Market Briefing: Tariff uncertainty
Have a look at the latest edition of our Event Radar & Views In A Nutshell pack
Tariff volatility. US/Canada tariff news generated further vol. overnight. US equities extend their slide. USD softer, EUR higher. AUD ticked up.
EUR upswing. Positive sentiment about EU fiscal spending is supporting the EUR. But has it moved too far too fast? EU in the firing line for US tariffs.
Macro events. US CPI due tonight. Bank of Canada expected to cut rates again. Several ECB members speaking. More intra-day market vol. likely.
Global Trends
Worries about the US-driven trade war and what it may mean for growth continue to rattle market nerves. Fears of a further escalation generated more volatility overnight as tensions between the US and Canada ratcheted up. In response to Ontario’s move to raise taxes on electricity sent to a few US states President Trump indicated he would lift tariffs on steel and aluminium imports from Canada to 50% (double the 25% tariffs set to come into effect for all nations today), and that he would “substantially increase” tariffs on Canadian auto part imports on 2 April if duties on US dairy products and other goods aren’t dropped. The threats saw Ontario suspend its plans and in turn the US stated the higher tariffs on steel and aluminium imports from Canada won’t be imposed. This is the latest example of how fluid the situation remains. On top of dampening risk sentiment, the uncertainty is starting to impact economic activity. Recall, tariffs are paid by the importer not the nation that sends the goods across, with the higher costs typically passed onto businesses along the supply chain and consumers. As our chart shows, a high share of the US’ imports of various goods come from Canada, Mexico, and China. US growth expectations are being marked down. More bursts of volatility are likely over the period ahead, particularly as 2 April approaches. This is when the US is due to make its wide-ranging “reciprocal tariff” announcements.
US equities were whipsawed around overnight. After initially opening higher following Monday’s steep falls, the US-Canada trade spat saw the S&P500 decline intra-day. Sentiment briefly perked up on the back of reports the Ukraine could accept a proposal for a 30-day truce if Russia also complied, but that didn’t last with underlying macro worries returning to the driver’s seat. The S&P500 ended the session 0.8% lower. As a result, the S&P500 is now ~9.3% from its February peak with the “magnificent 7” tech stocks ~20% below their highs. Elsewhere, bond yields rose with US rates up ~6-7bps across the curve. The benchmark US 10yr yield (now ~4.28%) is hovering near its 1-year average. In FX, the USD index lost a bit of ground with the European currencies extending their upswing. EUR (now ~$1.0918) is close to the top of its 4-month range, as is GBP (now ~$1.2950) with the Ukraine headlines providing a helping hand. USD/JPY (now ~147.80) is close to its multi-month lows. NZD (now ~$0.5715) and AUD (now ~$0.6298) ticked up slightly and USD/SGD (now ~1.3304) dipped over the past 24hrs.
US CPI (11:30pm AEDT) and the Bank of Canada decision (12:45am AEDT) are due tonight, with several ECB members also speaking. The BoC looks set to cut rates again, while US inflation could show core price pressures are moderating. If realised, we think this may see the USD remain on the backfoot, though more headline volatility is possible.
Global event radar: US CPI (Tonight), BoC Meeting (Tonight), China Data (17th Mar), US Retail Sales (17th Mar), BoJ Meeting (19th Mar), US Fed Meeting (20th Mar), BoE Meeting (20th Mar)
Trans-Tasman Zone
After losing a bit of altitude at the start of the week due to the market turbulence and falls in equities, the AUD (now ~$0.6298) and NZD (now ~$0.5715) ticked up modestly over the past 24hrs. This is despite ongoing volatility stemming from headlines reality to the US’ tariffs (see above). On net, while the AUD is modestly lower so far this week, it remains above its 3-month average. On the crosses the AUD continues to put in a mixed performance. While it edged up versus the JPY (now ~93.07) and CAD (now ~0.9092) overnight, it drifted back against GBP (now ~0.4863, near the bottom of its 5-year range) and CNH (now ~4.5520).
