USD Weakness Persists, But Trade War Fears Weigh on AUD

China’s Services PMI Rises, but Domestic Demand Struggles Persist

China’s Caixin Services PMI rose to 51.4 in February, surpassing expectations and signaling continued expansion in the services sector. Despite the improvement, weak domestic demand remains a significant headwind for economic growth.

Services Sector Sees Modest Growth Amid Policy Support

The latest PMI data reflects a mixed picture for China’s economy. While new business growth slightly accelerated, it remained below historical averages, indicating ongoing consumer caution. Export orders, however, surged to a three-month high, suggesting stronger global demand for Chinese services. Additionally, employment conditions improved as companies expanded staffing for the first time in three months.

Optimism within the sector reached its highest level since November, with firms expecting improved business conditions throughout the year. A notable decline in input prices—the first since June 2020—allowed businesses to pass cost savings onto consumers, potentially supporting future demand.

Market Reaction: Hang Seng and AUD/USD Respond to PMI Data

Financial markets reacted swiftly to the PMI report. The Hang Seng Index initially climbed to 23,514 before retracing to 23,294 as investors reassessed China’s economic trajectory. Despite stimulus measures, concerns about sluggish domestic consumption weighed on sentiment.

The Australian dollar also weakened in response to the data, with AUD/USD falling from 0.62587 to a post-report low of 0.62465. China’s economic outlook remains a key driver for the Aussie dollar, as uncertainty over Beijing’s stimulus effectiveness and U.S. trade policies add to market volatility.

What’s Next? U.S. Trade Policy and Market Sentiment

Investors are now shifting their focus to potential U.S. tariff policy adjustments. Reports suggest President Trump may ease tariffs on Canada and Mexico, raising speculation about possible trade relief for China. A rollback could lift market sentiment, benefiting risk assets like the Hang Seng Index and the Australian dollar.

However, any signs of escalating trade tensions or retaliatory measures could dampen investor confidence, reinforcing cautious positioning in Asian markets. As global economic conditions evolve, traders will be closely monitoring policy developments and economic indicators for further direction.

USD Weakness Persists, But Trade War Fears Weigh on AUD

The US dollar extended its decline on Tuesday, with the US Dollar Index (DXY) falling below 106.00 for the first time since December. US bond yields continued their downtrend across the curve, reflecting ongoing concerns about the US economy.

However, the Australian dollar (AUD) failed to capitalize on early gains, struggling near the 0.6240-0.6250 range as risk sentiment remained fragile. A slight rebound in the USD and renewed worries about US tariffs on China and other trade partners pressured the AUD lower.

Trade Tensions in Focus: AUD at Risk

Trade disputes continue to dominate market sentiment. The US imposed fresh tariffs, including a 25% duty on Canadian and Mexican imports and a 20% tariff on Chinese goods starting Tuesday. This escalation raises concerns about global trade disruptions, particularly affecting Australia’s commodity-driven economy due to its reliance on Chinese demand.

While recent Chinese business activity data was positive, investors remain skeptical about a sustained economic recovery, keeping the AUD vulnerable.

Central Banks & Inflation: What’s Next?

The Federal Reserve’s next steps remain uncertain, with market participants weighing the potential inflationary effects of rising tariffs. If inflation picks up, the Fed may adopt a more hawkish stance, limiting further downside for the USD.

Meanwhile, the Reserve Bank of Australia (RBA) recently cut rates by 25 basis points to 4.10% but stressed that this was not the beginning of an easing cycle. Officials see inflation at 2.7%, and Governor Michele Bullock has signaled that further rate cuts will depend on economic data.

Commodities Provide No Support

The AUD’s performance is closely tied to commodity prices, particularly iron ore and copper, which both extended their declines on Tuesday. With weaker demand from China, the AUD remains under pressure.

Key Events Ahead

Traders will watch Australia’s economic calendar closely, with upcoming releases including:

• S&P Global Services PMI & Ai Group Industry Index
• Q4 GDP Growth Rate (March 5)
• Balance of Trade & Housing Data (March 6)

With trade tensions rising and key data ahead, volatility in the AUD/USD pair is likely to persist.

USD/JPY Struggles Near 150.00 as Trade Tensions Intensify

The USD/JPY pair pared early gains on Wednesday, hovering near the 150.00 mark as uncertainty surrounding Trump's new tariffs fueled risk aversion. The Japanese Yen (JPY) strengthened as investors sought safe-haven assets, further pressuring the pair.

Trade War Fears Weigh on USD

Markets remain on edge following Trump’s announcement of additional tariffs, including:

• 10% tariffs on Chinese imports, citing concerns over drug imports.
• 25% tariffs on Canada and Mexico, escalating trade tensions within North America.

China retaliated with tariffs on key US agricultural imports, intensifying the global trade war narrative. This uncertainty weighed on Wall Street, with the S&P 500 dropping over 2% on Monday, and led to increased volatility in FX markets.

Fed Rate Cut Bets Rise

Amid weaker US economic data, expectations for a Fed rate cut in June have surged to 86%, up from 71% last week, according to the CME FedWatch Tool. The US Dollar Index (DXY) slipped near 106.00, marking its lowest level in nearly three months, further pressuring USD/JPY.

Japanese Yen Strengthens on BoJ Rate Hike Expectations

The Japanese Yen remains well-supported as speculation builds that the Bank of Japan (BoJ) could hike interest rates again in 2024. Recent data showed:

• Net long positions in JPY futures jumped to 96K contracts as of February 25—the highest in over 30 years.
• BoJ Deputy Governor Uchida hinted at further policy adjustments if forecasts align, reinforcing hawkish expectations.

Technical Outlook: Key Levels to Watch

• Support: 149.50 / 148.40 (Five-month low)
• Resistance: 150.50 / 151.00

While the pair struggles to hold above 150.00, sustained risk aversion and growing BoJ rate hike bets could push USD/JPY lower in the near term.