Market Briefing: Brace for tariff impact
US tariffs. US set to unveil its latest tariffs tomorrow. Still a lot of uncertainty on what will be announced. This can trigger another bout of volatility.
Holding on. Equities rose overnight, while bond yields dipped. AUD & NZD clawed back a bit of lost ground.
RBA hold. No change by RBA yesterday. Uncertainty clouds the outlook. There are upside & downside risks. Rate cut in May possible, but isn't locked in.
Global Trends
The US’ ‘reciprocal’ tariff announcement is almost here. ‘Liberation Day’, as President Trump is calling it, takes place tomorrow with the US set to unveil the measures at ~7am AEDT. There is still a lot of uncertainty about the size and scope of the latest round of tariffs, particularly with regards to how non-tariff barriers will be tackled. Various media reports over the past few weeks have mentioned a variety of plans. The latest is that the US is considering imposing tariffs of ~20% on goods from nearly every nation, rather than targeting specific countries or products. As was the case in previous rounds we would expect other nations to retaliate. This is something Canada’s Prime Minister Carney and the EU Commission President warned overnight.
With the tariff announcements just around the corner markets have remained jittery with more bursts of intra-day volatility coming through. US equities unwound early losses to end the day in slightly positive territory (+0.4%), while stock markets in Europe outperformed (EuroStoxx600 +1.1%). In FX, the USD Index tread water with a bit of strength against the EUR (now ~$1.0790) offset by a firmer JPY (USD/JPY dipped to ~149.60). GBP (now ~$1.2924) and USD/SGD (now ~1.3439) held steady, while the NZD (now ~$0.57) and AUD (now ~$0.6274) recouped some of Monday’s weakness.
By contrast, bond yields extended their slide. The US 10yr yield declined another ~4bps to be down at ~4.17%, near the bottom of its multi-month range. Bond markets continue to laser in on the negative growth implications and self-inflicted economic wounds tariffs can create. This was on show again in the latest US ISM manufacturing survey. The ISM slipped back into ‘contractionary’ territory with new orders and employment intentions dropping. At the same time, prices paid (a signal about future inflation) jumped up to levels last since in mid-2022. The JOLTS report also indicated that US labour demand is moderating and conditions are cooling.
Tomorrow’s US tariff unveiling is a key near-term event risk. While more turbulence on the back of hefty and broad-based ‘headline’ tariff rates might generate some knee-jerk USD strength, the underlying detail and response of other nations will also be important factors that dictate the market’s reaction. Looking beyond the potential short-term volatility, we remain of the view that tariffs should only generate a temporary bump in US inflation, yet the drag on activity may be more long-lasting as businesses and consumers will be faced with higher prices and greater uncertainty. We believe this should see the USD trend lower over the medium-term as growth differentials between the US and other nations narrow, and as a weakening US jobs market brings interest rate cuts by the US Fed back on the agenda.
Global event radar: US Reciprocal Tariffs (Thurs), US Jobs (Fri), Fed Chair Powell (Sat), RBNZ Meeting (9th Apr), US CPI (10th Apr), BoC Meeting (16th Apr), ECB Meeting (17th Apr)
Trans-Tasman Zone
AUD (now ~$0.6274) and NZD (now ~$0.57) partially unwound Monday’s softer start to the week over the past 24hrs. Given their positive correlation to risk sentiment the uptick in global equities ahead of tomorrow’s US tariff announcement (Thurs 7am AEDT) has provided a helping hand. The AUD also clawed back lost ground on the crosses with gains of ~0.3-0.7% recorded against the EUR, JPY, GBP, and CNH. That said, AUD/EUR (now ~0.5817) and AUD/GBP (~0.4860) remain near the bottom end of their respective cyclical ranges. AUD/JPY (now ~93.95) is still in the lower half of its 2025 range, while AUD/CNH (now ~4.5710) is close to its year-to-date average.
