Aussie straddles rapidly shifting global risks
AUD navigated another yet another challenging and news heavy week for global markets with composure, clocking a 1.6% gain Monday to Friday to close back above 0.6300.
Aussie straddles rapidly shifting global risks
AUD navigated another yet another challenging and news heavy week for global markets with composure, clocking a 1.6% gain Monday to Friday to close back above 0.6300.
In no particular order, a 25% tariff took effect on Canada and Mexico, only to be walked back a couple days later, Germany made an astonishing volte-face that will see hundreds of billions of euros in defence and infrastructure spending unleashed, while US stocks cratered under the weight of rising US growth concerns.
The week-ahead calendars are headlined by US Feb CPI, though with risks to US growth rising under the weight of elevated economic/policy uncertainty the consumer and business surveys will be heavily scrutinised too. Australia's calendar include NAB confidence and Westpac consumer sentiment.
The long awaited 25% tariffs on Canada and Mexico finally took effect early in the week, a potential watershed moment for global trade, only for President Trump to announce a 1-month reprieve a couple days later. President Trump initially postponed tariffs on automobiles and the following day expanded exemptions to include goods shipped under the US-Mexico-Canada agreement (USMCA).
This is now an increasingly familiar script for markets - aggressive tariff threats followed by policy reversal. AUD remains hyper-sensitive to tariff threats, but they are landing very differently. The broad sweep of Trump's policy proposals triggered a bearish range reset for AUD/USD last year, from the 0.6500-0.6700 area in late Oct/early Nov, to 0.6200 by year's end. But so far this year, after two rounds of tariff threats in early-Feb and again in early March, AUD/USD "upsets" are confined within what is now a mildly rising uptrend.
But the biggest development for global markets last week came out of Berlin. President Trump's decision to freeze financial and military support for Ukraine was the final straw, prompting a generational re-think in Europe's security architecture. An emergency EU summit was called and European leaders vowed to ramp up defence spending and aid to Ukraine. Germany's Chancellor in waiting Friedrich Merz said, "In view of the threats to our freedom and peace on our continent, the rule for our defence now has to be 'whatever it takes".
The usually fiscally conservative German government announced a regime change of historic proportions - EUR500bn infrastructure fund and EUR400bn for military spending. On paper that amounts to 20% of Germany's GDP over the next decade, an eye-watering amount that should comfortably drag Germany out of a period of prolonged stagnation to something a lot more dynamic. Markets took notice in a big way - European defence stocks have soared, German bund yields had their largest one-day spike since reunification (+30bp) last week, while EUR rose from below 1.03 to 1.08 in just a week.
Germany's lawmakers are scheduled to begin debating changes to the country's fiscal rules on March 13 and they have until 25 March, when a new parliament is seated. Gains by far-right and far-left parties in February's election mean they will not be able to reach a 2/3s majority to pass these historic fiscal measures after 25 March.
China's annual NPC session was held last week too. A 5% growth target was announced, considered ambitious, with a focus on AI, capital injections and local government relief. However, headlines did little to assuage fears around China's prospects. This combined with an uncomfortably low February CPI over the weekend, which showed a -0.7% annual decline, leaves markets on hold with respect to China. Stimulus has been pledged, the housing sector decline has moderated and soft survey are higher, but the hard activity and inflation data still show slack aggregate demand.
US payrolls printed near enough expectations with +151k jobs added in February. US bond yields ticked up in response and markets remain confident that the FOMC will keep rates on hold in March. While Feb payrolls reassured a bigger cloud of doubt around "US exceptionalism" remains in place. Demand for hedges against a rising dollar have fallen to the lowest levels seen since 2020.
Where does all this leave AUD-crosses? Despite AUD/USD's firmer tone, a range of AUD-crosses saw outsized bearish moves last week. AUD/EUR slumped nearly 3% last week to 0.5800, its lowest levels since the 2020 Covid-crash, as markets reappraised the region's long term outlook. AUD/GBP is also hovering at 5-year lows around 0.4900. AUD/JPY is holding in the 92-94 area, while AUD/NZD is still holding above 1.1000, just.
On the commodities front, gold traded within $2890/oz and $2930/oz, testing both extremes several times before closing at $2909.10 on Friday. OPEC has announced plans to resume oil production despite its previous claims of "oversupply in the market", sending WTI to the $66-68/bbl area.
Copper fell from 4-month highs as confusion over tariffs showed signs of hitting demand. Finally, Iron ore remained above the $100 level with signs of decent demand driven by restocking helping sentiment. China has also announced plans to slash steel production in 2025 which should see an eventual downturn in supply.
Moving to the week ahead, the Westpac-MI Consumer Confidence and NAB Business Confidence surveys will be a key focus domestically, capturing reactions to the RBA's recent 25bp rate cut. Globally, Feb US CPI (market f/c: 0.3% , Westpac f/c: 0.3%) and PPI (market f/c: 0.3%) data is expected to remain sticky.
Finally, Japan's annual Shunto wage negotiations will be key for future rate policy. With firms facing labour shortages, lobbying for higher wages may see rates hiked beyond what markets are expecting in 2025.
- Australia Mar Westpac-MI Consumer Confidence
- Australia Feb NAB Business Confidence
- US Jan JOLTS Job Openings
- US Feb NFIB Small Business Optimism
- China Feb Aggregate Financing
- Bank of Canada Rate Decision
- US Feb CPI
- 12 March US tariff deadline: 25% on Steel & Aluminium on EU
- Australia Mar MI Consumer Inflation Expectations
- Eurozone Jan Industrial Production
- US Feb PPI
- NZ Feb Food Prices
- UK Jan GBP and Industrial Production
- US Mar University of Michigan Consumer Sentiment
- Japan Preliminary 2025Wage Negotiation Outcome
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