US equities managed to trend higher through the course of the day, ending up 0.5%; US 10-year yields reversed the previous day’s fall; USD remained on a softer trajectory; NZD closed the week at around 0.7240

By Jason Wong

US equities (S&P500) opened weaker on Friday, following on from Trump’s tariff-induced swoon on Thursday, but managed to trend higher through the course of the day ending up 0.5%.  US 10-year yields reversed the previous day’s fall, while the USD remained on a softer trajectory.

Trump’s indication on Thursday that he’d look to impose a 25% tariff on US steel imports and 10% for US aluminium imports remained the focus of attention for markets on Friday and that theme is likely to linger as the new week begins.  Trump received widespread rebuke from a range of stakeholders, include US trading partners, manufacturers, the IMF and fellow Republicans.

The details of the tariff policy are expected to be released this week or next, and while there might have been some hope of a back-down, Peter Navarro, Trump’s trade advisor, has indicated that exemptions for countries or regions allies such as Canada and Europe won’t be exempt.  The direct impact of these tariffs on the economy will be small but the concern is that this is the beginning of a global trade war and the economic impact could snowball.  The European Commission’s Juncker said that the EU is prepared to respond forcefully, naming a number of products for which it could retaliate.  Trump responded by saying that he’d retaliate with tariffs on European car imports if that was the case.  China is barely impacted by the proposed tariffs and this was reflected in its fairly muted official response that it urged the US to follow trade rules.

For the day, all the key USD indices were lower, ranging from being down 0.1% to 0.4%, with the CAD’s underperformance explaining much of the difference, given its different weight across the various indices.  Canada would be the biggest loser from US steel tariffs, with the country being the top supplier of US steel imports and investors were likely probably taking a negative view on NAFTA negotiations from here.  USD/CAD reached its highest level this year, breaking through 1.29, before closing just under that mark.

The NZD was largely a by-stander and drifted higher through the Asian trading session, to a high of 0.7280, extending its non-fundamentally driven outperformance.  However its fortunes reversed and from the period after the NZ close, the NZD dollar ended up being the worst performing of the majors, closing the week around 0.7240. A nasty global trade war, while not our central forecast, would be negative for the NZD to the extent that we’d see a negative impact on global growth, commodity prices and risk appetite.

NZD/AUD reached a high of 0.9380 near the NZ close, before falling away and closing the week at 0.9330.

USD/JPY fell to as low as 105.25 following remarks from the BoJ’s Kuroda.  He said that the central bank would start thinking about how to complete it unprecedented monetary stimulus around the fiscal year beginning April 2019, the same time it expects to reach its 2% inflation target.  He has previously refused to comment on any exit strategy. Earlier in the day Japan’s unemployment rate dropped to 2.4%, much lower than expected, and the lowest rate since 1993.  USD/JPY closed the week at 105.75 while NZD/JPY fell to 76.5.  The 76 mark represents a key area of technical support.

UK PM May’s widely anticipated Brexit speech contained a bit more realism than previous missives, explicitly acknowledging that leaving the EU implied costs to the UK economy and would hit trade, commenting that “this is a negotiation—no one can have exactly what they want.”  The speech seemed to satisfy the key members of the Conservative party that span the pro and anti-Brexit spectrum, while the EU’s Barnier welcomed the clarity the speech provided.   There was little market reaction to the speech, with GBP closing the week near 1.38 and NZD/GBP near 0.5250.

EUR closed the week on a stronger note, around 1.2320, a reflection of USD weakness. Yesterday in Germany the SPD party voted to approve joining a Merkel-led coalition government, ending months of political uncertainty.  This might give EUR a little boost to start the week.  The polls for the Italy’s general election close soon and the first exit poll should be delivered around 11am this morning.  The likely result is a hung Parliament, with the 5-star movement gaining the most seats but unable to form a majority government.  This sort of political gridlock is par for the course for the country.

In the bond market, US 10-year Treasuries reversed the previous day’s fall, which looked to be an over-reaction to the tariff announcement, with the yield up 6bps to 2.86%.  Against a backdrop of lower US rates in the previous session, falls across the NZ curve on Friday were modest, with the 2-year and 10-year swaps down 1bp and the 10-year government rate only down 2bps.  Demand for NZ bonds from offshore investors appears to have moderated given the low historical spreads to the US.

The week ahead is looking busy with policy meetings for the RBA, ECB and BoJ.  A number of Fed speakers are on the circuit and the week culminates with the key US employment report.  The NZ calendar is uneventful by comparison, with only some dated indicators that will firm up Q4 GDP figures for next week.  The US non-manufacturing composite is the key release today in the overnight session, but global trade issues will remain at the forefront of mind for the market as the new week kicks off.

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