Market Briefing: EU on the defensive
Have a look at the latest edition of our Event Radar & Views In A Nutshell pack
EU spending. Signals about more EU defence spending boosted the EUR. This has weighed on the USD & indirectly given the AUD some support.
Tariffs. US tariffs on imports from Canada, Mexico, & China kicked off. China & Canada announced retaliatory measures. Pres. Trump speaks today.
AU data. Q4 GDP due today. Partial indicators suggest growth momentum improved. RBA easing cycle to be slow & limited. China's NPC also starts.
Global Trends
Geopolitical developments continue to push and pull markets. Global equity market losses extended overnight, with larger falls coming through in Europe compared to the US (EuroStoxx600 -2.1% vs S&P500 -0.5%), as tariff developments generate slower growth/higher inflation concerns. Reflecting this yield curves generally steepened. In terms of trade, as was flagged, 25% tariffs on US imports from Canada and Mexico, and an additional tariff on goods from China (now 20%) officially kicked off. And as promised, China and Canada retaliated, although the former is still taking targeted and measured steps. Canada will implement a 25% tariff on CAD30bn of US imports, with an extra CAD125bn of US goods impacted in three weeks’ time. Ontario will also impose a 25% tariff on power it sends to US states. China looks to be lasering in on US agriculture with 10-15% tariffs announced on things like soybeans, pork, beef and grains. Other non-tariffs measures, including the adding of 15 US companies to an export control list and 10 US companies to an “unreliable entity” list, were unveiled. Mexico stated it will respond on Sunday.
That said, in FX the USD index lost ground. FX is a relative price and what is going on outside of the US matters. And there have been positive fiscal developments in Europe that have propelled the EUR (the major USD alternative) higher (now ~$1.0615, a high since early-December). In reaction to the pullback of US security from Europe, the EU Commission proposed extending €150bn in loans to boost regional defence spending and will active a mechanism allowing countries to spend an additional €650bn on defence over four years without triggering budget penalties. The total figure equates to ~5% of EU GDP. In Germany, leaders of the new coalition are looking at the largest and fastest fiscal policy shift in post-unification history with a €500bn infrastructure fund and reforms to the nations debt brake if spending is geared towards defence being discussed. Elsewhere, GBP was also supported (now ~$1.2797, the top of its multi-month range), while the USD slipped back against the JPY (now ~149.33). USD/CNH (now ~7.2548), USD/SGD (now ~1.3390), and USD/CAD (now ~1.4471) also declined. The NZD (now ~$0.5652) and AUD (now ~$0.6256) rose.
As our chart shows, the USD index continues to follow a similar path to what happened in the first year of President Trump’s first term. While trade tariffs are being implemented more quickly this time out, other broader macro trends such as improving expectations about non-US growth (i.e. Europe) are similar. Today, US President Trump is due to address Congress (from 1pm AEDT) and in China the annual National People’s Congress starts. More rhetoric about trade tariffs is likely. However, based on what is happening in Europe in terms of fiscal/defence spending, and with a lot of positives still baked into the USD, we believe it may continue to fall (much like it did 8-years ago).
Global event radar: China NPC (from today), ECB Meeting (Thurs night), US Jobs Report (Fri night), US Fed Chair Powell Speaks (Sat), US CPI (12th Mar), BoC Meeting (13th Mar), 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 US tariffs on Canada, Mexico, and China formally kicking off, the USD has fallen back with positive fiscal developments in Europe (which are growth supportive for the region) a factor (see above). This has generated a bit of renewed support for the AUD (now ~$0.6256) and NZD (now ~$0.5652). On the crosses, the AUD has consolidated against GBP (now ~0.4891, towards the bottom of its multi-year range), while AUD/NZD is hovering near its 50-day moving average (~1.1072). And although the AUD ticked up a bit against the JPY (now ~93.43), the upswing in the EUR has exerted more downward pressure on AUD/EUR (now ~0.5895, a low since last-August).
Today, in addition to US President Trump’s address to Congress (from 1pm AEDT) and headlines from China’s National Party Congress, Q4 Australian GDP is released (11:30am AEDT). In our opinion, the partial data already out suggests there are upside risks to consensus predictions looking for growth momentum to have quickened from 0.3%qoq to 0.6%qoq in Q4. If realised, a pick up in activity into year end should reinforce thoughts that the RBA will be ‘cautious’ when it comes to further interest rate cuts. As RBA Deputy Governor Hauser outlined this morning it is still “too soon” to declare victory when it comes to inflation. We agree, and based on the resilient labour market, only a modest amount of interest rate relief from the RBA appears likely.
On balance, while more headline driven AUD volatility is probable near-term, as discussed before, we believe there are uneven risks down around current levels (i.e. there is more upside than sustained downside potential). Outcomes versus expectations drive markets, and a fair degree of negativity looks factored into the AUD. The AUD continues to trade at a discount to fundamentals (it is ~4 cents below our ‘fair value’ models), sentiment is ‘bearish’ (‘net short’ AUD positioning, as measured by CFTC futures, is elevated), the AUD has not traded much below where it is over the last decade (the AUD has only been sub-$0.6250 ~2% of the time since 2015), and the RBA should lag its peers during the policy easing cycle. Added to that, when it comes to tariffs, much like during President Trump’s first term, we believe export headwinds in China might be offset via measures aimed at boosting commodity-intensive infrastructure investment (this is where Australia’s exports are plugged into). We could get more signals about this during China’s NPC. Australia’s export basket also looks rather tariff-insulated given it is 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: AU GDP (Today), China NPC (from Today), ECB Meeting (Thurs night), US Jobs Report (Fri night), US Fed Chair Powell Speaks (Sat), US CPI (12th Mar), BoC Meeting (13th Mar), 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): 0.6130, 0.6170 / 0.6270, 0.6300
NZD levels to watch (support / resistance): 0.5520, 0.5570 / 0.5670, 0.5710
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
WEDNESDAY (5th March) AUD RBA Dep. Gov. Hauser Speaks (8:45am) AUD GDP (Q4) (11:30am) JPY BoJ Dep. Gov. Uchida Speaks (12:30pm) CNY Caixin PMI – Services (Feb) (12:45pm) USD Pres. Trump Address to Congress (1pm)
THURSDAY (6th March) USD ADP Employment (Feb) (12:15am) GBP BoE Governor Bailey Speaks (1:30am) USD ISM Services (Feb) (2am) USD Fed’s Beige Book (6am) CNY National People's Congress (no set time) NZD Volume of Buildings (Q4) (8:45am) AUD Building Approvals (Jan) (11:30am) AUD Trade Balance (Jan) (11:30am)
FRIDAY (7th March) EUR ECB Decision (12:15am) USD Initial Jobless Claims (12:30am) EUR ECB President Lagarde Speaks (12:45am) USD Fed’s Waller Speaks (7:30am) CNY National People's Congress (no set time) USD Fed’s Bostic Speaks (11am) CNY Trade Balance (Feb) (no set time) EUR Germany Factory Orders (Jan) (6pm) EUR ECB’s Lagarde, Nagel, Knot & Panetta Speak (8:30pm)
SATURDAY (8th March) USD Jobs Report (Feb) (12:30am) CAD Jobs Report (Feb) (12:30am) USD Fed’s Bowman Speaks (2:15am) EUR ECB’s Centeno & Kazaks Speak (2:45am) USD Fed’s Williams Speaks (2:45am) USD Fed’s Kugler Speaks (4:20am) USD Fed Chair Powell Speaks (4:30am) USD Fed’s Kugler Speaks (5am)
*Note, all times/dates provided are AEDT
About the author
