OIL: Demand & Supply Concerns Drive Prices Below Initial Support

Oil prices are higher during APAC trading today after news on the weekend that the US would go ahead with 25% tariffs on imports from Canada & Mexico and 10% from China. The inflationary impact had boosted oil prices with WTI up 1.8% to $73.81/bbl and Brent +0.8% to $76.28/bbl. They reached lows of $73.48 and $75.94 respectively. The USD index is 1.2% higher which has contributed to bringing oil off its intraday highs made early in the session.

• Canadian oil exports to the US will face a 10% tariff but that is still likely to mean higher fuel prices for American drivers as over half of US crude imports come from Canada. March gasoline futures are up 3.9% today but spiked 6.2% on the open. US President Trump is due to speak to Canada’s PM Trudeau later.
• While the prospect of increased protectionism is currently driving oil prices higher, they could easily turn down when concerns of the impact on global growth and thus demand for crude come to the fore.
• OPEC+ meets later today and is not expected to change its quotas. Rising non-OPEC supply and soft demand from China have driven it to delay its plan to normalise output.
• Trump plans to boost the US’ oil production and now there is the chance of increased supply from sanction-hit Venezuela on the global market after a US envoy met with President Maduro which resulted in an agreement to release American prisoners and for Venezuela to accept the return of illegal immigrants.
• Later the Fed’s Bostic and Musalem speak and US January manufacturing PMI/ISM and December construction print. ECB’s Donnery appears and European January manufacturing PMIs and January CPI are released.

USD/CNH has pulled back on a WSJ piece around China's potential response after the US imposed 10% tariffs on China exports to the US over the weekend. We got near 7.3400, but sit higher now around 7.3450. Earlier highs (in likely poor liquidity conditions) were at 7.3734.

•  The wide-ranging WSJ article states the authorities will seek to enter negotiations with the US side. WSJ notes: "China's initial proposal will center on restoring a trade agreement Beijing signed in early 2020 with the first Trump administration but didn't implement." 
• "Other parts of China's plan, the people said, include an offer to make more investments in the U.S. -- in sectors such as batteries for electric cars, a renewed pledge by Beijing not to devalue the yuan to gain competitive advantage, and a commitment to reduce exports of fentanyl precursors."
• See this link for the full article.
• The reference to not devaluing the currency is likely aiding CNH sentiment, although it remains to be seen what negotiated deal can be made between the two sides. The early 2020 agreement did little to reduce trade imbalances. 
• In any case a sharp devaluation of the yuan could create domestic financial stability concerns. 
• USD/CNH closed last Friday at 7.3220, so we are still some distance from that level. 

ACGBs (YM +6.0 & XM +5.5) are richer and near session highs.

• Outside of the previously outlined retail sales, building approvals and job ads there hasn't been much by way of domestic drivers to flag.
• The strengthening observed during the session appears more closely linked to movements in US tsys following the weekend’s US tariff announcements and the subsequent retaliatory measures by Canada and Mexico. China has also indicated it will implement countermeasures and file a complaint with the World Trade Organization.
• In today’s Asia-Pacific session, cash US tsys have twist-flattened, with yields ranging from 4bps higher to 5bps lower. In addition to tariff developments, this week’s focus in the US will be on a heavy slate of corporate earnings, key CPI and PPI inflation data, and January’s headline employment report.
• Cash ACGBs are 5-6bps richer with the AU-US 10-year yield differential at -13bps.
• Swap rates are 5bps lower.
• The bills strip is richer, with pricing +2 to +6.
• Tomorrow, the local calendar will see Household Spending and S&P Global Composite & Services PMIs.
• A new 21 March 2036 Treasury Bond is planned to be issued via syndication this week (subject to market conditions). The Joint Lead Managers are: Barrenjoey Markets; Commonwealth Bank of Australia; National Australia Bank Limited; and UBS.