Markets sees receding risks of an escalating US-China trade war; higher risk appetite means a stronger USD; NZDUSD met some resistance around 0.7320 yesterday afternoon and has fallen away since down to 0.7270

By Jason Wong

The USD is broadly stronger as markets take a more optimistic view on US-China trade tensions, while US rates drift higher against a backdrop of a further recovery in equities.

The market sees receding risks of an escalating US-China trade war, helping US equities extend their recovery yesterday.  White House trade advisor Navarro said that top government officials between the two countries will be in talks before any new tariffs are imposed.  Trump’s key economic advisor Kudlow spent a second day doing media interviews to hose down any major concerns about a possible trade war and arguing that there would be a negotiated solution, saying “it’s nothing around the corner…there’s going to be big discussion about it”.

There are also more positive signs of an imminent NAFTA trade agreement.  Canada’s PM Trudeau said that NAFTA talks are “moving forward in a significant way”.  This followed reports the US had softened its stance on a key NAFTA demand regarding North American content in car manufacturing.

Not helping the cause for the US back down on its trade rhetoric was data showing that the US trade deficit widened for the sixth consecutive month and by more than expected to a fresh 9-year high in February, driven by import demand.  On other data releases, final euro-area PMI data confirmed that growth momentum in the region had slowed.  A big miss to the downside for the UK services PMI was put down to bad weather as the “beast from the east” affected economic activity.

A receding of trade tensions sees improving risk appetite but in this case with the US at the centre of concern, higher risk appetite in this context means a stronger USD.  It has risen across the board over the last 24 hours and in overnight trading, although CAD has managed to keep pace given more hope of a re-negotiated NAFTA deal.  USD/CAD is flat around 1.2770 while NZD/CAD has fallen to its lowest level in a month to around 0.9270.

NZD/USD met some resistance around 0.7320 yesterday afternoon and has fallen away since down to 0.7270.  The “lower highs” pattern seen over the past couple of months still supports the view that a modest downward channel is in play, although it’s not significant enough to be overly confident about this pattern (yet) as the currency has more or less been in a range-trading environment for much of this year.

Moves on the crosses (apart from NZD/CAD) haven’t been significant as most currencies haven fallen against the USD by similar amounts.  So NZD vs AUD, JPY, EUR and GBP are all plus or minus 0.1-0.2% for the day.

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