In terms of AUD/USD, more bursts of volatility should be anticipated over the period ahead as the global economic and market ructions play out. But from a medium-term perspective we still think there is more upside than sustained downside potential for the AUD. A fair degree of negativity is already baked in with the AUD tracking ~3-4 cents below our ‘fair value’ models. The AUD has also not traded much below where it is over the past decade (AUD has been sub-$0.63 less than ~3% of the time since 2015). Underlying dynamics that cushioned the AUD down here (i.e. Australia’s improved capital flow trends and higher terms of trade) remain in place. Moreover, as discussed before, we think tariff induced export pain in China is likely to be offset via measures aimed at boosting commodity-intensive infrastructure investment. This is AUD supportive, as is Australia being one of the few nations the US runs a trade surplus with (i.e. US exports more to Australia than it imports from Australia).
AUD/EUR has extended its slide with the resurgence in the EUR on the back of the more positive sentiment regarding the Eurozone’s medium-term growth prospects because of the outlook for greater fiscal/defence spending. At ~0.5770 AUD/EUR is around levels last traded in April 2020. While the proposed EU fiscal policy ‘sea change’ is a longer-term EUR positive we believe the surge in the EUR has probably moved a little too far too fast. Our ‘fair value’ model suggests AUD/EUR should now be above ~0.59 rather than approaching ~0.5750. We would note that there are implementation risks to the proposed EU measures. German constitutional amendments need to pass parliament before 25 March. This isn’t guaranteed. On top of that, at best they will probably only start to support Eurozone activity later this year, and even then, the multiplier effect across the economy may not be that large. Shorter-term the EU is also still facing US tariff risks. The US imports ~20% of its goods from the EU (this is more than Mexico, Canada, and China). The US’ ‘reciprocal tariffs’ are due 2 April. The EU could be in the firing line. This might take some of the heat out of EUR and generate renewed support for AUD/EUR.
AUD & NZD event radar: US CPI (Tonight), BoC Meeting (Tonight), China Data (17th Mar), US Retail Sales (17th Mar), BoJ Meeting (19th Mar), US Fed Meeting (20th Mar), NZ GDP (20th Mar), AU Jobs (20th Mar), BoE Meeting (20th Mar)
AUD levels to watch (support / resistance): 0.6240, 0.6280 / 0.6330, 0.6360
NZD levels to watch (support / resistance): 0.5630, 0.5660 / 0.5750, 0.5800
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
WEDNESDAY (12th March)
EUR ECB Pres. Lagarde Speaks (7:45pm)
EUR ECB’s Villeroy Speaks (8:15pm)
EUR ECB’s Escriva Speaks (11pm)
USD CPI Inflation (Feb) (11:30pm)
EUR ECB's Centeno Speaks (11:45pm)
THURSDAY (13th March)
CAD Bank of Canada Decision (12:45am)
EUR ECB’s Nagel Speaks (12:45am)
EUR ECB’s Lane Speaks (2:15am)
EUR ECB's Panetta Speaks (3:30am)
AUD RBA’s Jones Speaks (1:30pm)
EUR ECB's Rehn Speaks (8pm)
EUR ECB’s Guindos Speaks (8:15pm)
EUR Industrial Production (Jan) (9pm)
USD PPI Inflation (Feb) (11:30pm)
USD Initial Jobless Claims (11:30pm)
FRIDAY (14th March)
EUR ECB’s Holzmann Speaks (3am)
EUR ECB’s Villeroy & Nagel Speak (4:30am)
GBP GDP – Monthly (Jan) (6pm)
EUR ECB's Escriva Speaks (8pm)
SATURDAY (15th March)
EUR ECB’s Cipollone Speaks (12:15am)
USD Uni. of Michigan Sentiment (Mar P) (1am)
*Note, all times/dates provided are AEDT
About the author
