is already in play

The threat of tariffs alone has already been enough to create an impact. We have already seen early evidence of stockpiling from U.S. importers ahead of the tariff implementation, a feature in our Playbook for how to measure a tariff shock in Canada. This has worsened the U.S. trade deficit and mechanically pushed down U.S. GDP nowcasts.

Meanwhile, uncertainty measures are at or near all-time highs, which will weigh on business investment and hiring in Canada. Surveys like the ISM Manufacturing indicator showed a surge in expectations for prices combined with a drop in new orders and employment activity in February—a stagflationary sentiment likely to reveal itself in a variety of other indicators into March.

A stagflationary shock for the U.S.

While Canada’s concerns are tilted towards the growth side, we expect the U.S. will struggle with the inflationary impact of broad-based tariffs. With a persistent tariff, we expect the U.S. could see a year-over-year rise in core inflation of 0.5-1 percentage point, pushing it above 3% by the end of 2025. However, growth would also need to be downgraded with our forecast suggesting that U.S. growth would move sideways in 2025 with risks to the downside should tariffs expand to Europe or globally. Growth would likely be materially impacted as well with tariffs in place for at least six months.

That said, we expect a very tight labor market and lack of labor supply will keep a lid on how high the unemployment rate can rise. That will make the U.S. Federal Reserve’s job especially challenging as they maneuver a supply-side shock to inflation that could be unresponsive to interest rate hikes. Currently, we have the Fed on hold for 2025, but further deterioration in sentiment or investment could prompt higher probabilities of additional cuts.

Incoming near-term support

Central bankers and governments may have time. Indeed, they might need time to develop strategies to react. The Bank of Canada has been noncommittal in how it would respond to a tariff shock—waiting to see whether inflation or growth dominate. Without tariffs, we expected the BoC to gradually cut rates to 2.25%. Now, we expect that the longer tariffs remain in play, the greater the likelihood that rates fall faster and by a larger magnitude.

Provincial and federal stimulus packages will also matter. A prolonged trade shock means governments would have to respond to both the immediate recession, while also strengthening the underlying economy that is ill positioned to absorb such a shock. Targeted support would help to offset the growth impact, while broad-based cash transfers risk inflation that would complicate the BoC’s job and limit future fiscal firepower. Prorogued legislatures at the federal level and in Ontario conveniently give policymakers more time to plan their reaction, while automatic stabilizers like employment insurance or Crown financial programs likely provide latitude to address many immediate concerns.

An eye on medium- and longer-term solutions

There are longer-term plays available to facilitate export diversification and stronger domestic growth drivers despite the hurdles facing the Canadian economy. One is the U.S.’s recognition of the importance of Canadian commodities. Lower tariff rates on Canadian energy and critical minerals reveal how big a global player Canada is on oil, gas, potash, agrifood, uranium and other essentials without easy substitutes. Expanding a cross-border partnership in these areas could refocus the relationship, while underpinning a greater value capture in manufacturing and ancillary services, and greater trade diversification.

There is increasing consensus in Canada on the urgency of addressing structural growth impediments from interprovincial trade barriers to peer-lagging business investment and high regulatory burdens. There are no easy fixes for U.S. tariffs. These issues could only be addressed over time, but would unequivocally be positive for the Canadian economy.

Trade turbulence is likely to be a persistent theme

While our current focus is on 25% across the board tariffs on Canadian and Mexican goods, there are other trade-related deadlines coming. In addition to the planned March 12 implementation of previously announced steel and aluminum tariffs, April 2 is the next trigger date. The U.S. administration is expecting trade analysis from several agencies to support reciprocal tariffs, while its already put out a notice for stakeholder views on USMCA/CUSMA in advance of July 2026 renegotiations. Ongoing trade disruption means both economies can expect to be beset by policy uncertainty that weighs on business investment.

• NZDJPY reversed from long-term support level 83.15
• Likely to rise to resistance level 85.00

NZDJPY currency pair today reversed up exactly from the long-term support level 83.15 (which stopped the sharp downtrend at the start of August of 2024 as can be seen below), standing near the lower daily Bollinger Band.

The upward reversal from this support zone will form the daily Japanese candlesticks reversal pattern Hammer – if the pair closes today near the current levels.

Given the proximity of the strong support level 83.15 and the oversold daily Stochastic, NZDJPY currency pair can be expected to rise to the next resistance level 85.00, former support from the start of February.

• EURGBP reversed from support area
• Likely to rise to resistance level 0.8300

EURGBP currency pair recently reversed from the support area set between the multi-month support level 0.8235 (which created the Double Bottom in December) and the lower daily Bollinger Band.

The upward reversal from this support zone created the daily Japanese candlesticks reversal pattern Doji which signalled the strength of this support area.

Given the strength of the support level 0.8235 and the strongly bullish euro sentiment seen today, EURGBP can be expected to rise to the next resistance level 0.8300 (top of the previous correction ii).

Fresh bullish acceleration extends into second consecutive day and pushed EURUSD to new 2025 high (1.0559) on Tuesday.

Weaker dollar on dovish shift in monetary policy outlook, as US Treasury Secretary signaled stronger policy easing, after a series of weak US economic data, with markets pricing in three 25 bp cuts this year, was the main driver of the single currency

Little help for dollar was seen on anticipated safe haven demand after the USA imposed new tariffs.

On the other hand, the Euro received boost from signals that the bloc is working on increase of spending on defense, which may provide some support to economic growth.

Bulls cracked pivotal barriers at 1.0533/29 (recent range tops) and pressure another key resistance at 1.0573 (Fibo 38.2% of 1.1214/1.0177 downtrend) but need a clear break above this zone to signal an end of sideways phase and bullish continuation.

Technical picture on daily chart is overall positive, as bullish momentum is strengthening and rising Tenkan and Kijun-sen are diverging after formation of bull-cross.

However, closing above cracked 100DMA (1.0517) is minimum requirement to keep fresh bulls in play and focus shifted to the upside.

Markets focus on important economic releases in coming days – EU February Services PMI, ECB interest rate decision (25bp cut is expected) and US NFP.

Res: 1.0559; 1.0573; 1.0630; 1.0695
Sup: 1.0471; 1.0426; 1.0395; 1.0360