USD up as the US policy on steel and aluminium tariffs looks to be watered down; EUR has underperformed as the ECB dropped its easing bias; NZD nudge down to around 0.7260 on USD strength

By Jason Wong

The USD has made some broadly-based gains as the US policy on steel and aluminium tariffs looks to be watered down, while EUR has underperformed following the ECB announcement and for the same reason global bond rates are lower.

The focus overnight was the ECB’s policy update. As many expected, the ECB dropped its easing bias, removing the pledge to increase the asset purchase programme if economic conditions deteriorate, a further step in the progression of communication to end the programme entirely. However, in the press conference President Draghi, wary of adding further fuel to EUR, which had nudged up to a 3½-year high this week on a TWI basis, talked a dovish game. He downplayed the removal of the easing bias, indicated that inflation remained subdued and that policy would be “reactive not proactive”, and warned that trade protectionism presents a new downside risk.  Our view on the policy outlook remains unchanged, seeing the ECB making further communication tweaks in the months ahead, culminating in ending QE sometime between September and December, before moving to rate rises sometime in 2019.

EUR initially rose after the announcement on the removal of the easing bias but then fell away sharply as Draghi spoke.  From a high of 1.2446, EUR has fallen down to 1.2315.  This has seen NZD/EUR trade (roughly) a 0.5840-0.59 range.

A risk-on tone developed early yesterday as Trump’s spokeswoman hinted of potential tariff carve-outs for some countries. It looks like US steel and aluminium tariff policy will temporarily exempt Canada and Mexico, with extensions possible depending on NAFTA negotiations.  This announcement boosted CAD and supported equity markets through the Asian session.  The S&P500 opened stronger but is now flat for the session.

The key on tariffs will be the extent of retaliation from the EU and China.  Yesterday, China’s foreign minister vowed a “justified and necessary response” to any efforts to incite a trade war, the government’s strongest response to the proposed tariffs.  Yesterday we reported on some suspected bad maths by Trump as he tweeted that he was looking for a $1 billion reduction in the US trade deficit with China.  That suspicion has proved correct, as the WSJ reports that the White House is asking Beijing for a plan to cut the annual deficit with China by $100 billion, so Trump missed off a couple of zeros.  In 2017 the US trade deficit with China was $375 billion.  Yesterday, China’s trade balance reported for February was way above market expectations, but the figures appear to be distorted by the timing of Chinese New Year.

The USD has managed to show some broadly based support in overnight trading.  This sees the NZD nudge down to around 0.7260, down 30pips or so from the 0.7290 level near the NZ close.  There hasn’t been a great deal of movement in the crosses, with NZD/AUD largely tracking sideways, NZD/GBP slightly higher and NZD/JPY slightly lower.  The recovery in CAD sees NZD/CAD near 0.94.

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