Australia, NZ dollars mugged as proxies for tariff, China risks

By Wayne Cole

SYDNEY, Feb 28 (Reuters) - The Australian and New Zealand dollars were in retreat on Friday as the spectre of imminent U.S. tariffs and a potential global trade war hammered export-exposed currencies, wiping out a month of gains in just a handful of sessions.

Not only did President Donald Trump reiterate that levies on Mexico and Canada would start next week, but he also flagged another 10% duties on imports from China.

The Asian giant is the biggest market for the Antipodeans' resource exports, leaving them vulnerable to any policies that might hurt demand there.

That makes the Aussie a liquid proxy for China risk, with investors globally selling it when the yuan is under pressure.

"The downside risks in a tariff war are clearly on display and a move sub $0.60 is plausible if escalation continues," said Tapas Strickland, head of market economics at NAB.

"And it still feels as if the market is nowhere near pricing in the full probability of tariffs, let alone their potential impact," he added. "We await news on Chinese retaliation, and there are evident depreciation pressures for the yuan with reports of China tightening up capital controls."

The tide of selling left the Aussie washed up at a three-week low of $0.6231 AUD=D3, having dived 1.1% overnight and 2.0% for the week. There is some support under $0.6230 ahead of $0.6089, a five-year trough hit at the start of the month.

The kiwi dollar was down at $0.5625 NZD=D3, having also shed 2.0% for the week so far. It has chart support around $0.5600 and the recent $0.5517 low.

The Reserve Bank of Australia has repeatedly warned the tariffs would be a drag on world growth, and thus on an already struggling domestic economy.

Data due next week are expected to show gross domestic product rose a moderate 0.5% in the December quarter, helped by tax cuts and government spending, but annual growth would still be a meagre 1.2%.

Also out are minutes of the RBA's February meeting which should offer more detail on why it decided to cut the cash rate a quarter point to 4.10%, while also warning that further easing was dependant on progress in inflation. 0#AUDIRPR

Markets currently imply a scant chance it will cut again at the next meeting on April 1, but a 68% probability of a move in May assuming inflation data for the first quarter prove benign.