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Protectionist trade and central bank policy announcements dominate direction

By Nick Parsons

The Australian Dollar edged marginally higher throughout the domestic session on Thursday but failed to make any meaningful forays above resistance at 0.7830. Despite a week filled with heavy hitting macroeconomic data sets and central bank policy updates political brinkmanship and trade have dominated direction and ensured the market would largely gloss over domestic trade balance data. A surprise return to surplus in January failed to provide the catalyst to drive the AUD higher as the broader consensus remained largely unchanged with a majority of analysts anticipating a return to deficit in February.

Intraday highs topped out at 0.7836 before the dollar began reversing gains enjoyed above 0.8 and slid back to touch session lows at 0.7773 and now appears to be entrenched in a broader downtrend channel. Stable resistance appears to have formed on moves approaching 0.7830 and while we remain reasonably well supported on moves approaching the weekly and year to date lows at 0.7720/30 the threat of increased protectionist trade policies and an RBA with little drive to amend accommodative monetary policy through the short term leaves the AUD vulnerable to deeper corrections.

Attentions remain strictly focused on U.S Protectionist trade policy for direction through the rest of the week as Trump’s Whitehouse seems set on introducing tariffs on steel and aluminum. The question is will there be caveats and exemptions that include Australia or is this the first step in a broader global trade war that could undermine the global economic recovery.

Much like its antipodean counterpart the New Zealand dollar edged higher throughout domestic trade on Thursday before giving up efforts to push back through 0.73 and sinking to intraday lows at 0.7246. With little macroeconomic data on hand to drive direction the Kiwi took its cues from broader risk sentiment plays and expectations surrounding global trade policy. Despite announcements a landmark Asia Pacific Trade deal was reached by 11 participants, including New Zealand, the NZD failed to hold on to upward momentum generated through trade on Wednesday. Thursday’s signing of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, while a shot in the arm to protectionist trade policy, did little to quell market concerns a global trade ware could derail the broader economic recovery and failed to bolster risk-based trade. The Trade agreement will reduce trade taxes in 11 countries that make up over thirteen percent of the worlds global economy however perhaps of greater significance is the absence of the U.S. Trumps withdrawal from the ten Trans Pacific Partnership was the first signal the current administration would push an Domestic America first platform when negotiating trade.

As we edge closer to an environment of reduced global cooperation in trade commodity currencies like the NZD and emerging markets across Asia will meet increasing downward pressures and we turn our attentions now to revision of Tariff section 232 to determine just what Trumps tariff proclamation means for the broader global economy.

The Great British Pound moved sharply lower against the USD through trade on Thursday as concerns Britain will not secure a favourable transition deal before the end of this month’s round of EU negotiations forced the unit back below 1.38. Sticking points surrounding Irish border concerns and restrictions placed on London’s financial services engine continue to delay talks. European Council President Donald Tusk remarked on Thursday that negotiations would continue to face delays if Britain could not present a realistic proposal to exit and failed to accept EU fallback proposals.

Brexit remains the key driver behind broader GBP direction through the short term and as negotiations continue to fall down the upward momentum fostered by increased optimism in December and January is undermined. Sterling continues on a softer footing and if a deal cannot be struck in the coming months then we may see a shift in expectations supporting a BoE rate hike as early as May. The possibility of tighter monetary policy to combat inflation is providing a floor under the cable at present however should Brexit negotiations break down or prove unfavourable for the UK then we may see a return to a bearish GBP outlook.

Attentions now turn to a raft of domestic macroeconomic indicators, headlined by manufacturing production, for direction through Friday with broader trends driven by ongoing Brexit talks and broader global trade moves.

The U.S dollar advanced against most major currency counterparts and forced a sell off in emerging market currencies through trade on Thursday as the threat of a global trade war escalated after President Trump signed in section 232 proclaiming an increase in tariffs on steel and aluminum. While specifics of the import duties are still to take shape the proclamation appears largely wide reaching with only Canada and Mexico appearing to enjoy exemptions at this current stage with future exemption dependent on ongoing NAFTA negotiations.

The continued advance of republican protectionist and America first policies threaten to derail the global growth recovery, especially if the latest move sparks a fully-fledged trade war as other nations and trading blocs respond. Trade wars undermine productivity and increase prices for domestic consumers reducing the impetus of consumer led growth as purchasing power diminishes. While the U.S is somewhat insulated from the impacts of such moves thanks to the power of its domestic led economy the ramifications of an all-out trade war could derail the post GFC economic recovery and force a rapid revision in expectations for tighter global monetary policy.

Attentions now turn to the global response as politics continues to dominate direction while macroeconomic pundits will shift their focus to key Non-Farm Payroll data this afternoon. A strong read will only support suggestions the U.S labour market is nearing full capacity with an uptick in average hourly earnings raising expectations for a spill over into key GDP and inflation indicators.

The Euro moved sharply lower against the USD through trade on Thursday following largely dovish commentary for ECB president Mario Draghi. The ECB elected to maintain its current monetary policy settings and despite dropping reference to an easing bias failed to outline a clear bath to removing emergency quantitative easing settings. The 19-nation combined unit tumbled 150 points touching intraday lows at 1.2299 as the ECB cited a cautious approach to future decisions on monetary policy tightening given the current low inflation environment and emerging protectionism.

Most market analysts will tell you they weren’t surprised by the ECB’s dovish undertone with many looking to April as the marker for the ECB to begin laying out plans to close out emergency monetary policy programs and announce an end to the current bond buying program in September and signal a 20-point hike in deposit rates come December. It is this optimism that has ensured the Euro remains largely well supported on moves approaching 1.22 with fair value still considered to sit anywhere between 1.26-1.30. However recent political uncertainty in Italy and increasing concerns surrounding protectionist trade policies could threaten to derail the EU and global recovery and force a revision in such expectations.

With little of note on the macroeconomic docket today we expect direction to be driven by broader risk trends and global political brinkmanship.

The Canadian dollar while edging marginally lower as oil prices continued to slip through trade on Thursday managed to stave off broad scale losses as suggestions Canada and Mexico would be exempt for US imposed tariffs on imports of steel and aluminum bolstered demand for the loonie. CAD direction has been largely driven by risk lays surrounding trade expectations this week as investors try to gauge just what this means for ongoing NAFTA negotiations.

Touching intraday lows at 0.7715 the CAD has rallied on open this morning as Trump signed section 232 proclaiming the introduction of a 25% steel tax and 10% aluminum tax on imports which would see Canada and Mexico enjoy exemptions. Recovering much of the days losses the CAD jumped half a cent to trade through 0.7750 toward resistance at 0.7775 and 0.78.

Attentions now turn to key US labour market data for direction through trade today while NAFTA negotiations remain the primary driver of broader direction. Today’s Trans Pacific trade agreement will perhaps offer some support to Canada when they next sit down and if a largely unrevised agreement can be reached then CAD upside should ensue through the medium term.