Market Briefing: Will the rebound in sentiment last?
Read the 2025 Currency Outlook from Corpay Currency Research
Positive vibes. Yesterday's news tariffs on Mexico & Canada have been delayed boosted risk sentiment & weighed on the USD. But will it last?
Tariff risks. China announced countermeasures. Risk of the US imposing tariffs on EU remains. More headline-driven volatility likely over period ahead.
AUD & NZD. AUD bounced above its 1-month average. NZD also rebounded, but higher NZ unemployment reinforces RBNZ rate cut expectations.
Global Trends
Yesterdays news that the proposed US tariffs on Mexico and Canada would be delayed by a month improved the market mood. Indeed, even news out of China that it will impose various retaliatory measures on the US, effective from 10 February, didn’t generate a lasting impact. In addition to some company specific levers being pulled China is set to implement a 15% levy on a small amount of US coal and LNG imports, a 10% fee on US oil and agricultural equipment, and export controls on a few commodities used in semi-conductors and military applications. Glass half-full markets seem to be taking the view that the more strategic approach from China may avoid escalating the situation and keeps alive the possibility of negotiations. Time will tell if this holds true. As seen over recent days sentiment can turn quickly, and bursts of volatility should be anticipated. Specifically, despite repeated threats the US still hasn’t announced any tariffs on the EU. ~19% of the US’ imports come from the EU, a larger share than what is brought across from Canada, Mexico, and China.
In terms of markets, the more positive vibes saw European and US equities push higher with the S&P500 rising ~0.7%. The tech-focused NASDAQ outperformed (+1.4%), and despite recent swings remains within 3% of its record highs. Elsewhere, US bond yields declined ~3-5bps across the curve. The positive tariff developments was compounded by news the US jobs market is still cooling. The latest JOLTS data (a gauge of labour demand closely watched by the US Fed) showed job openings fell in December, with the ‘quits rate’ (a measure of jobs churn) holding at levels indicative of slower wages and lower services inflation down the track. The pullback in US yields and improved sentiment has exerted downward pressure on the USD. USD/CAD has shed ~1.7% over the past 24hrs to be back where it was trading a week ago. EUR has edged up towards ~$1.04, GBP is just below ~$1.25, and USD/JPY is lingering around ~154.30. Closer to home, AUD (now ~$0.6258) is north of its 1-month average, while NZD (now ~$0.5650) has nudged up despite a further rise in the NZ unemployment rate.
Markets will remain subject to tariff-related headline risk over the period ahead. However, on the proviso there is no new negative tariff related stories, we think the lofty USD might continue to give back ground. A lot of positives appear to be baked into the USD at such high levels. We believe more signs the US labour market is losing steam (ADP employment is due tonight (12:15am AEDT)) could revive some US Fed interest rate cut expectations.
Global event radar: BoE Meeting (Thurs), US Jobs (Fri night), US CPI (13th Feb), US Retail Sales (15th Feb), RBA Meeting (18th Feb), RBNZ Meeting (19th Feb), Global PMIs (21st/22nd Feb)
Trans-Tasman Zone
The more positive market tone and softer USD stemming from the delay in the implementation of US tariffs on Canada and Mexico has given the AUD and NZD a boost. At ~$0.6258 the AUD is north of its ~1-month average and ~2.8% above the lows it plunged to during Monday’s turbulence. The NZD (now ~$0.5650) has also rebounded over the past few sessions, though this mornings data showing a further lift in NZ unemployment (now 5.1%, a high since COVID) could act as a handbrake as it reinforces expectations for another 50bp RBNZ rate cut later this month.
The improved market vibes has also helped the AUD on the crosses with gains of 0.3-0.9% recorded against the EUR, JPY, GBP, and CNH over the past 24hrs. At ~0.6027 AUD/EUR is now not that far from its 1-month high, and AUD/NZD (now ~1.1065) is within 1% of its cyclical peak. We believe the diverging Australia and NZ macro trends should support a higher AUD/NZD over the medium-term.
As discussed over the past few days, the recent headline driven volatility in the AUD is another reminder that the more challenging geopolitical environment should mean intra-day ranges are wider than what people have gotten used. Since the late-1980s the average daily trading range in the AUD has been ~1%. In the last 2-years the AUD’s daily trading range has only been bigger than average about ~1/3 of the time.
More intermittent bursts of volatility should be expected over the period ahead as tariff risks continue to play out. But as we have noted, what's important for markets isn’t if something is ‘good’ or ‘bad’ but rather if it is ‘better’ or ‘worse’ than what is priced in. Based on this, we continue to believe downside potential in the AUD should be somewhat limited. This is because: (a) the AUD is already trading at a discount to fundamentals (it is tracking ~4-5 cents below our ‘fair value’ models); (b) negative sentiment already appears embedded (as our shown ‘net short’ AUD positioning, as measured by CFTC futures, is stretched): (c) the AUD has not sustainably trading much below where it is in recent times (the AUD has only been sub-$0.62 ~1% of the time since 2015); (d) we think that, much like during President Trump’s first term, any tariff induced export pain in China is likely to be offset via steps to bolster commodity-intensive infrastructure investment. This is where Australia’s exports are plugged into; and (e) Australia’s export basket is rather tariff-insulated given its minimal manufacturing and with it running a trade surplus with the US. In our opinion, these factors should help the AUD pick up ground against currencies like the EUR, CAD, NZD and CNH.
AUD & NZD event radar: BoE Meeting (Thurs), US Jobs (Fri night), US CPI (13th Feb), US Retail Sales (15th Feb), RBA Meeting (18th Feb), RBNZ Meeting (19th Feb), Global PMIs (21st/22nd Feb)
AUD levels to watch (support / resistance): 0.6170, 0.6200 / 0.6290, 0.6330
NZD levels to watch (support / resistance): 0.5570, 0.5610 / 0.5690, 0.5720
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
WEDNESDAY (5th February) EUR ECB’s Villeroy Speaks (12:30am) USD JOLTS Job Openings (Dec) (2am) USD Fed’s Bostic Speaks (3am) USD Fed’s Daly Speaks (6am) NZD Jobs Report (Q4) (8:45am) JPY Labor Cash Earnings (Dec) (10:30am) USD Fed’s Jefferson Speaks (11:30am) CNY Caixin PMI – Services (Jan) (12:45pm) EUR ECB Wage Tracker (8pm)
THURSDAY (6th February) USD ADP Employment (Jan) (12:15am) EUR ECB’s Lane Speaks (1am) USD Fed’s Barkin Speaks (1am) USD ISM Services (Jan) (2am) USD Fed’s Goolsbee Speaks (6:30am) USD Fed’s Bowman Speaks (7am) USD Fed’s Jefferson Speaks (11:30am) AUD Trade Balance (Dec) (11:30am) JPY BoJ’s Tamura Speaks (12:30pm) EUR Germany Factory Orders (Dec) (6pm) USD Fed’s Waller Speaks (6:30pm) GBP Bank of England Decision (11pm)
FRIDAY (7th February) USD Initial Jobless Claims (12:30am) EUR ECB’s Nagel Speaks (3:15am)
USD Fed's Logan Speaks (9:10am)
EUR Germany Industrial Production (Dec) (6pm) EUR ECB’s Guindos Speaks (7:45pm) GBP BoE’s Pill Speaks (11:15pm)
SATURDAY (8th February) USD Jobs Report (Jan) (12:30am) CAD Jobs Report (Jan) (12:30am) USD Fed’s Bowman Speaks (1:25am) USD Uni. of Michigan Sentiment (Feb P) (2am) USD Fed’s Kugler Speaks (4am)
*Note, all times/dates provided are AEDT
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