Market Briefing: Tariffs & economic risks
Have a look at the latest edition of our Event Radar & Views In A Nutshell pack
US risks. ISM manufacturing index underwhelmed. Pres. Trump reiterated that tariffs on imports from Mexico, Canada, & China kick in tomorrow.
Risk sentiment. Backdrop weighed on US yields & equities. AUD/USD holding its ground, but AUD underperformed the EUR, GBP, & JPY.
Volatility. More bursts of market volatility likely. Several global & domestic risk events are scheduled over the rest of this week.
Global Trends
Diverging regional performance across markets overnight. In Europe, efforts to forge a Ukraine/Russia peace plan and the prospect of greater regional defence spending supported equities (particularly the aerospace and defence sector), pushed up bond yields ~4-9bps, and helped the EUR outperform (now ~$1.0475, towards the upper end of its year-to-date range). By contrast, more disappointing US economic data raised further concerns about growth momentum. The bellwether US ISM manufacturing gauge slipped back with ‘stagflation’ vibes coming through. New orders and employment intentions fell into ‘contractionary’ territory and prices paid jumped up with respondents pointing to ‘sweeping price increases’ from suppliers because of tariffs and labour costs. This was compounded by US President Trump’s comments that there is “no room left” for a deal with Canada and Mexico and that 25% tariffs will commence as planned on 4 March. President Trump also reiterated that tariffs on imports from China will double to 20% tomorrow. In response Canadian officials stated they have prepared a package of counter-tariffs while yesterday media reports indicated China was studying its response.
The combination of factors dampened risk sentiment as the US session rolled on. The S&P500 shed ~2.1%, with the tech-focused NASDAQ underperforming (-2.6%). US bond yields declined 3-5bps with the 10yr rate extending its pullback (now ~4.16%, a low since early-December). And oil lost ground (WTI crude -2%) after OPEC+ announced they will begin to slowly ratchet up production in April. In FX, the uptick in the EUR, a firmer JPY on the back of the bout of risk aversion, and modest appreciation in GBP weighed on the USD. There was some intra-day volatility, but on net the NZD (now ~$0.5606) and AUD (now ~$0.6208) are little changed compared to this time yesterday. That said, USD/CAD rose (now ~1.4535), as did USD/CNH (now ~7.3011) and USD/MXN with confirmation tariffs will be imposed on their exports to the US dragging on the respective currencies.
As our chart shows, Canada (~76%) and Mexico (~83%) send a high share of their exports to the US, and this direct trade accounts for a fair chunk of domestic activity. By comparison, China only sends ~15% of its exports to the US, with exports not as big of a driver of its economic fortunes as some other nations. As mentioned yesterday, based on the upcoming event calendar more bursts of market volatility should be anticipated. In addition to US tariffs against Mexico, Canada and China kicking off, President Trump is also due to address Congress (Weds AEDT). The US jobs report (Fri night AEDT) is set to be released later in the week with Fed Chair Powell speaking on the outlook (Sat AEDT). In China, the annual National People’s Congress is also scheduled (from Weds AEDT). On balance, we think the USD, which has priced in a lot of positives, is biased to gradually deflate, similar to the pattern displayed during the first year of President Trump’s first term.
Global event radar: China NPC (from Weds), 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
The push and pull macro and geopolitical forces that came through in the European and US trading sessions overnight generated a bit of intra-day AUD and NZD volatility. But, on balance, the AUD (now ~$0.6208) and NZD (now ~$0.5606) are little changed compared to where they were 24hrs ago. That said, expectations of greater defence spending across Europe and higher bond yields exerted more downward pressure on AUD/EUR (now ~0.5927, a low since early-August) and AUD/GBP (now ~0.4893, levels last traded in April 2020). The environment also supported the JPY, and this has kept AUD/JPY on the backfoot (now ~92.80, a multi-month low). By contrast, AUD/CAD edged a bit higher (now ~0.9024) while AUD/CNH and AUD/NZD consolidated.
As mentioned before, given the environment we are in wider intra-day ranges in currencies like the AUD should be expected for some time. Since the late-1980s the average daily trading range in the AUD has been ~1%, but in the last 2-years it has only been above average about ~1/3 of the time. Participants may have forgotten about AUD’s volatility. Since the turn of the year AUD/USD has traded in a ~5.3% range, however on net, it isn’t that far from where it ended 2024 (see chart below).
Based on the upcoming events more volatility looks likely. As flagged, US tariffs on imports from Canada, Mexico, and China will start on 4 March, President Trump is scheduled to give a speech to Congress (Weds AEDT), the monthly US jobs report is due (Fri night AEDT), and US Fed Chair Powell discusses the outlook (Sat AEDT). In China, the National People’s Congress takes place (from Weds AEDT), while in Australia Q4 GDP and a speech by RBA Deputy Governor Hauser are on the run sheet (both Weds AEDT).
In our judgement, while more AUD volatility is probable, we believe there are uneven risks down around current low levels (i.e. there is more upside than sustained downside potential). Outcomes versus expectations drive markets, and a fair degree of negativity appears factored into the AUD. The AUD is still trading 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), and 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). Moreover, when it comes to tariffs, much like during President Trump’s first term, we believe export headwinds in China could be offset via measures aimed at boosting commodity-intensive infrastructure investment (this is where Australia’s exports are plugged into). And Australia’s export basket also looks 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).
AUD & NZD event radar: AU GDP (Weds), China NPC (from Weds), 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 / 0.6260, 0.6290
NZD levels to watch (support / resistance): 0.5520, 0.5570 / 0.5650, 0.5690
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
TUESDAY (4th March) AUD Current Account Balance (Q4) (11:30am) AUD Net Exports (Q4) (11:30am) AUD Retail Sales (Jan) (11:30am) AUD RBA Meeting Minutes (11:30am)
WEDNESDAY (5th March) USD Fed’s Williams Speaks (6:20am) CNY National People's Congress (no set time) 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
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