The Australian and New Zealand dollars saw a significant rebound following a sharp recovery in global stock markets after U.S. President Donald Trump decided to pause most of his reciprocal tariffs. However, Trump’s announcement that tariffs on Chinese goods would increase to 125% raised concerns for both countries, particularly Australia, which is heavily dependent on trade with China.
The Australian dollar gained 3.3% overnight, marking its largest daily increase in 15 years, and rose to US$0.6121, recovering from a five-year low of US$0.5912. Despite this, it remains 2.7% lower than its value on April 2, when Trump had announced tariffs on a broad range of global imports, causing significant disruption in markets.
Similarly, the New Zealand dollar also experienced a bounce, climbing 2.1% overnight to US$0.5636, though it eased slightly by 0.2% thereafter. It had previously fallen to a five-year low of US$0.5485 and now faces resistance at US$0.5650.
The unexpected reversal of Trump’s tariff policies, which provided a 90-day reprieve for most countries, triggered a sharp rally in U.S. stocks and a decline in Treasury yields. As a result, financial analysts adjusted their outlooks for future rate cuts by the Reserve Bank of Australia (RBA). Deutsche Bank revised its previous forecast of a half-point rate cut to a smaller 25 basis point reduction, acknowledging a decreased need for urgent action in light of improved market sentiment.
However, National Australia Bank still expects a half-point cut in May, with additional rate reductions anticipated through the middle of the year, bringing the RBA’s terminal rate to 2.6%.
Despite the positive impact on the currencies, concerns persist for Australia as Trump’s plans to raise tariffs on Chinese goods could intensify trade tensions. These concerns are particularly critical for Australia, given its trade reliance on China. In response to these uncertainties, Australian bonds were sold off, with government bond futures falling 10 ticks to 96.67, though they have risen significantly in recent weeks as markets anticipate more aggressive monetary easing by the RBA.
Swaps markets now fully price in a 25 basis point rate cut in May, with some risk of a larger 50 basis point move, and further rate cuts are expected over the course of the year.
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