Market Briefing: Tariff tango
Liberation Day. US unveiled 'reciprocal' tariffs this morning. Sentiment soured with bond yields & equity futures falling. AUD & NZD lost ground.
Broad-based. US tariffs are wide-ranging. Levies on AU & NZ goods will be 10%. Products from more economically important nations are higher.
Shaky sentiment. Concerns about growth may weigh on sentiment near-term. But will the moves disproportionately impact the US economy?
Global Trends
Markets have been focused on the much talked about unveiling of US ‘reciprocal’ tariffs this morning. US President Trump, who proclaimed this is “Liberation Day” and a the “declaration of economic independence” announced a new minimum baseline tariff of 10% on US imports, as well as a range of higher duties on various nations based on tariff and non-tariff barriers. For example, the reciprocal tariff on goods imported from China will be 34% (though according to US Treasury Secretary Bessent this might be on top of tariffs already in place so the total duty could be as high as 54%), with levies also imposed on items from regions/nations such as EU (20%), Japan (24%), Korea (25%), Vietnam (46%) and Taiwan (32%) among others. The duty on imports from Australia and NZ will be the minimum 10%, while Canada and Mexico will also have goods compliant in the regional trade agreement excluded (at least for now).
On our figuring, an economically significant share of US imports will be captured by the higher ‘reciprocal’ duties. We estimate this will see the US’ effective tariff rate jump to levels last seen about a century ago. Markets endured a volatile session ahead of and in the wake of the US tariff announcements. There was a positive slant to sentiment prior to the news with US equities closing in the green (+0.7%), the USD dipping and cyclical currencies such as the AUD and NZD rising. However, sentiment soured after the fact with equity futures and bond yields reversing course, cyclical currencies such as the NZD (now ~$0.5698) and AUD (now ~$0.6240) backpedaling, and safe havens like the JPY appreciating.
Short-term the wave of US tariffs, which look to be towards the upper end of consensus predictions, look set to generate a bout of negative risk sentiment, in our view. Based on what has happened before we anticipate other nations directly impacted to retaliate to the US’ moves. This points to more bursts of volatility over the period ahead. That said, because the tariffs are broad-based, we believe there should be a hit to US growth down the track. US businesses and consumers won’t be able to avoid higher prices. This in turn is likely to sap confidence, reduce the volume of activity, and in time see labour market conditions weaken. And with inflation effects ‘transitory’ once the price level adjustment washes through we would expect the growth downturn to bring US interest rate cuts back on the agenda later this year. This, and narrowing growth differentials between the US and other nations, should in our mind, see the USD trend lower over the medium-term.
Global event radar: 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 and NZD have whipped around over the past 24hrs with the positive sentiment ahead of the US tariff announcements unwinding after the duties imposed raised concerns about the US/global growth outlook (see above). At ~$0.6240 the AUD is back below its year-to-date average, with the AUD also losing ground against the firmer JPY (now ~92.65, towards the bottom end of its 1-year range), EUR (now ~0.5770), and GBP (now ~0.4806, a fresh multi-year low). By contrast, AUD/CNH (now ~4.5845) has ticked a touch higher.
As discussed above, we think the odds of other nations directly impacted by the US reciprocal tariffs announcing countermeasures are elevated. A tit-for-tat response is likely to unnerve markets and weigh on risk sentiment. More bursts of volatility are anticipated. If realised, this could exert a little more downward pressure on cyclical currencies such as the NZD and AUD in the near-term, in our opinion.
However, as outlined before, on balance, we think further falls in the AUD shouldn’t be that pronounced, and that over the medium-term there are uneven risks near current levels (i.e. there is more upside than downside potential). In our judgement a decent degree of negativity already looks factored in (the AUD is ~4 cents below our 'fair value' models, and positioning metrics such as CFTC futures are already quite 'bearish'). Structural forces that have supported the AUD at these levels remain (i.e. Australia’s improved capital flow trends, the reorientation of trade, and higher terms of trade). The AUD has only closed below $0.6250 ~2% of the time since these dynamics kicked into gear about a decade ago.
On top of that, when it comes to the macro impacts of the US’ tariffs, we believe that: (a) the broad-based nature of the ‘reciprocal’ duties could create self-inflicted wounds on the US economy that ultimately drag the USD lower as a stepdown in activity/higher unemployment sees the US Fed re-start its interest rate cutting cycle; (b) as per during President Trump’s first term any tariff induced export pain in China/Asia should be counteracted via measures aimed at boosting commodity-intensive infrastructure investment and domestic demand. This is where Australia’s key exports are plugged into; and (c) contrary to the media hype Australia’s direct trade relationship with the US is minimal, hence the economic consequences should be manageable. Only ~4% of Australia's exports are sent to the US, and many of the products affected such as beef might be able to find new markets.
AUD & NZD event radar: 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 / 0.6310, 0.6350
NZD levels to watch (support / resistance): 0.5650, 0.5700 / 0.5770, 0.5820
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
THURSDAY (3rd April) 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
About the author
