10th May 2019 - It's going to be a volatile session for the AUD as the US tariff deadline looms

Good Morning,

Overnight Market Headlines

- Sentiment remained sour approaching the Friday deadline for US-China trade tariff increases. US bond yields and the USD were slightly weaker.

- The US 10yr treasury yield initially fell from 2.47% to 2.42%, but later retraced and is currently at 2.45%.

- The chance of a Fed rate cut by December, implied by Fed fund futures, rose from 80% to 90%

- Wall Street's main indexes fell ahead of critical trade negotiations between the U.S and China, paring losses significantly after U.S. President Donald Trump said reaching a deal this week was possible. Dow Jones fell 138.97 points (0.54%) to 25,828.36, the S&P 500 lost 8.7 points (0.30%) to 2,870.72 and the Nasdaq dropped 32.73 points (0.41%) to 7,910.59.

- Gold prices rose, supported by a weaker USD and as investors sought safe-haven assets, sending global stocks lower. Spot gold gained 0.3% at $1,284.55 per ounce.

- China's iron ore futures were shaky as investors struggled between waning demand at steel mills and another supply shock after U.S. imposed new sanctions on Iran. Trump imposed new sanctions on Iran, covering iron, steel, aluminium and copper sectors, the country's largest non-petroleum-related sources of export revenue and 10% of its export economy

- Prices of copper and other metals retreated, hit by the potential for escalating trade tensions as the U.S. and China prepare to resume talks to resolve their long-running trade conflict. LME copper closed down 0.7% at $6,102 a tonne.

- LME aluminium fell to its lowest since January 2017 and closed barely changed at $1,798 a tonne. Zinc finished 1.5% lower at $2,610, lead shed 2.5% to $1,835 after touching its lowest since August 2016.

- Brent oil futures settled slightly higher, rebounding from a drop after U.S. President Donald Trump revived investor hopes that the U.S. might not raise tariffs on Chinese imports, a step that could hit economic growth and crimp oil demand. Brent settled 2 cents higher at $70.39 a barrel, rebounding from a session low of $69.40 a barrel. U.S. West Texas Intermediate (WTI) crude futures settled down 42 cents at $61.70 per barrel.


- The US dollar index is down 0.2% on the day.

- EUR rose from 1.1175 to 1.1250.

- USD/JPY fell from 110.00 to 109.47 – a three-month low.

- AUD found a base at 0.6965, rising to 0.6998.

- NZD similarly based at 0.6570, rising slightly to 0.6598.

- AUDNZD ranged sideways between 1.0590 and 1.0615.

- AUDEUR dipped towards 0.6200 but managed a rebound towards 0.6230

AUD Thoughts

AUD was under pressure as U.S. President Donald Trump kept up his war of words with China over trade, even as talks between to two protagonists were set to resume.

Markets had calmed a little overnight but were jolted when Trump told a rally of supporters that China had "broke the deal" and would be paying for it. AUD slipped 0.1% to 0.6965 on Trump's latest outburst, leaving it just a whisker above the recent four-month trough of 0.6960. In late trade AUD did benefit with a jump up towards 0.7000 where Trump announced he had received a "beautiful letter" from Chinese President Xi Jinping. Trump did not elaborate on the status of trade negotiations with talks continuing on Friday in Washington. When asked about a trade deal with Beijing, he said, "We'll see."

As U.S.-China trade tensions ratchet higher AUD is grinding lower on the back of the yuan's fall to two-month lows versus the USD. AUD has not been able to make a new trend low despite USD/CNH's break above the 200-DMA and 50 Fib of the November-March decline and subsequent new high. The inability of AUD to break the May 6 low might be attributed to several reasons. The drop in U.S. Treasury 10-year yields toward the April 1 low increase the odds of Fed rate cuts, which is likely keeping investors from loading up on the USD. Ironically USD/CNH gains could be keeping AUD bears cautious, with markets worried that USD/CNH gains toward 7.0 could raise the risk of PBOC action to prevent capital outflows from China. Memories of USD/CNH slide after the last it neared 7.0 remain relatively fresh in memory.

For now, AUD downside risks prevail but if trade tensions ease, AUD shorts will get squeezed hard as risk sentiment recovers. The 200-DMA and April's 0.7206 high would then be targeted.

Technical Outlook

AUD trades below 0.6980 for most of NY despite downbeat US data. US-Sino tensions drive USD/CNH above 6.8600 which weighs down AUD. AUD resilient despite weak CNH, possible warning for bears.

AUD daily techs lean bullish, RSI rises & long lower wick on day candle. Major headline risk from tonight's US-China meeting scheduled for 5p.m.

Event Risk Data Today

- Australia: The RBA release their Statement on Monetary Policy after leaving rates on hold on Tuesday and adopting an easing bias. Growth and inflation forecasts will be downgraded as indicated in the decision statement.

- NZ: Electronic retail spending is estimated to have risen 0.8% in April.

- UK: Q1 GDP is expected to rise 0.5% following a soft 0.2% read in Q4 2018.

- US: Apr CPI is anticipated to rise 0.4%. Annual headline and core inflation are both seen lift to 2.1%. Fedspeak involves Williams at a banking event, Daly in a Syracuse, Bostic in Mississippi and Brainard at a community event.

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