Market Briefing: Tariff sabre rattling
Have a look at the latest edition of our Event Radar & Views In A Nutshell pack
Tariff news. Threats of increased US tariffs on the EU rattled nerves on Friday. US President Trump pushed out the deadline this morning.
FX trends. US growth challenges & policy uncertainty weighs on USD. AUD & NZD edge higher. AUD & NZD also outperform on the crosses.
Event Radar. RBNZ expected to cut rates (Weds). AU monthly CPI due (Weds). US PCE deflator released (Fri). Several US Fed members speaking
Global Trends
Market nerves were shaken on Friday during the US trading session after President Trump rattled the ‘Tariff Sabre’ once again. The EU and Apple were in President Trump’s line of fire and this dampened sentiment. According to President Trump the EU are “very difficult to deal with”. And because trade talks “are going nowhere” a 50% tariff on goods imported from the EU, starting on 1 June, was threatened. In terms of Apple, pressure on the tech giant to secure more US production was also ramped up with President Trump warning that it may face a tariff of at least 25% if phones aren’t manufactured domestically.
As our chart shows, the EU is the US’ largest trading partner and single biggest source of US goods imports. However, in more positive news this morning, President Trump agreed to extend the EU tariff deadline to 9 July. This is in line with when the 90-day ‘pause’ on the reciprocal tariffs on the US’ broader trading partners (excluding China) is due to expire.
In response to the Friday news equities declined (the US S&P500 shed 0.7% taking its weekly fall to 2.6%) and bond yields gave up ground, though the benchmark US 10yr rate still rose over the week (now ~4.51%). In FX, the USD index slipped back with USD/JPY dipping to ~142.60 (the bottom-end of its May range) and EUR edging higher (now ~$1.1367). The AUD (now ~$0.6497) and NZD (now ~$0.5987) outperformed. This morning’s announcement that the EU tariff deadline had been pushed out into early-July has lifted the mood with US equity market futures opening positively. We think this may continue over today’s trade given the lack of important releases and with the US and UK enjoying a long weekend.
Global event radar: RBNZ Meeting (Weds), US PCE Deflator (Fri), China PMIs (Sat), EZ CPI (3rd June), US ISM (3rd June), AU GDP (4th June), US Jobs (6th June)
Trans-Tasman Zone
On the back of the weaker USD stemming from the perceived negative US economic implications from the threatened increase of EU import tariffs the AUD and NZD jumped up at the end of last week (see above). At ~$0.5987 the NZD is above its 1-year average and within ~0.6% of its year-to-date high, while the AUD (now ~$0.6497) is hovering around the upper-end of its 6-month range. The AUD also outperformed on the crosses with gains of ~0.4-0.8% recorded against the EUR, JPY, GBP, CAD, and CNH on Friday.
The bounce back in the AUD after the modest knee-jerk dip after last week’s RBA rate cut and ‘dovish’ headlines is in line with our long-held view that there is strong fundamental support around current levels and that USD headwinds are building. In our opinion, the USD looks set to trend lower over the medium-term due to the growth challenges the US is facing from the high import duties and potential shift in capital flows away from the US because of lingering policy uncertainty and/or more attractive ‘valuations’ elsewhere. This should, in our opinion, help the AUD grind higher over time. We believe macro and monetary policy trends should also remain in the AUD’s favour with the RBA embarking on a modest and gradual easing cycle. This in turn can generate relative strength against other currencies such as the EUR, NZD, JPY, and CAD. We think this might be on show once again this week with the monthly Australia CPI indicator (released Weds) at risk of bucking consensus predictions looking for a further cooling in inflation due to a seasonal pick up in holiday travel prices over Easter.
Across the Tasman, the RBNZ also meets this week (Weds). Another 25bp rate cut is widely anticipated with all surveyed economists forecasting further easing and interest rate markets assigning a ~98% chance of a move. Outcomes compared to expectations matter in markets. With this in mind we think the softer USD trend may override an as anticipated RBNZ result and this might see the NZD nudge up a little further in the near-term.
AUD & NZD event radar: AU Monthly CPI (Weds), RBNZ Meeting (Weds), US PCE Deflator (Fri), China PMIs (Sat), EZ CPI (3rd June), US ISM (3rd June), AU GDP (4th June), US Jobs (6th June)
AUD levels to watch (support / resistance): 0.6380, 0.6450 / 0.6520, 0.6550
NZD levels to watch (support / resistance): 0.5880, 0.5920 / 0.6040, 0.6090
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
MONDAY (26th May) No major scheduled events
TUESDAY (27th May) EUR ECB Pres. Lagarde Speaks (12:30am) EUR France CPI (May) (4:45pm) EUR ECB’s Villeroy Speaks (5pm) USD Fed’s Kashkari Speaks (6pm) USD Durable Goods Orders (Apr P) (10:30pm) USD Fed’s Barkin Speaks (11:30pm)
WEDNESDAY (28th May) USD Consumer Confidence (May) (12am) EUR ECB’s Nagel Speaks (2am) USD Fed’s Williams Speaks (10am) AUD CPI Inflation – Monthly (Apr) (11:30am) AUD Construction Work (Q1) (11:30am) NZD RBNZ Decision (12pm) NZD RBNZ Press Conference (1pm) USD Fed’s Kashkari Speaks (6pm)
THURSDAY (29th May) USD FOMC Meeting Minutes (4am) NZD RBNZ Gov. Speaks (7:10am) NZD Business Confidence (May) (11am) AUD CAPEX (Q1) (11:30am) USD Initial Jobless Claims (10:30pm) USD Fed’s Barkin Speaks (10:30pm)
FRIDAY (30th May) USD Fed’s Goolsbee Speaks (12:40am) USD Fed’s Kugler Speaks (4am) USD Fed’s Daly Speaks (6am) NZD Consumer Confidence (May) (8am) JPY Tokyo CPI Inflation (May) (9:30am) JPY Industrial Production (Apr P) (9:50am) USD Fed’s Logan Speaks (10:25am) AUD Building Approvals (Apr) (11:30am) AUD Retail Sales (Apr) (11:30am) EUR Spain CPI (May) (5pm) EUR ECB’s Panetta Speaks (6:30pm) EUR Germany CPI (May) (10pm) CAD GDP (Q1) (10:30pm) USD PCE Deflator (Apr) (10:30pm) USD Chicago PMI (May) (11:45pm)
SATURDAY (31st May) CNY PMIs (May) (11:30am)
*Note, all times/dates provided are AEST
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