Yesterday’s RBA decision also looks to have generated a bit of AUD support. As expected the RBA kept the cash rate steady at 4.1%, however it didn’t provide strong signals about the timing of another rate cut. Uncertainty clouds the landscape; hence the RBA is awaiting clarity as it navigates the tricky terrain. In our view, the US’ protectionist policy push suggests US growth risks are shifting to the downside. Outside of the US however authorities such as in China are pulling levers to guard against growth headwinds, while in Europe governments are moving to lift fiscal/defence spending. These are important offsets for Australia given trade with these nations is more economically important than with the US. Another interest rate cut by the RBA on 20 May, which will give the Board time to digest US tariff decisions, the quarterly Australian CPI (released 30 April), and the state of the local jobs market (due 15 May) is possible, although it isn’t guaranteed. For more see Market Musings: RBA: Navigating the uncertainty.
US reciprocal tariff announcements are the next major AUD event risk (Thurs 7am AEDT). More bursts of volatility should be anticipated as there is still a lot of uncertainty about what the next phase in the Trump Administrations plans may look like. That said, on net, we continue to believe further falls in the AUD shouldn’t be long-lasting or overly large, and that over the medium-term there are uneven risks near current levels (i.e. there is more upside than downside potential). Outcomes relative to expectations matter in markets. And in our judgement a decent amount of negativity already looks baked in (the AUD is ~4 cents below our 'fair value' models). Added to that, when it comes to trade/tariff risks, we think that: (a) much like during President Trump’s first term any tariff induced export pain in China should continue to be offset via measures aimed at boosting commodity-intensive infrastructure investment. This is where Australia’s key exports are plugged into; and (b) Australia’s direct trade relationship with the US is minimal. Only ~4% of Australia's exports are sent to the US, and Australia is one of the few nations the US runs at trade surplus with.
AUD & NZD event radar: US Reciprocal Tariffs (Thurs), US Jobs (Fri), Fed Chair Powell (Sat), RBNZ Meeting (9th Apr), US CPI (10th Apr), BoC Meeting (16th Apr), NZ CPI (17th Apr), AU Jobs (17th Apr), ECB Meeting (17th Apr)
AUD levels to watch (support / resistance): 0.6190, 0.6220 / 0.6300, 0.6350
NZD levels to watch (support / resistance): 0.5600, 0.5650 / 0.5720, 0.5770
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
WEDNESDAY (2nd April) AUD RBA’s Kent Speaks (10:25am) AUD Building Approvals (Feb) (11:30am) EUR ECB’s Schnabel Speaks (9:30pm) USD Reciprocal Tariff Announcement (no set time) USD ADP Employment (Mar) (11:15pm)
THURSDAY (3rd April) USD Reciprocal Tariff Announcement (no set time) USD Fed’s Kugler Speaks (7:30am) AUD Job Vacancies (Q1) (11:30am) AUD Trade Balance (Feb) (11:30am) AUD RBA Financial Stability Review (11:30am) CNY Caixin PMI – Services (Mar) (12:45pm) EUR ECB's Guindos Speaks (6:20pm) EUR ECB's Schnabel Speaks (9pm) EUR ECB Meeting Minutes (10:30pm) USD Trade Balance (Feb) (11:30pm) USD Initial Jobless Claims (11:30pm)
FRIDAY (4th April) USD ISM Services (Mar) (1am) USD Fed’s Jefferson Speaks (3:30am) USD Fed’s Cook Speaks (5:30am) AUD Household Spending (Feb) (11:30am) EUR Germany Factory Orders (Feb) (5pm) CAD Jobs Report (Mar) (11:30pm) USD Jobs Report (Mar) (11:30pm)
SATURDAY (5th April) USD Fed Chair Powell Speaks (2:25am) USD Fed’s Barr Speaks (3am) USD Fed's Waller Speaks (3:45am)
*Note, all times/dates provided are AEDT
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