Market Briefing: Signal versus noise
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Holding on. Yesterdays tariff headlines didn't trigger a lasting market impact. Equities pushed higher, bond yields consolidated, & AUD rebounded.
Macro impulses. In addition to tariff news markets will be focused on Fed Chair Powell's testimony tonight. US Fed looks to be in no rush to cut again.
Tariff news. AUD outperformed overnight. There are indirect headwinds but AU's export basket looks rather tariff-insulated. US runs a trade surplus with AU.
Global Trends
Markets look to have taken the latest US trade tariff news in their stride. As outlined yesterday, the US is reportedly set to impose 25% tariffs on all imports of steel and aluminium, with broader reciprocal measures also in the pipeline. This is where the US imposes tariffs on imports that are equal to rates trading partners impose on US exports. More concrete tariff announcements are anticipated over coming days. But in terms of the steel and aluminium measures we would note that while these products grab headlines, they aren’t a big share of the pie. On our figuring, steel, iron products, and aluminum only equate to ~2% of US goods imports.
With respect to overnight moves global equities pushed higher with the major indices across Europe and the US rising ~0.4-1%. Bond markets have also been well behaved with only modest adjustments coming through. While bond yield across Europe ticked down ~1-3bps, US yields consolidated. Although there were the tariff related headlines yesterday there was limited new news on the broader economic front that shifted the dial with respect to interest rate expectations. In FX, the USD index nudged up with slim gains recorded against GBP (now ~$1.2365), EUR (now ~$1.0305) and the JPY (USD/JPY is now ~152) over the past 24hrs. Elsewhere, NZD drifted lower (now ~$0.5640) however the AUD bucked the trend and more than unwind yesterday morning's knee-jerk dip (now ~$0.6278).
In our opinion, the ongoing threat and likelihood of more US trade tariffs being imposed is a factor that can keep the USD supported. This might also be compounded by US economic impulses. Ahead of the latest read on US CPI inflation (Weds night AEDT), US Fed Chair Powell is testifying to US Congress tonight (2am AEDT). We think Chair Powell should reiterate that policymakers aren’t in a hurry to cut interest rates again and have time to watch the data. Markets are not fully discounting another US Fed rate cut until September. The higher for longer US interest rate outlook is another factor that is USD positive. Though, as our chart shows, with sentiment/positioning already ‘bullish’ it may be more of a case of the USD holding up at lofty levels rather than strengthening further.
Global event radar: Fed Chair Powell (Tonight/Weds night), US CPI (Weds night), US Retail Sales (Fri night), RBA Meeting (18th Feb), RBNZ Meeting (19th Feb), Global PMIs (21st/22nd Feb)
Trans-Tasman Zone
Yesterday morning’s burst of volatility and dip in the AUD on the back of headlines about US tariffs on steel and aluminium didn’t last (see above). While the NZD has remained on the backfoot (now ~$0.5640), the AUD rebounded (now ~$0.6278) with outperformance on the crosses providing a helping hand. AUD/EUR (now ~0.6092) has pushed up towards the top of its ~6-week range. AUD/GBP is approaching its 100-day moving average (~0.5078), AUD/JPY recouped a little lost ground (now ~95.43), and AUD/NZD (now ~1.1128) is within 0.5% of its cyclical peak.
Ahead of next weeks RBA decision, where a 25bp rate cut is ~91% factored in, the latest reads on consumer confidence (10:30am AEDT) and business conditions (11:30am AEDT) are due. The latter provides a timely guide on underlying economic trends and will be an input in the RBA’s thinking. That said, we doubt it will generate much lasting impact on the AUD given the global focus on US trade policy.
In terms of aluminium and steel, despite the press headlines, it should be remembered that exports by Australia of these products to the world equates to only ~A$6.5bn/year. This is ~1% of total exports. The quantity sent to the US is even smaller. As shown in the chart below, annual steel and aluminum exports to the US are less than ~$1bn (or just ~0.2% of Australia’s total exports). As we have flagged repeatedly, Australia’s export basket appears 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). This, in our opinion, should help the AUD outperform currencies like the EUR, CAD, NZD, and CNH over the period ahead.
Moreover, beyond short-term volatility stemming from US tariff headlines or comments by US Fed Chair Powell during tonight’s testimony (2am AEDT), we believe downside potential in the AUD should be constrained. This is because: (a) the AUD is trading at a discount to fundamentals (it is ~4 cents below our ‘fair value’ models); (b) sentiment is already bearish (‘net short’ AUD positioning, as measured by CFTC futures, is elevated): (c) the AUD has not sustainably traded below where it is over the past decade (the AUD has only been sub-$0.62 ~1% of the time since 2015); and (d) we think tariff induced export headwinds in China are likely to be offset via measures aimed at boosting commodity-intensive infrastructure investment. This is where Australia’s exports are plugged into.
AUD & NZD event radar: Fed Chair Powell (Tonight/Weds night), US CPI (Weds night), US Retail Sales (Fri night), RBA Meeting (18th Feb), RBNZ Meeting (19th Feb), Global PMIs (21st/22nd Feb)
AUD levels to watch (support / resistance): 0.6200, 0.6220 / 0.6300, 0.6330
NZD levels to watch (support / resistance): 0.5590, 0.5620 / 0.5690, 0.5720
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
TUESDAY (11th February)
AUD Consumer Confidence (Feb) (10:30am)
AUD Business Conditions (Jan) (11:30am)
GBP BoE’s Mann Speaks (7:45pm)
USD NFIB Small Business Optimism (Jan) (10pm)
GBP BoE Governor Bailey Speaks (11:15pm)
WEDNESDAY (12th February)
USD Fed’s Hammack Speaks (12:50am)
USD Fed Chair Powell Speaks (2am)
USD Fed’s Williams Speaks (7:30am)
AUD New Home Lending (Q4) (11:30am)
EUR ECB’s Elderson Speaks (9pm)
THURSDAY (13th February)
USD CPI Inflation (Jan) (12:30am)
USD Fed Chair Powell Speaks (2am)
GBP BoE’s Greene Speaks (2am)
USD Fed’s Bostic Speaks (4am)
EUR ECB’s Nagel Speaks (4am)
CAD Bank of Canada Meeting Minutes (5:30am)
USD Fed's Waller Speaks (9:05am)
NZD 2yr Ahead Inf. Expectations (Q1) (1pm)
GBP GDP (Q4) (6pm)
EUR Industrial Production (Dec) (9pm)
FRIDAY (14th February)
USD PPI Inflation (Jan) (12:30am)
USD Initial Jobless Claims (12:30am)
EUR ECB’s Nagel Speaks (4am)
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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