12th April 2019 - Aussie rally capped as US labour market underpins USD

Good Morning,

Yesterday's Highlights

The EU Summit agreed a Brexit extension to October 31 and Australian PM Morrison confirmed what had been suspected for some time, Australia will go to the polls on May 18. Markets were unfazed though equities had a softer day, with financials down 0.66% material stocks down 0.66%. The A$ hit a 6 week high of 0.7175 in afternoon trading.


Currency Markets

Higher US yields have helped the USD outperform across the board with AUD and NZD amongst the underperformers. Oil prices have led the decline in commodities with the IEA noting economic threats could weaken demand.

One of the big takeaways from the past few days has been the broad decline in volatility across markets particularly in FX land where major FX volatility indices such the JP Morgan and DB FX have drifted down to levels not seen since late 2014. This has occurred in spite of the major risk events in the calendar this week (ECB, Fed, RBA Debelle and Brexit). The dovish shift in policy by major central banks has been one factor at play while signs that policy stimulus are starting to have a positive effect (particularly in China) have also play their part. Kicking the Brexit can down the road means a potential macro risk has been delayed yet again while the never ending, but still positive, US-China trade talks have also played into the low environment.

Looking at the calendar, for this environment to persist we need more positive data to support China’s growth greenshoot with loan and financing data the ones to watch over the coming days. US equities are also likely to become a major focus with the Q1 earnings reporting season starting in earnest tonight.

The NZD and AUD have been the two weakest currencies over the past 24 hours, by 0.6% and 0.7% respectively. Notably the AUD has failed to sustained yesterday’s move above 0.7150 and the pair now trades at 0.7124. The RBA Financial Stability Review is out today with the market focus likely to be on whether the Bank shows any concerns over the ongoing decline in the housing market. Yesterday NAB revised down its expectations for residential dwelling prices. Following larger than expected falls over 2018 and early-2019, NAB is now predicting peak to trough falls of 20% in Sydney and 15% in Melbourne.


Interest Rates

· The US 10yr treasury yield rose from 2.47% to 2.51%, the 2yr yield from 2.32% to 2.36%. Probability of a Fed rate cut by December, implied by Fed fund futures, fell 75% to 65%.

· AU 3yr yields are 1.5bp higher overnight, and 10yr yields 2bp higher, steepening the curve to 47.5bp. The market continues to soften expectations for a rate cut, with 75% of a cut priced by August and a full cut priced by October. The AU-US 10yr spread holds steady around -60.5bp.


Commodity Markets

· Oil prices have led the overnight decline in commodities following comments from the International Energy Agency noting that agency could lower its Consumption forecasts because of economic threats. Iron ore has been one exception (+1.1 at $93.6) while steam coal is the other up $2.4 to $84.2.


Event Risk

· The NZ Manufacturing PMI, electronic retail spending, and migration are out today but are typically not market-moving.

· In Australia we will see the bi-annual RBA Financial Stability Review released. Key topics of interest will be their assessment of the housing market, tightening lending practices, and short-term funding rates.

· China’s Mar trade balance is anticipated to be a $5.7bn surplus following +$4.1bn in Feb.

· Outgoing ECB Chief Economist Praet speaks in Washington D.C.

· In the US the Apr University of Michigan consumer sentiment is expected to maintain an elevated level of 98.1 compared to 98.4 in Feb.

· JP Morgan and Wells kick off Q1 reporting season in the US.




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