Market Briefing: Tariffs & inflation
Have a look at the latest edition of our Event Radar & Views In A Nutshell pack
Improved sentiment. After a difficult spell risk appetite improved a little overnight. US equities rose, as did bond yields. AUD & NZD edged higher.
Tariff news. After the US confirmed tariffs on steel & aluminium imports the EU unveiled countermeasures. Canada also announced more steps.
US CPI. Inflation cooled in the US. This supported risk markets. But the data doesn't yet capture impacts from higher duties on US imports.
Global Trends
Global trade tensions remain an underlying focus for markets, but despite more tit-for-tat moves over the past 24hrs fragile risk sentiment improved a little after data showed US inflation eased. As mentioned yesterday the US confirmed 25% tariffs on its steel and aluminium imports were coming into effect. Despite the headlines this isn’t that substantial as these products account for less than 2% of US goods imports. Nevertheless, in response, the European Union unveiled countermeasures on €26 billion worth of US imports that will kick off in April. Canada also announced additional counter-tariffs. We think further headline driven 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. The EU could be in the US’ line of fire given ~20% of US imports come from the region and European nations have high VAT/GST rates. This is something the Trump Administration thinks creates an unfair advantage as exporters to the US receive a rebate when products cross national borders, while US imports are taxed because VAT/GST is charged when items are purchased.
After the torrid spell US equities rose in choppy trade overnight, led by the tech-sector (NASDAQ +1.2%, S&P500 +0.5%). That said, it only partially unwinds recent losses with the S&P500 nearly 9% from its February peak. Bond yields were also a bit volatile intra-day but ended slightly higher with the US 10yr rate ticking up ~3bps (now ~4.31%). In FX, the USD Index edged up with higher US bond yields supporting USD/JPY (now ~148.23) and EUR drifted back (now ~$1.0890) following its strong upswing. Elsewhere, CAD strengthened after the Bank of Canada delivered another interest rate cut but was more cautious about the prospect of future easing due to uncertainty about what the trade war could mean for growth and inflation. The improved risk appetite helped NZD (now ~$0.5731) and AUD (now ~$0.6320) nudge up.
Data wise the February reading of US CPI showed price pressures cooled. Headline inflation slowed to 2.8%pa, a 4-month low, and core CPI dipped to 3.1%pa, rates last seen in 2021. The primary source of the downside miss was volatile airline fares. The data is old news and is yet to pick up the impact of the US’ tariffs. Next months release should show some effects from the initial extra duties placed on imports from China. Further out, based on the signal from business surveys, there could be renewed upward pressure on goods prices. While we believe the USD should lose ground over the medium-term, signs inflation is re-accelerating could generate intermittent bouts of USD supportive market volatility.
Global event radar: 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
Despite concerning developments around US/global trade, the relative improvement in risk sentiment in the wake of the slight downside surprise in US inflation has helped the AUD (now ~$0.6320) and NZD (now ~$0.5731) tick up over the past 24hrs. The AUD is back above its 4-month average, with a partial rebound on some of the crosses also providing a helping hand. The backdrop helped the AUD strengthen by ~0.6% against the EUR, JPY, and CNH, while it recorded more modest gains versus GBP (+0.3%) and NZD (+0.2%).
As discussed previously, looking past the media hype, the broader direct macro impact from tariffs being imposed on Australian steel and aluminium exports to the US is negligible. Aluminium and steel only equate to ~4% of Australia's exports to the US, and given the US isn't a large trading partner, these products account for ~0.2% of Australia’s total exports. In 2023 Australia shipped A$830mn worth of aluminium and steel to the US. To give some context, that's equivalent to just over 2 days worth of Australian iron ore exports.
We remain of the view that more short-term bursts of AUD volatility are likely over the period ahead as the global economic and market ructions play out, particularly as 2 April approaches. This is when the US will make its broader ‘reciprocal tariff’ announcements. But from a medium-term perspective we believe there is more upside than sustained downside potential for the AUD. A fair degree of negativity already looks baked in with the AUD running ~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-$0.6350 less than ~4% of the time since 2015). The structural underlying forces that have cushioned the AUD down around current levels (i.e. Australia’s improved capital flow trends and higher terms of trade) remain in place. Moreover, as mentioned 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 given this is where Australia’s key exports are plugged into. Australia is also in a relatively favourable position tariff-wise given it is 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 & NZD event radar: 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): 0.6220, 0.6260 / 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
THURSDAY (13th March)
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
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