Market Briefing: Push-pull tariff headlines
Tariff news. Pres. Trump warned tariffs on the EU are coming. But start date for tariffs on Canada & Mexico pushed out again. 2 April is a key date.
Growth worries. US equities have slipped back recently due to US growth concerns. This has dragged AUD & NZD a bit lower the past few days.
AU CPI. Monthly CPI indicator showed slow disinflation process continues. AU GDP due next week. RBA rate cuts still look to be slow & limited.
Global Trends
There has been a bit of news that buffeted markets, but on net moves have been modest across US equities (S&P500 -0.2%, the 5th straight daily fall), and bonds. US yields declined ~3-5bps across the curve, with the benchmark 10yr rate slipping to ~4.25% (a low since mid-December). In FX, the USD index ticked up a little with EUR giving back some of its recent post-German election gains (now ~$1.0485), while GBP (now ~$1.2676) and the interest rate sensitive USD/JPY (now ~148.90, near the bottom of its ~4-month range) consolidated. Elsewhere, lingering growth worries exerted a bit more downward pressure on cyclical currencies like the NZD (now ~$0.5694) and AUD (now ~$0.63), with both close to their respective February averages.
In terms of the news flow, US tariff headlines again hit the wires. When speaking, President Trump stated that tariffs on the EU will be announced “very soon, and it’ll be 25%, generally speaking”, with headline grabbing auto imports in the firing line. ~14% of US imports are autos, with about half coming from Canada and Mexico. That said, it wasn’t all one-way traffic when it comes to tariffs. President Trump also announced that the planned 25% tariffs on Mexico and Canada would be pushed out again. After originally being set to start on 1 February, and then extended to 4 March, the tariffs on Canada and Mexico are now due to kick off on 2 April. The timing of 2 April coincides with a possible start date for a whole host of other tariffs given various reports on US trade need to be delivered to President Trump by the start of April.
In other news it was reported that China plans to start re-capitalising three of its biggest banks in coming months, following through on a broad stimulus package unveiled last year that is designed to shore up the stuttering economy. Authorities are looking to inject at least CNY 400bn ($US55bn) of fresh capital which is aimed at fending off risks and spurring lending in China. The China stimulus drive is something that needs to be monitored closely as domestic activity is where Australia’s key exports are directly plugged into.
While the overnight news didn’t generate too much market turbulence, US trade developments are an ongoing source of volatility. We think more bursts of volatility are likely over the period ahead, particularly as the 1 April deadline date for the US’ investigations into trade practices comes closer into view. But on balance, as we have also seen recently, the tariff reality might not be as harsh or implemented as quickly as what many fear. In our judgement, this suggests the USD (which is tracking above where interest rate expectations suggest it should be) is biased to gradually ease back over the medium-term as more of the built-up Trump risk premium is unwound.
Global event radar: US PCE (1st Mar), China PMI (1st Mar), EZ CPI (3rd Mar), ECB Meeting (7th Mar), US Jobs Report (8th Mar)
Trans-Tasman Zone
AUD and NZD have drifted lower over the past few days on the back of a run of underwhelming US data that has raised concerns about its growth momentum, and lower US equities. That said, at ~$0.63 the AUD is hovering close to its February average, as is the NZD (now ~$0.5694). The backdrop, as well as other specific factors such as the positive EUR sentiment generated by the recent German election result, also exerted a bit of downward pressure on the AUD crosses. At ~0.6010 AUD/EUR is tracking a touch below its ~1-year average, and inline with where it started the month. Elsewhere, AUD/JPY has extended its slide. At ~93.80 AUD/JPY is close to the bottom of its ~5-month range with expectations of further Bank of Japan rate hikes and shaky risk sentiment supporting the JPY. AUD/GBP (now ~0.4970) has dipped while AUD/NZD (now ~1.1064) has given back some of its early-month gains over the past few sessions.
Macro wise, the Australian inflation indicator for January was released yesterday. This is the monthly series which doesn’t capture all consumer prices. Given it was the first month of the quarter ~40% of the CPI basket wasn’t measured. That said, on what was captured, the process of slow disinflation remains intact. Headline inflation held steady at ~2.5%pa, and although core inflation nudged up a fraction (now 2.8%pa) there were positive signs when it comes to things like dwelling costs. The data was broadly inline with the RBA’s thinking. Q4 Australian GDP is due next week and the partial data received so far suggests growth momentum picked up a little into the end of 2024. If realised, this and the ongoing resilience in the Australian labour market should maintain the RBA’s gradual approach to further rate cuts. Markets are not fully discounting the next RBA rate cut until July, with another move after that only baked in by November.
More bursts of tariff-related AUD volatility are probable over coming weeks; however we believe AUD downside potential should be constrained, and that a further modest grind higher can unfold over the medium-term as the USD drifts lower (see above). Notably, we think a decent amount of negativity still looks factored into the AUD given it is tracking ~4 cents below our ‘fair value’ models and ‘net short’ AUD positioning (as measured by CFTC futures) is elevated. Relative policy trends between the RBA and other central banks is also a factor that can help the AUD level off and outperform currencies like the EUR, CAD, NZD and CNH over the period ahead, in our view.
AUD & NZD event radar: China PMI (1st Mar), EZ CPI (3rd Mar), AU GDP (5th Mar), ECB Meeting (7th Mar), US Jobs Report (8th Mar)
AUD levels to watch (support / resistance): 0.6250, 0.6290 / 0.6340, 0.6380
NZD levels to watch (support / resistance): 0.5630, 0.5670 / 0.5730, 0.5760
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
THURSDAY (27th February) NZD ANZ Business Confidence (Feb) (11am) AUD CAPEX (Q4) (11:30am) EUR Spain CPI Inflation (Feb P) (7pm) EUR ECB Meeting Minutes (11:30pm)
FRIDAY (28th February) USD Durable Goods Orders (Jan P) (12:30am) USD Initial Jobless Claims (12:30am) USD Fed's Schmid Speaks (1:15am) USD Fed’s Hammack Speaks (5:15am) USD Fed’s Harker Speaks (7:15am) NZD Consumer Confidence (Feb) (8am) NZD Filled Jobs (Jan) (8:30am) JPY Tokyo CPI Inflation (Feb) (10:30am) JPY Industrial Production (Jan P) (10:50am) GBP BoE’s Ramsden Speaks (6pm) EUR France CPI Inflation (Feb P) (6:45pm)
SATURDAY (1st March) EUR Germany CPI Inflation (Feb P) (12am) CAD GDP (Q4) (12:30am) USD PCE Deflator (Jan) (12:30am) USD Trade Balance (Jan) (12:30am) USD Chicago PMI (Feb) (1:45am) CNY PMIs (Feb) (12:30pm)
*Note, all times/dates provided are AEDT
About the author
