Market Briefing: Upbeat end to the week
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Positive vibes. Equities rise, yields fall. USD loses ground. Favourable US PPI & geopolitical/tariff news support sentiment. AUD & NZD lift.
Tariff news. 'Reciprocal' US tariffs in the pipeline. Likely to be formally announced by 1 April. Markets breathe a short-term sigh of relief.
Macro events. US retail sales due tonight. Next week the RBA & RBNZ meet. Rate cuts expected by both, though the RBNZ should be more aggressive.
Global Trends
There were a few more pockets of headline-driven volatility overnight. But on balance, risk sentiment has been positive with favourable data and geopolitical developments coming through. Equities have risen with Europe (EuroStoxx50 +1.8%) outperforming the US (S&P500 +1%). Bond yields fell, unwinding the bulk of yesterday’s spike higher with US rates declining ~5-9bps across the curve. In FX, the USD index shed some ground with the EUR (now ~$1.0460, a 2-week high) and the JPY strengthening (USD/JPY slipped down to ~152.80) on the back of the decline in bond yields. GBP also rose (now ~$1.2558, the top end of its 1-month range), as did NZD (now ~$0.5673) and AUD (now ~$0.6315), though they lagged the other major currencies.
Macro wise, although headline US Producer Price inflation was stronger than predicted, the bits and pieces that flow into the US PCE Deflator (the US Fed’s preferred inflation gauge) such as portfolio management fees and hospital services were benign. These eased the inflation fears rekindled by yesterday’s US CPI report. In the UK, Q4 GDP was slightly better than forecast with the economy expanding by a meagre 0.1% compared to predictions looking for a contraction. Markets are fully pricing in the next Bank of England rate cut by June, while the timing for another US Fed move was brought forward with a 25bp reduction discounted by October (it had shifted out to December after the US CPI).
Continued reaction to moves towards a US-driven Russia/Ukraine peace deal also underpinned sentiment. This partially helps explain the EUR’s strength and European stockmarket gains. It was also visible in commodities with European gas prices extending their slide (now ~13% below Mondays peak). Also hitting the wires were fresh US trade tariff announcements. As had been hinted at, US President Trump directed his trade reps to investigate and propose “reciprocal tariffs”. The process should be completed by 1 April, and according to comments they may also look to offset non-tariff barriers such as subsidies, value-added taxes, and other regulations. As our chart shows, on a purely tariff-for-tariff basis, reciprocal measures don’t appear to be as substantial as feared, especially considering the pre-election Trump rhetoric. The broader scope does create uncertainty; however, it also means there is time for negotiations, particularly on big ticket items such as the trade of vehicles between the US and EU.
Markets breathed a 'glass half-full' sigh of relief given the delayed start date of the proposed measures and the potential for deals to be struck. In our view, traders looked to have fallen into the same trap as after the first Trump victory in 2016, whereby they too aggressively factored in the policy agenda into the USD but the bite ultimately wasn’t as bad as the bark. A solid US retail sales report (12:30am AEDT) can give the USD a little support, but on net, we believe the USD (which is already tracking above our models) is biased to unwind more of its Trump risk premium over coming weeks.
Global event radar: US Retail Sales (Tonight), RBA Meeting (18th Feb), RBNZ Meeting (19th Feb), Global PMIs (21st/22nd Feb)
Trans-Tasman Zone
AUD (now ~$0.6315) and NZD (now ~$0.5673) have perked up a bit over the past 24hrs. The positive risk sentiment stemming from softer US PPI data, the prospect of an end to the Ukraine/Russia war, and delayed US tariff measures have taken more heat out of the USD (see above). However, NZD and AUD have lagged their peers. As a result, the AUD has underperformed a little on the crosses with modest falls of ~0.1-0.4% recorded against the CAD, CNH, EUR, and GBP. AUD/JPY was a relatively larger mover (-0.6% to ~96.50), though that comes after the outsized jump up yesterday.
While short-term headline-driven volatility is likely to continue for a while, our general underlying thesis looks to be playing out. As outlined over recent weeks, in our 2025 outlook, and above, we thought markets may have gotten ahead of themselves, as they did after the 2016 Trump victory, with too much positivity factored into the USD and too much negativity baked into the AUD. Indeed, as we often state, what's important for markets isn’t if something is ‘good’ or ‘bad’ but rather if it is ‘better’ or ‘worse’ than what’s priced in.
Based on this framework we continue to feel downside potential in the AUD should be constrained, and that a further modest grind higher can come through (as our chart shows, the AUD is following a similar path to what happened during the first Trump term). This is because: (a) the AUD is tracking at a discount to fundamentals (it is ~4 cents below our ‘fair value’ models); (b) sentiment is bearish (‘net short’ AUD positioning, as measured by CFTC futures, is elevated); (c) an RBA rate cutting cycle looks well priced (a move next Tuesday is ~90% discounted, and although we expect it to deliver relief for indebted mortgage holders we also think it will stress future moves are data dependent); and (d) 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).
Added to that, when it comes to trade tariffs, much like during President Trump’s first term, we believe export headwinds in China are likely to be offset via steps to bolster commodity-intensive infrastructure investment (this is where Australia’s exports are plugged into). And despite the media hype Australia’s export basket looks 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).
AUD & NZD event radar: US Retail Sales (Tonight), RBA Meeting (18th Feb), RBNZ Meeting (19th Feb), Global PMIs (21st/22nd Feb)
AUD levels to watch (support / resistance): 0.6200, 0.6260 / 0.6330, 0.6380
NZD levels to watch (support / resistance): 0.5590, 0.5620 / 0.5680, 0.5720
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
FRIDAY (14th February)
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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