Market Briefing: Tariff tango
US tariffs. Pres. Trump confirms tariffs on Canada & Mexico will go ahead next week. Another 10% will also be placed on imports from China.
Negative jolt. US equities lost ground. The USD rose, while AUD & NZD declined ~1%. AUD is back down near where it started the month.
More volatility. Headline driven markets point to more bursts of volatility. Since the late-80s the AUD has, on average, traded in a ~1% daily range.
Global Trends
A bout of risk aversion washed through markets with US tariff related headlines continuing to generate volatility. After indicating yesterday that the start date for the 25% tariffs on Mexico and Canada would be delayed until April, US President Trump backtracked overnight. According to President Trump the proposed tariffs “will, indeed, go into effect” on 4 March. Added to that, an additional 10% tariff will be placed on goods imported from China from the same date. The tariffs are linked to drug trafficking and illegal immigration with President Trump unhappy with the progress Canada and Mexico have made on border security. On top of this, the 2 April date for potential ‘reciprocal tariffs’ on a long list of US trading partners “remains in force”.
In terms of China, this latest step will lift the tariff rate on US imports to 34.5% (up from 14.5% at the start of Trump’s second term). Last time out China’s response to a tariff hike was rather restrained. The risk of more targeted/forceful counterpunches grows with each US provocation, in our view. As our chart shows, these duties on imports from Canada, Mexico, and China will raise the US’ effective tariff rate to levels last seen in the 1940s. This could be a negative for US growth, and production in other nations, given the jump up in prices paid by US consumers and businesses, and the possible headwinds on investment and jobs from greater policy uncertainty.
In terms of the numbers, while moves in bonds were limited (the US 10yr rate nudged up ~2bps), equities fell with the tech-focused NASDAQ underperforming (-2.8% vs -1.4% for the S&P500). Though in addition to the tariff news an underwhelming results update from megacap tech stock Nvidia also played a role. In FX, the USD strengthened with EUR slipping down towards ~$1.04. GBP eased (now ~$1.2607), USD/JPY edged up a touch (now ~149.77) despite the shaky risk backdrop, and CAD lost ground (USD/CAD increased to ~1.4445, a high since 4 February). USD/CNH also rose (now ~7.2977, just above its 3-month average). Elsewhere, NZD (-1.1% to ~$0.5633) and AUD (-1% to ~$0.6237) underperformed as growth worries rattled sentiment.
Further reaction to the updated US tariff news is likely during Asian trade. We think this may give the USD a bit more short-term support. However, this might be offset later on by signs in the US PCE deflator (the Fed’s preferred inflation gauge) that price pressures are moderating (12:30am AEDT). If realised, this could boost longer-dated US Fed rate cut expectations, which in turn drags on the USD. Moreover, while the latest round of US tariff headlines have caused a few ructions in markets, we don’t think it will lead to a sharp sustained jump in the USD. A fair amount of tariff risk should already be factored in, and there are signs that the US’ economic outperformance (another driver behind the USDs late-2024 strength) is fading.
Global event radar: US PCE (Tonight), China PMI (1st Mar), EZ CPI (3rd Mar), ECB Meeting (7th Mar), US Jobs Report (8th Mar)
Trans-Tasman Zone
The AUD (now ~$0.6237) and NZD (now ~$0.5633) both fell back overnight as the latest US tariff news dampened risk sentiment and supported the USD (see above). The ~1% decline over the past 24hrs pushed the AUD and NZD down to around where they were trading at the start of the month. The AUD also underperformed on the crosses with it shedding ~0.2-0.6% against the EUR, JPY, GBP, CAD, and CNH.
The latest headline driven swings in FX markets are another reminder that bursts of volatility and wider intra-day ranges in currencies like the AUD should be anticipated for a while. Since the late-1980s the average daily trading range in the AUD has been ~1%. This hasn’t been the recent norm, and participants may have forgotten about AUD’s volatility. In the last 2-years the AUD’s daily trading range has only been larger than its long run average about ~1/3 of the time. It was ~1.3% over the past 24hrs.
In our view, the ‘shoot first ask questions later’ response in FX markets to the overnight tariff news looks a bit overdone, particularly when it comes to the AUD. This is best illustrated by the AUD’s relative underperformance against currencies in the direct tariff firing line (i.e. CAD and CNH). As discussed before, 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). Indeed, Australia’s direct trade relationship with the US is small (only ~4% of exports are sent to the US, and ~11% of imports come from the US). And while there are indirect risks stemming from impacts on China, much like during US President Trump’s first term, we believe export pain felt in China is likely be offset via steps to bolster commodity-intensive infrastructure investment (this is where Australia’s exports are plugged into).
While there could be a bit more knee-jerk downward pressure exerted on the AUD during today’s Asian session we believe that sustained downside potential in the AUD should be constrained. On top of the trade factors mentioned above: (a) the AUD is still tracking at a discount to fundamentals (it is ~4 cents below our ‘fair value’ models); (b) sentiment is already bearish (‘net short’ AUD positioning, as measured by CFTC futures, is still elevated); and (c) the AUD has not traded much below where it is over the past decade (the AUD has only been sub-$0.6250 ~2% of the time since 2015).
AUD & NZD event radar: US PCE (Tonight), 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): 0.6170, 0.6210 / 0.6290, 0.6340
NZD levels to watch (support / resistance): 0.5580, 0.5610 / 0.5690, 0.5720
Market Moves
Peter Dragicevich
Currency Strategist - APAC
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