Wells Fargo: US-China trade spat still a drag for Aussie

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Lingering trade tensions between the US and China will continue to weigh down optimism for sentiment-linked currencies such as the Australian and New Zealand dollars in the short term, according to Brendan McKenna, a currency strategist at Wells Fargo Securities, which topped last week’s one-month currency forecast tables.

“Trade linkages between these two countries and China are extremely high, and until trade uncertainty gets lifted, these currencies may continue to see downward pressures,” McKenna says.

The central banks of Australia and New Zealand are likely to stay the course on monetary policy amid this uncertainty, as signalled by the Reserve Bank of Australia’s recent decision to shift to a more neutral stance from a hawkish tilt.

Wells Fargo expects AUD/USD to trade at 0.7000 through the second quarter of this year, while NZD/USD could fall to 0.6600.

For months, Washington and Beijing have been waging a tit-for-tat trade dispute, each hiking and imposing tariffs on billions of dollars of imports from the other country. But there are signs a resolution may be near, as negotiators work to come to an agreement before March 1, when US levies on $200 billion of Chinese goods are set to rise from 10% to 25%.

“We agree that it seems as if progress is being made, which has resulted in optimism coming back to markets. Eventually, we do expect some kind of trade deal to be made between the US and China, although the likelihood [that] a deal gets made before the March 1 tariff deadline is unlikely at this point,” McKenna says.

“The details of what a potential deal will look like are highly uncertain, but, as of now, our base case is for another extension of the tariff deadline, which should boost short-term optimism in the markets a bit more and result in upside for CNY, eventually getting down to 6.68,” he adds.

We think [the] UK parliament will eventually do whatever it takes to avoid a no-deal Brexit and will eventually come to an agreement to pass a version of Theresa May’s deal

Brendan McKenna, Wells Fargo Securities

Elsewhere, Wells Fargo is eyeing further strength for sterling, amid renewed hopes that UK prime minister Theresa May will be able to overcome parliamentary roadblocks before the country withdraws from the European Union on March 29.

If Brexit uncertainty is alleviated, it could pave the way for the Bank of England to hike interest rates, which would boost the pound.

Wells Fargo projects GBP/USD will trade up to 1.3600 by the second quarter of 2020.

“We think [the] UK parliament will eventually do whatever it takes to avoid a no-deal Brexit and will eventually come to an agreement to pass a version of Theresa May’s deal,” says McKenna.

“With that said, the likelihood for an extension of Article 50 has increased substantially, and we would not be surprised if the UK asked for, and was granted, a three- to six-month extension from the EU to continue efforts for a resolution,” he adds.