Market Briefing: Art of the (temporary) deal
Have a look at the latest edition of our Event Radar & Views In A Nutshell pack
De-escalation. US/China agree to roll back 'reciprocal' tariffs for 90-days while they negotiate a deal. Equities jump up. USD firmer. AUD loses ground.
Positive steps. The moves are a short-term positive & help lessen the risks the US/China were facing. But longer-term challenges remain.
USD trends. USD may edge up a bit further in response to the news. But we think this may not last with medium-term US headwinds still in place.
Global Trends
As outlined yesterday the mood music after the weekend trade talks between US and China officials sounded quite positive, and there was a further substantial de-escalation in the trade war overnight. Both sides agreed to slash the very high ‘reciprocal’ tariffs put in place in tit-for-tat fashion over the past month. For the next 90-days, while further negotiations take place, the US will reduce its prohibitive ‘reciprocal’ tariffs on Chinese imports from 145% to 30%, while China will lower its retaliatory tariffs on imports from the US from 125% to 10%. The moves have been taken well by markets as they: (a) signal that the two sides are willing to strike a more long-lasting deal; and (b) reduce the more acute downside growth / upside inflation risks the US was facing.
US equities powered ahead with the NASDAQ (+4.4%) and S&P500 (+3.3%) up strongly. The moves extended the recovery that has taken place over recent weeks and have pushed up the S&P500 to levels last seen in early-March. Bond yields also rose with US Fed interest rate cut expectations reduced. The US 2yr rate increased 12bps (now ~4.01%) while the benchmark 10yr rate is 9bps higher (now ~4.47%). The reduction in near-term US macro risks and higher bond yields supported the USD. The interest rate sensitive USD/JPY appreciated ~1.5% (now ~148.37) and EUR fell under ~$1.11 for the first time in a month. The NZD shed ~1.1% (now ~$0.5855) and although the AUD also lost ground (now ~$0.6370) outperformance on some of the cross-rates helped cushion the impact.
This is a step in the right direction that may see the USD (which is still tracking below our ‘fair value’ model estimate) edge higher over the near-term, especially versus the EUR and JPY. However, we still think the US and the USD are facing medium-term headwinds. A closer look at the detail shows that only ~1/2 of the imports from China were captured by the nose-bleed level ‘reciprocal’ tariffs because of exemptions and carve-outs for specific goods. Hence, based on China’s share of overall US trade we estimate that only ~7% of the US total imports are impacted by the latest news. On our figuring, although the US’ ‘effective tariff rate’ (i.e. the weighted average across imports from all nations) is in a better spot than it was, it may not fall that much further from what is still a historically high level (see chart below). The higher levy on US imports continues to pose a challenge that should ultimately weigh on US economic activity. If realised this points to the USD’s downtrend re-asserting itself over time, in our opinion, once the short-term adjustment runs its course.
Global event radar: US CPI (Tues), US Retail Sales (Thurs), JP GDP (Fri), China Activity Data (19th May), RBA Meeting (20th May), RBNZ Meeting (28th May)
Trans-Tasman Zone
The further de-escalation in the US/China trade war and perceived reduction in US economic risks has supported sentiment and the USD (see above). This has dragged down the NZD (now ~$0.5855) which is now tracking between its 50- and 200-day moving averages. The AUD also lost ground (now ~$0.6370), although the strong rise in equities and reduction in global growth concerns helped it outperform other currencies such as the JPY (+0.7%), EUR (+0.3%) and NZD (+0.3%). That said, the AUD has also weakened versus the CNH (-1.2% to ~4.5860) given the positive implications for China’s outlook.
The pull-back in AUD/USD is in line with our thoughts from the past week or so which were pointing to the prospect of the beaten down USD rebounding on the back of a potential improvement in US/China trade relations. As outlined above, we think the upturn in the undervalued USD might have a bit further to run in the near-term, and this may see the AUD slip back a little more, particularly if the incoming Australian wages (Weds) and/or jobs report (Thurs) underwhelm consensus expectations. This is where we feel the risks reside with the employment data.
That said, as also flagged, we believe this should be a short-term phenomenon with retracements in the AUD unlikely to be too deep and/or last too long. In our view, the USD’s upswing shouldn’t extend that far and the medium-term downturn is likely to reassert itself over the period ahead given the ongoing growth challenges the US is facing from the still historically high import duties. Added to that, we think the AUD may garner support from relative strength against other currencies such as the EUR, NZD, JPY, and CAD because of diverging policy impulses between the RBA and other central banks, the resilience in the Australian economy, and moves by authorities in China to offset lingering headwinds in its export sector via steps to boost domestic activity. This is where Australia’s key exports are plugged into.
AUD & NZD event radar: US CPI (Tonight), AU Wages (Weds), AU Jobs (Thurs), US Retail Sales (Thurs), JP GDP (Fri), China Activity Data (19th May), RBA Meeting (20th May), RBNZ Meeting (28th May)
AUD levels to watch (support / resistance): 0.6320, 0.6360 / 0.6420, 0.6520
NZD levels to watch (support / resistance): 0.5780, 0.5810 / 0.5920, 0.6020
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
TUESDAY (13th May) AUD Consumer Confidence (May) (10:30am) AUD Business Conditions (Apr) (11:30am) GBP Jobs Report (Mar/Apr) (4pm) EUR ECB’s Escriva Speaks (5pm) EUR ECB’s Makhlouf Speaks (6pm) GBP BoE’s Pill Speaks (6:45pm) EUR Germany ZEW Survey (May) (7pm) USD NFIB Small Bus. Optimism (Apr) (8pm) USD CPI Inflation (Apr) (10:30pm)
WEDNESDAY (14th May) GBP BoE Governor Bailey Speaks (1am) EUR ECB’s Knot Speaks (1am) NZD Card Spending (Apr) (8:45am) AUD Wages (Q1) (11:30am) GBP BoE’s Breeden Speaks (5:05pm) EUR ECB’s Nagel Speaks (6pm) USD Fed’s Waller Speaks (7:15pm) USD Fed’s Jefferson Speaks (11:10pm)
THURSDAY (15th May) EUR ECB’s Holzmann Speaks (12am) USD Fed’s Daly Speaks (7:40am) AUD Jobs Report (Apr) (11:30am) GBP GDP (Q1) (4pm) EUR ECB’s Guindos Speaks (8:15pm) USD Retail Sales (Apr) (10:30pm) USD PPI Inflation (Apr) (10:30pm) USD Initial Jobless Claims (10:30pm) USD Fed Chair Powell Speaks (10:40pm) USD Industrial Production (Apr) (11:15pm)
FRIDAY (16th May) USD NAHB Housing Index (May) (12am) GBP BoE’s Dhingra Speaks (12am) USD Fed’s Barr Speaks (4:05am) JPY GDP (Q1) (9:50am) NZD 2yr Ahead Inf. Expectations (Q2) (1pm) JPY BoJ’s Nakamura Speaks (2pm) USD Housing Starts/Building Permits (Apr) (10:30pm) USD Import Prices (Apr) (10:30pm)
SATURDAY (17th May) USD Uni. Michigan Sentiment (May P) (12am) GBP BoE’s Lombardelli Speaks (1am) EUR ECB’s Lane Speaks (1am)
*Note, all times/dates provided are AEST
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