15th April 2020 - AUD rally extends as risk on momentum drives markets



Good morning

OVERNIGHT DATA AND HEADLINES


  • The plunge in China's exports and imports eased in March as factories resumed production, but shipments are set to shrink sharply over coming months as the coronavirus crisis shuts down many economies and puts the brakes on a near-term recovery. Financial markets breathed a sigh of relief after customs data on Tuesday showed overseas shipments fell 6.6% in March year-on-year, improving from a 17.2% slide in January-February, as exporters rushed to clear a backlog of orders after forced production shutdowns.Economists had forecast shipments to drop 14% from a year earlier.

  • The global economy is expected to shrink by 3.0% during 2020 in a stunning coronavirus-driven collapse of activity that will mark the steepest downturn since the Great Depression of the 1930s, the International Monetary Fund said on Tuesday. The IMF, in its 2020 World Economic Outlook, predicted a partial rebound in 2021, with the world economy growing at a 5.8% rate, but said its forecasts were marked by "extreme uncertainty" and that outcomes could be far worse, depending on the course of the pandemic. "This recovery in 2021 is only partial as the level of economic activity is projected to remain below the level we had projected for 2021, before the virus hit," Gita Gopinath, the IMF's chief economist, told a news conference via a video link. Under the Fund's best-case scenario, the world is likely to lose a cumulative $9 trillion in output over two years - greater than the combined gross domestic product of Germany and Japan, she added.

  • Equity markets rallied globally and the USD weakened as better-than-expected Chinese trade data suggested the threat of a much deeper downtown from the coronavirus had been overstated, removing the safe-haven allure of the greenback. Wall Street jumped as hopes that President Donald Trump could move to ease coronavirus-induced lockdowns overshadowed dismal quarterly earnings reports from JPMorgan and Wells Fargo. Dow Jones was up 2.39% at 23,949 and the S&P 500 was up 2.87% at 2,846. The Nasdaq Composite .IXIC was up 3.95% at 8,515.

  • Oil prices dropped sharply on Tuesday, with U.S. prices sliding back toward $20 a barrel, as investors bet that fuel demand destruction caused by the coronavirus pandemic would be too much for producers embarking on record global output cuts to offset. Global oil-producing nations are expected to reduce production by as much as 19.5 million barrels per day, but those cuts are being implemented slowly and in some cases will not start for weeks. By contrast, demand plunged by roughly 30% worldwide several weeks ago, causing refiners and producers suddenly stuck with oil to stick it into rapidly filling storage. 

CURRENCIES

  • The USD fell as risk sentiment returned to market following better-than-expected economic data from China. The DXY index fell 0.50% to 98.85. 

  • The JPY rose 0.52% to a two-week high of 106.98 from 107.70.

  • EUR gained up towards 1.0985 from 1.0915. 

  • GBP was up almost 1.00%, rallying from 1.2523 towards a 1.2642 high.

  • AUD rose to a more than one-month high, up 0.97% from 0.6378 lows to 0.6444. 

  • NZD saw positive gains from 0.6060 to 0.6105.

  • AUDEUR was up in smalls, trading to 0.5870 from previous 0.5850 lows.

  • AUDNZD remained stable trading above 1.0550 in a tight 15 point range. 


TREASURIES

  • U.S. Treasury yields were mixed in rangebound trading, as investors lacked incentives to move decisively in either direction even as they were cautiously optimistic about the outlook for the coronavirus outbreak and looked forward to the reopening of the economy.

  • U.S. 10-year yields edged higher to 0.755% from 0.749% late on Monday.

  • Yields on U.S. 30-year bonds were at 1.410%, up from 1.39% on Monday.

  • On the short end of the curve, U.S. 2-year yields were last at 0.223%, down from Monday's 0.243%.

  • The yield curve has flattened a little bit, with the spread between the 10-year and the 2-year narrowing to 50 basis points, from about 52 basis points on Monday. The curve has been steepening since the beginning of the health crisis as investors have priced out any rate increase in the immediate future.

COMMODITIES

  • Gold soared nearly 2% to hit its highest since late 2012. Spot gold gained 1.3% to $1,735.85 per ounce, having earlier jumped as much as 1.9% to $1,746.50.

  • Benchmark iron ore futures in China closed at a four-week high, as lower shipments from big miners in Australia and Brazil stoked concerns over supply amid resilient demand in the country. