Synopsis:
ING argues that markets may be underestimating the risks of a prolonged US-China trade conflict, keeping downside risks in place for AUD and NZD. While optimism has grown after the US border deal with Canada and Mexico, tariffs on China allow Trump to negotiate on his own timeline, meaning that risks for AUD and NZD remain skewed to the downside.
Key Points:
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Markets Are Pricing in a US-China Trade Deal Too Quickly
- The measured response by China to Trump’s tariffs has fueled market optimism.
- However, Trump has indicated he’s in no rush to engage with President Xi Jinping.
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AUD/USD Has Fully Erased Its Risk Premium
- AUD/USD – often used as a proxy for China sentiment – no longer reflects trade war concerns.
- This may be premature, as tariffs on China are not as immediately impactful as those on Canada and Mexico, allowing Trump to extend negotiations.
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Downside Risks for AUD and NZD
- The market is pricing in a deal, but ING believes it is still too early to rule out a more prolonged US-China trade conflict.
- With Trump having time to negotiate and China’s retaliatory tariffs set to take effect on January 10, the risks remain for a lower AUD and NZD.
Conclusion:
Despite recent optimism, ING remains cautious on AUD and NZD, warning that markets may be too quick to price out US-China trade risks. With Trump in no rush to negotiate, the balance of risks remains tilted lower for AUD and NZD, especially if trade tensions escalate further.
