10th February 2020 - AUD vulnerable as global growth concerns weigh

Good morning


• Global equity markets and government debt yields slumped as nagging concerns about the impact of the coronavirus on global growth overshadowed a strong U.S. jobs report that indicated an economy on pace to grow moderately.

• U.S. job growth accelerated in January, Non-farm payrolls increased by 225,000 jobs last month, with employment at construction sites increasing by the most in a year amid milder-than-normal temperatures. There were also strong gains in hiring in the transportation and warehousing industry. Economists polled by Reuters had forecast payrolls would rise by 160,000 jobs in January. The economy grew 2.3% in 2019, the slowest performance in three years, after logging 2.9% growth in 2018. Growth this year is seen around 2%.

• The labour force participation rate rose two-tenths of a percentage point to 63.4% last month, the highest since June 2013. As a result, the jobless rate rose to 3.6% from 3.5% in December. Wage inflation remains tame as average hourly earnings increased 0.2%, last month after gaining 0.1% in December. That lifted the annual increase in wages to 3.1% in January from 3.0% in December. The average workweek was 34.3 hours for a third straight month in January.

• The Fed released their semi-annual monetary policy report and concluded that downside risks had eased late in 2019 though the coronavirus outbreak was a new threat that could impact the global economy.

• Wall Street fell from record levels after a four-day rally - Dow Jones fell 277 points (0.94%) to 29,102, S&P 500 lost 18 points (0.54%) to 3,327 and the Nasdaq fell 51 points (0.54%) to 9,520.

• German industrial production was poor, falling 3.5% in Dec m/m to be 6.8% lower y/y , and seeing sharp downgrades to 4Q19 GDP forecasts for Germany. Even the trade surplus softened materially to EUR 15.2 bio in Dec. Similarly, French industrial production fell 2.8% m/m in Dec, to be 3.0% lower y/y.


• The U.S. DXY vaulted to a four-month peak propelled by a strong U.S. non-farm payrolls report – DXY index rose 0.2% to 98.69. The DXY index posted its largest weekly percentage gain in more than two years, hitting a two-month high against GBP, CAD, a six-week peak versus the Swiss franc, and a four-month high against the EUR.

• JPY improved, falling down towards 109.52 in more of a safe-haven play for the Japanese currency in the wake of the coronavirus outbreak.

• EUR fell to its lowest since October after German industrial output recorded its biggest decline in a decade in December. EUR dropped to 1.0940 (its worst weekly loss since November).

• GBP tumbled from 1.2960 down towards 1.2880.

• China's CNY eased against the USD as it staggered towards a feeble end to a week – opened at 6.9768 but finished above 7.0000.

• AUD struggled to maintain last week’s gains, falling from 0.6725 Friday highs down to a 0.6659 low.

• NZD also found selling pressure, down from 0.6450 towards 0.6400 lows.

• AUDNZD found initial selling pressure down to 1.0390 however later improved towards 1.0430. Opens this morning lower at 1.0415.

• AUDEUR was back under 0.6100, trading as low as 0.6076 but back up towards 0.6100.


• U.S. Treasury yields declined as concerns about global growth and a growing coronavirus epidemic outweighed a strong U.S. jobs report.

• The 10-year yield was down 7 basis points from 1.64% to 1.573% in afternoon trading.

• The two-year U.S. Treasury yield was down 4.4 basis points at 1.4031% in afternoon trading.

• Euro zone bond yields fell after December German industrial output suffered its biggest fall since January 2009 - Germany's benchmark 10-year Bund yield fell to as low as -0.368%.


• Gold prices rose as fears of an economic slowdown from the coronavirus outbreak and lower interest rates globally offset strong U.S. economic data. Spot gold rose 0.3% to $1,570.52 per ounce but was down about 1.2% last week. It was on track for the biggest weekly loss since early November.

• China's iron ore futures ticked up following news that Australian miners were bracing for a tropical cyclone, but it marked its biggest weekly loss in six months, hammered by worries over the coronavirus epidemic. Spot iron ore prices remained volatile, with the benchmark 62% iron-content ore for delivery to China settling at $83 a tonne, down from $83.80 on Wednesday.

• Copper prices fell on concerns that a rising death toll from the coronavirus in China could lead to a bigger hit to economic activity. Three-month LME copper ended 1.3% lower at $5,663 an ounce.

• Oil prices fell 1% as Russia said it needed more time before committing to output cuts sought by other large producers while the coronavirus outbreak fanned worries about global crude demand. Oil prices posted their fifth straight weekly decline. Brent crude futures lost 46 cents (0.8%) to settle at $54.47 a barrel. Brent sank 6.3% for the week. U.S. WTI crude futures fell 63 cents (1.2%) to settle at $50.32 a barrel.


• No Australian Economic data today

• China - Jan CPI %yr (last 4.5%, forecast 4.9%). Food prices to keep CPI elevated for a while yet.

• China - Jan foreign direct investment %yr. Continued FDI inflow necessary for development. Jan M2 money supply %yr (last 8.7%, forecast 8.6%). Jan new loans, CNYbn 1,140 3,081.

• US Fedspeak – Daly speaks in Dublin, Harker discusses economic outlook.

• Canada – Dec housing starts & building permits.


AUD was driven to fresh ’10 year lows’ over the Friday night session, falling as low as 0.6659 after the overall stronger U.S. Economic data and Non-farm payrolls result.

The bearish factors drove AUD below 2019's low and the slide extended to levels not seen since March 2009.

The Coronavirus is set to continue to dominate market sentiment for the week ahead. Investor attention firmly focussed on the spread and fatality rates released daily while also looking for any further infections outside of China. No Australian Economic data today – we do have China inflation data. CPI inflation could rise to 4.9% y/y in January (from 4.5% in December). Expect PPI inflation to rise from -0.5% to +0.1% in January.

AUD selling interest remains heightened as it treads on territory that has not been seen in nearly 11 years. AUD likely to remain on that turf for now as there remains few signs that AUD should rally.

The upbeat U.S. January employment report followed a string of recent data suggesting the U.S. economy remains robust. U.S. growth contrasts that of Australia's and the RBA's latest Statement of Monetary Policy (SOMP released last Friday), highlighted downside risks to economic growth as GDP forecasts were reduced due to bush fires and coronavirus impact. The SOMP also said that the RBA is expected to remain accommodative. The virus impact has contributed to AUD selling confidence as Asian emerging market currencies and China's yuan, both of which the AUD is highly correlated to, are sold against the USD.


Technicals highlight AUD downside ras a continued risk.

The 10 day moving average (0.6717) limits rallies while daily and monthly RSIs imply that bearish momentum is intact.

AUD shorts are likely targeting psychological support at 0.6600 followed by 0.6565/70 and

0.6510/25 supports from mid-March 2009.

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