Market Briefing: Planes, trains & automobiles
US tariffs. Tariff developments dominate the headlines. Yesterday the US announced 25% duties on vehicle imports. Reciprocal tariffs due 2 April.
Holding on. Equities eased, as did the USD. NZD ticked higher while AUD is hovering near ~$0.63. RBA & US jobs report also on the radar next week.
EUR risks. EUR strengthened over the past month. Is too much good news priced in? EU exposed to vehicle tariffs. EU is a large US trading partner.
Global Trends
US tariff developments continue to dominate the headlines and generate bursts of market volatility. Yesterday morning the US Administration came through and delivered on earlier reports that tariffs were set to be place on vehicle imports with President Trump signing an order to place a 25% duty on foreign-made cars and some parts. This will start next week. The trade war is ramping up with regions/nations directly impacted by the latest step such as EU, Canada, Japan, and South Korea threatening to retaliate. At the same time the US warned that other major products such as pharmaceuticals were also in the firing line and that broader ‘reciprocal’ tariffs are still due to be unveiled on 2 April.
In terms of markets, European and US equities eased overnight with automakers underperforming. The US S&P500’s dip (-0.3%) compounded yesterday’s 1.1% fall. The S&P500 has clawed back some ground since mid-March, however it remains over 7% from its February peak. In contrast to European bond yields which shed ~2-5bps across various curves there was a mild steepening bias in US rates with the benchmark 10yr yield consolidating (now ~4.36%) and the 2-year yield losing a bit of altitude (-3bps to 3.99%). In FX, the USD index drifted lower, despite a modest uptick in USD/JPY (now ~151), with GBP (now ~$1.2948) and EUR (now ~$1.08) edging up ~0.4% in the face of the ongoing US trade ructions. Elsewhere, USD/SGD consolidated (now ~1.3397), the NZD nudged up a fraction (now ~$0.5740), and the AUD was range-bound (now ~$0.6304).
In the US tonight the PCE deflator (the US Fed’s preferred inflation gauge) is due (11:30pm AEDT). Core price pressures are projected to accelerate slightly. The data is for February, so the impact of recent tariff announcements won’t be captured. In time, we think the tariffs placed on US imports should generate an inflation jolt as goods prices increase. However, this should be “transitory” as tariffs create a price level adjustment not ongoing price growth/inflation. That said, those higher prices and greater uncertainty consumers and businesses are facing are starting to act as sand in the gears of the US economy. Hence, while renewed bouts of turbulence may generate intermittent USD strength in the near-term, over the longer-run we remain of the view that the USD should trend lower as growth differentials between the US and other major nations narrow and as a loosening in the US labour market brings interest rate cuts by the US Fed back on the agenda.
Global event radar: China PMI (31st Mar), RBA Meeting (1st Apr), EZ CPI (1st Apr), US Reciprocal Tariffs (2nd Apr), US Jobs (4th Apr)
Trans-Tasman Zone
Yesterday mornings US auto tariff news (see above) generated a little intra-session FX volatility, but on net the softer USD helped the NZD tick up (now ~$0.5740) and the AUD consolidate (now ~$0.6304). There have also been some diverging performances on the AUD crosses. The AUD has slipped back by ~0.1-0.3% versus the NZD, GBP and EUR over the past 24hrs, while it has risen by ~0.4% against the JPY and CAD.
The macro event calendar heats up over the next week. Tonight, the US PCE deflator is due (11:30pm AEDT), while the China PMI (Mon), Eurozone inflation (Tues), and US jobs report (Fri) are some of the global releases looming. On top of that the RBA meets (Tues), and the US is due to unveil reciprocal tariffs (2 April). In terms of the RBA, given the easing cycle has started, the chance of another rate cut next Tuesday shouldn’t be viewed as zero. That said, we do feel it is a low probability. We believe the 20 May RBA meeting is the next most likely time for another cut as this would allow policymakers to digest the US tariff news and quarterly Australian CPI (released 26 April), and avoid the politics of the Australia Federal Election which will take place on 3 May.
As discussed before, more short-term bursts of AUD volatility should be anticipated around the 2 April tariff announcements. That said, we don’t expect any further falls in the AUD to be overly large or long-lasting. Over the medium-term we continue to believe there is more upside than downside potential for the AUD. A decent amount of negativity still looks baked in (the AUD is ~4 cents below our ‘fair value’ models). The AUD has not traded much below where it is over the past decade (AUD has only closed below $0.63 ~3% of the time since 2015). Structural factors that supported the AUD at these low levels remain (i.e. Australia’s improved capital flow trends and higher terms of trade). And as mentioned previously, we also think tariff induced export headwinds in China should be offset via measures aimed at boosting commodity-intensive infrastructure investment. This is where Australia’s key exports are plugged into.
We also believe the AUD may garner support via relative outperformance on crosses such as AUD/EUR. We think the drop in AUD/EUR has run too far too fast. Our modelling suggests AUD/EUR should be tracking closer to ~0.60 rather than near ~0.5840. Increased fiscal/defence spending across Europe is a longer-term positive for the economy and EUR. However, markets may have jumped the gun, and we doubt the spending taps will be opened quickly. Moreover, the EU is still facing near-term tariff headwinds. The EU is the US’ biggest trading partner and more punitive tariffs look to be in the pipeline. By contrast, Australia has minimal direct trade with the US. For more see Market Musings: AUD/EUR: signs of life emerging.
AUD & NZD event radar: China PMI (31st Mar), RBA Meeting (1st Apr), EZ CPI (1st Apr), US Reciprocal Tariffs (2nd Apr), US Jobs (4th Apr)
AUD levels to watch (support / resistance): 0.6200, 0.6260 / 0.6340, 0.6380
NZD levels to watch (support / resistance): 0.5650, 0.5690 / 0.5760, 0.5800
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
FRIDAY (28th March)
JPY Tokyo CPI Inflation (Mar) (10:30am)
USD PCE Deflator (Feb) (11:30pm)
CAD GDP – Monthly (Jan) (11:30pm)
GBP Retail Sales (Feb) (6pm)
EUR France CPI Inflation (Mar P) (6:45pm)
EUR Spain CPI Inflation (Mar P) (7pm)
SATURDAY (29th March)
USD Fed’s Barr Speaks (3:15am)
USD Fed’s Bostic Speaks (6:30am)
*Note, all times/dates provided are AEDT
About the author
