13th May 2020 - Risk on, Risk off. AUD back under 0.6500 in turbulent trading

Good morning


  • Democrats in the U.S. House of Representatives on Tuesday unveiled a $3 trillion-plus coronavirus relief package with funding for states, businesses, food support and families, only to see the measure flatly rejected by Senate Republicans. The new legislation, which would more than double Congress's financial response to the crisis, includes nearly $1 trillion in long-sought assistance for state and local governments. The House is due to meet at 9 a.m. EDT (1300 GMT) on Friday for expected votes on the legislation and on a rules change allowing members to vote by proxy during the pandemic. Republicans say they want to hold off on new coronavirus relief legislation to assess the impact of nearly $3 trillion in response assistance that Congress has allocated since early March, as states move to reopen a shuttered U.S. economy. Tens of millions of people have lost jobs.

  • U.S. consumer prices dropped by the most since the Great Recession in April, weighed down by a plunge in demand for gasoline and services including airline travel as Americans stayed home during the coronavirus crisis. The consumer price index tumbled 0.8% last month after falling 0.4% in March. That was the largest decline since December 2008 when the economy was in the throes of a recession, and marked the second straight monthly decrease in the CPI. Gasoline prices plunged 20.6%, the largest decrease since November 2008, after tumbling 10.5% in March. Cheaper gasoline amid a collapse in crude oil prices offset a 1.5% surge in the cost of food last month, which was the largest gain since January 1990, after a 0.3% rise in March. Prices for food consumed at home accelerated 2.6%, the largest advance since February 1974.

  • Yesterday, China's factory prices fell at the sharpest rate in four years in April, highlighting weakening industrial demand as the coronavirus pandemic slams global growth. The producer price index (PPI) fell 3.1% from a year earlier compared with a 2.6% drop tipped by a Reuters poll of analysts and a 1.5% decline in March. China's consumer price index (CPI) rose 3.3% from a year earlier, slower than a 3.7% rise tipped by a Reuters poll of analysts and a 4.3% increase in March. That was largely due to slowing food price growth, which rose over 18% in March. But it still rose 14.8% last month, led by a 96.9% jump in pork prices. Non-food prices rose 0.4% in April, the data showed. Core inflation - which excludes food and energy prices - remained benign last month at 1.1%,down from 1.2% in March.

  • China announced a new list of 79 U.S. products eligible for waivers from retaliatory tariffs imposed at the height of the bilateral trade war, amid continued pressure on Beijing to boost imports from the United States. China's finance ministry said in a statement the new waivers will take effect on May 19 and expire on May 18, 2021. The latest list waives tariffs on products including ores of rare earth metals, gold ores, silver ores and concentrates. Under the deal, China agreed to increase its purchases of U.S. goods from a 2017 baseline by $200 billion over two years, with about $77 billion in increased purchases in the first year and $123 billion in the second year. Renewed tensions between the two countries are also raising questions about the trade truce. 

  • China has suspended beef imports from four of Australia's largest meat processors, as the trade of several key agricultural commodities suffers in the wake of souring ties stemming from a dispute over the COVID-19 pandemic. The suspension comes after Australia last month called for an independent inquiry into the origins of the novel coronavirus and just days after China proposed introducing an 80% tariff on Australian barley shipments. Kilcoy Pastoral Company, JBS's Beef City and Dinmore plants, and the Northern Cooperative Meat Company have been banned from exporting beef to China due to issues with labelling and health certificates. China is by far Australia's largest trading partner, taking around 38% of all exports in 2019. Australia was China's third largest beef supplier in 2019, after Brazil and Argentina. China's beef imports surged in the first quarter of 2020, despite a sharp slowdown in demand as consumers stay away from restaurants following the coronavirus outbreak.

  • The S&P 500 closed lower after a choppy session as investors took profits following a warning from the top U.S. infectious disease expert that premature moves to reopen the nation's economy could lead to novel coronavirus outbreaks and set back economic recovery. Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases, told Congress that the virus was not yet under control and that there would not likely be a treatment or vaccine in place by late August or early September. Dow Jones fell 1.73% to end at 23,803.51 points, S&P 500 lost 1.87%, to 2,875.46 and Nasdaq dropped 1.86%, to 9,021.36.


  • The USD originally fell overnight as investor risk appetite rose but managed to climb back half of the fall in late NY trading. The DXY index fell from 100.50 down to 99.68 but rebounded back up to 100.00. 

  • EUR was up 0.7% at 1.0885 but ended the session lower at 1.0848. 

  • USDJPY found some strength, trading lower towards 107.17 from 107.77.

  • GBP found fresh lows, tumbling from 1.2377 to a 1.2266 low.

  • AUD buying took off early London, up from 0.6432 lows to 0.6536 high but risk off in NY saw it trade back down to 0.6470.

  • NZD saw a similar picture, rising up to touch 0.6123 but falling back towards 0.6075.

  • AUDNZD boosted up towards 1.0681 but lower in the NY close at 1.0650.

  • AUDEUR traded a 0.6020 high but selling interest took it back down to 0.5960.


  • Investors looking for safety as the economy sputters sent U.S. Treasury yields lower, with strong demand for 10-year notes at an auction.

  • The benchmark 10-year yield was down 3.2 basis points at 0.6938% whilst the 2-year U.S. Treasury yield was down one basis point at 0.1708% in afternoon trading.

