Written by Steven Dooley, Head of Market Insights, and Shier Lee Lim, Lead FX and Macro Strategist
China, Canada and Mexico in focus for tariffs
The Australian dollar and Chinese yuan were the hardest hit APAC currencies yesterday as president-elect Donald Trump warned that he was planning to introduce new tariffs on China, Canada and Mexico.
Yesterday’s tariff warnings were more unusual because they were centred on forcing these countries to take action on non-trade policies – around drug- and human-trafficking – rather than to manage competitiveness in goods and services.
The initial market reaction saw sharp losses in trade-exposed currencies. The AUD/USD plunged 1.1% before later rebounding to finish down 0.5%.
The USD surged in North America with the USD/CAD up 0.5% as it hit four-year highs while USD/MXN jumped 1.7% to hit the highest level in two years.
CNY lowest in four months as China warns on trade
A senior Chinese diplomatic representative Liu Pengyu cautioned that economic confrontations would harm all parties involved, responding to recent statements about potential new trade measures.
The comments came after announcements of possible additional 10% duties on Chinese products, linked to concerns about illegal drug trafficking.
The Chinese spokesperson emphasized their nation’s commitment to combating narcotics, pointing to recent bilateral agreements and enforcement actions. They strongly rejected accusations about China’s role in the movement of drug-related chemicals.
Financial markets reacted to the trade tension news immediately, with the Chinese currency weakening to 7.2730 against the dollar, with USD/CNH its highest level in four months.
As per the chart below, rate differentials also support CNY weakness.
Aussie CPI, RBNZ due
Looking forward, the Australian monthly inflation report, due at 11.30am AEDT, will be key.
Lower gasoline prices, reduced travel and lodging expenses, and low rent inflation should all be highlighted in the October CPI index. The semi-annual tax indexation, however, should also result in increased tobacco costs, and base effects are expected to raise the annual CPI inflation rate.
The “trimmed mean” inflation metric will receive the majority of our focus since they serve as the source data for the whole Q4 CPI, which is expected to be released in late January.
The AUD/USD negative outlook has worsened since 13 November, after the pair i) broke decisively below ~0.6500, ii) diverged from the lower Bollinger with iii) milder negative momentum. We remain more about the AUDUSD and consider recoveries to be corrective.
Also clearly in a downtrend, with key moving averages pointing lower, the NZ dollar is poised for today’s Reserve Bank of New Zealand decision. The NZD/USD fell to one-year lows yesterday.
The RBNZ is expected to cut rates by 50bps at the decision at 2.00pm NZDT (12.00pm AEDT).
Trade-exposed FX hit
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 25 – 30 November
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
