Australia, New Zealand dollars stumble as Donald Trump fires up trade frictions

The United States government shutdown had also ended when Democrats agreed to end the standoff in exchange for President Donald Trump's Republicans promising a debate on the future of young illegal immigrants. The deal lasts until February 8.

United States President Donald Trump. (AP Photo)

The Australian and New Zealand dollars took a small step back on Tuesday after news of US tariffs sparked fears of a global trade war, offseting upgrades to the world growth outlook and a deal to re-open the US government. Risk sentiment took a knock when President Donald Trump slapped steep tariffs on imported washing machines and solar panels, in what might only be the first of several potential trade restrictions.

While the tariffs were not aimed directly at Australian goods, the country is heavily reliant on free trade and particularly of commodities that fuel global supply chains. As a result the Aussie dropped back to $0.7997, from a top of $0.8029. The currency had already run into offers above $0.8030 and needs to end a day above the $0.8000 barrier to keep its recent uptrend going. “A break of the high would suggest a run toward the top of the current uptrend channel at $0.8060. If that breaks, the 81 cent level is in the frame,” said Greg McKenna, chief market strategist at FX provider AxiTrader.

“Then above that is the 2017 high,” being a top touched in September around $0.8125. The Aussie had being doing well after the IMF upgraded its global economic outlook to growth of 3.9 percent for this year and next, against 3.7 percent previously. The US government shutdown had also ended when Democrats agreed to end the standoff in exchange for President Donald Trump’s Republicans promising a debate on the future of young illegal immigrants. The deal lasts until Feb. 8.

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All of which proved to be bullish for risk trades, equities and commodities, but bearish for sovereign bonds. Australian government three-year bond futures were off a tick at 97.705 and only just above their lowest since late 2015. The 10-year contract eased 0.5 ticks to 97.1300, while the cash yield stood at 2.58 percent and near its highest since October. The New Zealand dollar also had a see-saw session, rising to a four-month peak of $0.7355 before the tariff news pulled it down to $0.7325.

New Zealand investors remain in wait-and-see mode until fourth-quarter consumer price index figures are released on Thursday. Median forecasts are for a 0.4 percent rise in consumer prices for the December quarter, leaving annual inflation running at a tame 1.9 percent. Anything softer would only reinforce expectations the Reserve Bank of New Zealand will not be hiking rates for many more months to come, and could undermine the kiwi.

New Zealand government bonds eased, sending yields 1.5 basis points higher at the long end of the curve.

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