AUSSIE BONDS: Risk Induced Bull-Steepener, Light Local Calendar Ahead Of US Payr

RBA Deputy Governor Hauser spoke at the AFR Business Summit on uncertainties around global trade and the domestic labour market. He said that while unchanged rates resulted in a “modest undershoot” of the band mid-point over the forecast horizon, the timing of the cut was driven by judgement on the risks which had shifted with greater downside risks to inflation from trade uncertainties but lower upside risks to inflation. 

• He said that there has been progress in bringing inflation back to the band but that the RBA can’t declare victory yet. He also identified productivity growth as the key issue which monetary policy can’t do anything about and can only react to. It may be the reason for lower wage growth despite the tight labour market.
• Hauser noted that as Australia increased rates less than others, it will then reduce them by less too. But it began easing at around the same point from target as other countries.
• The RBA is alert to the possibility of labour market overheating but is unclear as to the level of spare capacity, as it is unusual to have strong jobs growth with subdued activity. It may reflect the gap between non-market and market employment gains.
• While Australia has little direct trade exposure to the US compared to most other countries, its growth will be negatively impacted through indirect effects. The RBA is unsure if a trade war has actually begun, but it will monitor the situation closely for what it means for Australia. Its scenario analysis suggests that it will be ambiguous for inflation.
• There are many things that still need to be made clear, including retaliatory measures and the FX response. As a result, a trade scenario wasn’t included in the RBA’s February base case. So far the equity risk premium has been very low but has adjusted recently.
• The uncertainty alone is a problem with the Fed estimating it reduced global growth 1pp in 2019 and Hauser thinks it could be larger this time. 

• RES 3: 97.190 - High May 5 2023
• RES 2: 96.730/932 - High Sep 17 / 76.4% of Mar-Nov ‘23 bear leg 
• RES 1: 96.360 - High Dec 11  
• PRICE: 96.330 @ 16:14 GMT Mar 4
• SUP 1: 95.900 - Low Jan 14  
• SUP 2: 95.760 - Low 14 Nov ‘24
• SUP 3: 95.480 - Low Jan 11 2023 and a major support

Prices rallied alongside global bonds Tuesday, prompting a further recovery from recent lows. On the upside, an extension higher would signal scope for 96.360, the Dec 11 high. Clearance of this level would open 96.730, the Sep 17 ‘24 high. On the downside, a reversal lower from current levels would signal a resumption of the downtrend. A deeper sell-off would refocus attention on 95.760, the 14 Nov ‘24 low. 

USD/CNH tracks near 7.2535 in early Wednesday dealings. CNH gained nearly 0.70% for Tuesday's session, as broader USD sentiment faltered. Concerns over the US economic outlook weighed on dollar sentiment, although US Tsy yields recovered from earlier lows (the 10yr yield rebounding around 15bps as Tuesday's session unfolded). USD/CNY spot finished up at 7.2639, while the CNY CFETS basket tracker slipped 0.16% to 100.016. 

• For USD/CNH, we are back sub the 100-day EMA (near 7.2615). Tuesday lows were at 7.2487. On the downside we have the 200-day EMA (7.2384). The 20 and 50-day EMAs sit back in between 7.2765-7.2800.
• China's response to the recent US tariff increased was described as measured. Effective from March 10, China will impose a 15% tariff on chicken, wheat, corn, and cotton imported from the U.S, and a 10% duty on sorghum, soybeans, pork, beef, aquatic products, fruits, vegetables, and dairy products, the Ministry of Finance said in a statement.
• This may have helped CNH at the margin in the sense it is designed not to escalate tensions with the US. Remarks from Trump on Monday around devaluing of the yuan and JPY may also be in play (as the market speculates the authorities will keep the yuan stable to slightly firmer to avoid trade conflict escalation).
• Comments from US Commerce Secretary Lutnick around potential tariff compromise with Mexico and Canada aided the CAD and MXN, but China wasn't mentioned in great detail in the remarks.
• In US trade, the Golden Dragon index rose 1.95%, its first gain in 4 sessions. Yesterday the headline CSI 300 index was close to unchanged.
• On the data front today we have the Caixin PMI services (and composite read) for Feb. The market forecast is a 50.7 read for services (prior was 51.0).