  • The gap between yields on two- and 10-year Treasury notes was at 51 basis points, about 2 basis points lower than at Monday's close. 

  • Euro zone bond yields edged higher as investors kept a wary eye on climbing coronavirus infection rates in China and on the risks of countries moving to reopen their economies too soon.

  • German 10-year bond yields rose as much as 5 basis points (bps) to a two-week high of -0.473% before falling to trade at -0.508%, up 1 bp. Most other yields also rose 1-2 bps. 


  • Gold prices rose to $1,711.00 but settled lower 0.18% at $1,700.00 per ounce. Gold has risen over 12% so far this year. Palladium fell 2.2% to $1,853.06 per ounce, while platinum gained 0.8% to $763.11.

  • Construction rebar and hot-rolled coil futures in China rose for the seventh straight session, boosted by firm consumption outlook even as data showed the country reported a sharp drop in factory gate prices last month. Benchmark iron ore futures on the Dalian Commodity Exchange closed up 1.0% to 638 yuan ($89.96) a tonne. Spot prices of iron ore with 62% iron content for delivery to China was unchanged from previous session at $88.80 a tonne.  

  • Aluminium slipped along with other industrial metals on worries about demand as new COVID-19 cases emerged in China and more data showed how global economies have been battered by the pandemic. Benchmark LME aluminium was down 1% at $1,483 a tonne. Copper edged 0.1% down to $5,252.50 a tonne after touching an eight-week high on Monday. LME nickel fell 0.3% to $12,315 a tonne while zinc shed 1.3% to $2,001.50.

  • Oil prices rose after OPEC's de facto leader, Saudi Arabia, said it would increase supply curbs in June, while other members of the oil-producing group said they want to extend the deep cuts reached in April for a longer period than originally agreed. U.S. WTI crude futures settled at $25.78 a barrel, up $1.64, or 6.8%. Brent crude futures settled at $29.98 a barrel, gaining 35 cents, or 1.2%


  • Australia - May WBC consumer sentiment (last 75.6). Confidence collapsed in April as COVID shutdown hit.

  • Australia - Q1 wage cost index (last 0.5%, forecast 0.5%). Wages usually slow to respond to labour market shifts.

  • NZ - April food price index (last 0.7%). May be a spike due to lack of ’specials’ during lockdown.

  • NZ - RBNZ policy decision (last 0.25%, forecast 0.25%). OCR on hold; QE program expected to increase to $60bn.

  • Japan - March current account balance. Spike in March set to be partially unwound.

  • Europe - March industrial production (last -0.1%, forecast -12.0%). Production set for a record monthly contraction.

  • UK - March trade balance & Q1 GDP (last 0.0%, forecast -2.6%). GDP to contract but should fare better than EU majors in Q1.

  • US - April PPI (last -0.2%, forecast -0.4%). Factory price deflation set to continue in April.


A continuation in upbeat risk drove a reversal in the AUD yesterday from initial 0.6432 lows, back up towards a 0.6536 high as a raft of other indicators followed suit. However, despite its best efforts to continue higher the AUD risk soured and suffered another selloff back down towards 0.6470 as an improvement in the USD and reversal in U.S. equities unfolded. US Treasuries and major commodities also weakened.  

Todays local data will focus on the consumer with sentiment and Q1 wage price index releases.

Consumer sentiment plunged 17.7% to 75.6 in April, as the full impact of the Coronavirus shutdown hit. The decline was the single biggest monthly fall in the 47yr history of the survey, taking the index beyond GFC lows to levels only seen during the deep recessions of the early 1990s (64.6) and early 1980s (75.5). The May update is in the field over the week ending May 9. Developments over the last month have been mixed. On the positive side, Australia's Coronavirus case count has been lower than feared, allowing for an earlier than expected relaxation in restrictions that is likely to be confirmed late in the survey week. There has been some improvement abroad although new cases and fatalities remain relatively high. Against this, news around the economy, both here and globally, is confirming a very heavy impact on activity and jobs.

Wages growth was running at a slow pace even before the COVID-19 recession hit Australia. The Wage Price Index (WPI) rose 0.5% in the final quarter of 2019, holding annual growth at 2.2%yr but with a slight moderation to a 2.1% annual pace over the second half of the year. That compares to a cycle low of 1.6% over the second half of 2016 but is still well below the long-run average of 3%. Expect the wage inflation to show another weak result for the first quarter of 2020 ahead of a material slowing as the Coronavirus shock plays through

The RBNZ is likely to remain on hold today at 0.25%. A t the last meeting they signalled it would remain at that level for at least 12 months. The cut was shortly followed by the introduction of a bond purchase program. Since that time, the economic outlook as continued to deteriorate. The RBNZ will expand its bond purchase programme to $60bn in May. The RBNZ may also announce a target interest rate for Government Bonds or give more forward guidance, such as a commitment to keep buying bonds for a set period. 

Offshore we have some major data releases with focus on the UK Q1 GDP (further contraction expected) and the US April PPI (another deterioration expected).

For the AUD, opens this morning at 0.6470. The consolidation of the March/April rally remains bullish for the time being but 0.6570 resistance persists. AUD bulls need persistent risk-on, weaker USD if the rally is to resume.

The fall in the AUD stops short at the daily 10 DMA (0.6470) and the 50% fibonacci retracement of the 0.6373/0.6562 range.  A further fall targets 0.6420 followed by last weeks 0.6378 low. 

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