Market Briefing: Tariff fatigue?
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Calm markets. European equities outperformed. Bond yields ticked higher. USD drifted back with EUR & GBP firmer. AUD & NZD also rose.
Fed comments. Fed Chair Powell reiterated a patient approach to future rate cuts. This is well known. US CPI tonight. Chair Powell speaks again.
Tariff fatigue? Lots of tariff headlines hit the wires. But market & USD impacts look to be lessening. A similar thing happened in Trump's first term.
Global Trends
Financial markets were rather calm overnight. There were no strong reactions to the first day of US Fed Chair Powell’s semi-annual Congressional testimony, or yesterday's announcement of 25% tariffs on US steel and aluminium imports given this was well flagged. Across equities, although European markets rose (EuroStoxx600 +0.2%), the US S&P500 consolidated, and the tech-focused NASDAQ slipped a little. Bond yields edged higher, though there were larger relative moves in Europe (+5-7bps across respective curves) compared to the US (~1-4bps across the curve). And in FX, the USD index drifted a bit lower despite USD/JPY tracking the uptick in bond yields (now ~152.54) with a firmer EUR (now ~$1.0360) and GBP (now ~$1.2440) the driving force. Elsewhere, NZD (now ~$0.5656) nudged up with the AUD also extending its recent upturn (now ~$0.6294).
When speaking US Fed Chair Powell didn’t throw up any surprises. The message regarding policy was inline with previous comments with the US Fed attentive to risks on both sides of its inflation/employment mandate, however at this stage it is no hurry to cut rates further as it watches how things unfold in the “strong” economy. The US Fed’s patient approach appears factored into markets with the next interest rate cut not fully discounted until September and another move after that not completely priced in until December 2026.
US Fed Chair Powell speaks again tonight (2am AEDT). This appearance may be a little more interesting as it follows the latest read on US CPI inflation (12:30am AEDT). We believe the US CPI data risks showing the disinflation pulse is stalling with core inflation expected to hover around 3.1-3.2%pa, close to where it has been the past few months. If realised, we think this should reinforce the ‘higher for longer’ and cautious approach by the US Fed, which in turn may help keep the USD at elevated levels. That said, while the USD looks set to remain firm for a while as the various tariff and macro issues play out, we don’t think it will push above recent highs. USD sentiment/positioning is already ‘bullish’, and the USD is tracking above our ‘fair value' models. This suggests a lot of positives are already baked in. And there are also a few signs of ‘tariff fatigue’ starting to creep into FX markets with various headlines not having the same effects as they did a few weeks back. This is similar to what happened during President Trump’s first term (see chart below).
Global event radar: Fed Chair Powell (Tonight), US CPI (Tonight), US Retail Sales (Fri night), RBA Meeting (18th Feb), RBNZ Meeting (19th Feb), Global PMIs (21st/22nd Feb)
Trans-Tasman Zone
AUD (now ~$0.6294) and NZD (now ~$0.5656) have ticked up over the past 24hrs, with the AUD near a ~2-week high. The softer USD and relative calm in markets after US Fed Chair Powell reiterated what was already known has been an underlying driver (see above). Indeed, outside of AUD/JPY (which has pushed up to ~96) the other major AUD-crosses are within -0.3% and +0.2% of where they were tracking at this time yesterday.
Locally, there are no major economic releases scheduled. Yesterday, the latest readings on household sentiment and business conditions showed a small improvement in confidence. And although overall business conditions moderated in January, the detail indicated that hiring intentions are solid and capacity utilization is still elevated. Hence, while growth momentum has slowed activity levels across the economy remain high. These trends support our assessment that the RBA is likely to provide interest rate relief next week (a 25bp rate cut is ~90% priced in), but the cycle will be drawn out and limited. Indeed, we don’t think the RBA will pre-commit and should stress that the data will guide its decisions.
As outlined over the past week, and above, we think that while there will continue to be bursts of short-term volatility stemming from US tariff headlines, tonight’s US CPI data (12:30am AEDT), and/or US Fed Chair Powell’s second day of testimony (2am AEDT), we also believe downside potential in the AUD should remain somewhat constrained. Outcomes relative to expectations are what matter for markets, and in our opinion a decent amount of negativity still looks factored into the AUD. This is because: (1) the AUD is trading at a discount to fundamentals (it is ~4 cents below our ‘fair value’ models); (2) sentiment is bearish (‘net short’ AUD positioning, as measured by CFTC futures, is elevated); and (3) an RBA rate cutting cycle looks well priced.
Added to that, the AUD has not sustainably traded below where it is over the past decade (the AUD has only been sub-$0.6250 ~1.5% of the time since 2015); we think any tariff induced export headwinds in China are likely to be offset via measures aimed at boosting commodity-intensive infrastructure investment (this is where Australia’s exports are plugged into); and as discussed previously, despite the media headlines Australia’s export basket appears rather tariff-insulated given its minimal manufacturing and with Australia being one of the few nations the US runs a trade surplus with (i.e. the US exports more to Australia than it imports from Australia). This, in our judgement, should help the AUD outperform currencies like the EUR, CAD, NZD, and CNH over the period ahead.
AUD & NZD event radar: Fed Chair Powell (Tonight), US CPI (Tonight), US Retail Sales (Fri night), RBA Meeting (18th Feb), RBNZ Meeting (19th Feb), Global PMIs (21st/22nd Feb)
AUD levels to watch (support / resistance): 0.6200, 0.6240 / 0.6330, 0.6380
NZD levels to watch (support / resistance): 0.5590, 0.5620 / 0.5690, 0.5720
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
WEDNESDAY (12th February)
AUD New Home Lending (Q4) (11:30am)
EUR ECB’s Elderson Speaks (9pm)
THURSDAY (13th February)
USD CPI Inflation (Jan) (12:30am)
USD Fed Chair Powell Speaks (2am)
GBP BoE’s Greene Speaks (2am)
USD Fed’s Bostic Speaks (4am)
EUR ECB’s Nagel Speaks (4am)
CAD Bank of Canada Meeting Minutes (5:30am)
USD Fed's Waller Speaks (9:05am)
NZD 2yr Ahead Inf. Expectations (Q1) (1pm)
GBP GDP (Q4) (6pm)
EUR Industrial Production (Dec) (9pm)
FRIDAY (14th February)
USD PPI Inflation (Jan) (12:30am)
USD Initial Jobless Claims (12:30am)
EUR ECB’s Nagel Speaks (4am)
EUR GDP (Q4 P) (9pm)
SATURDAY (15th February)
USD Retail Sales (Jan) (12:30am)
USD Industrial Production (1:15am)
USD Fed's Logan Speaks (7am)
*Note, all times/dates provided are AEDT
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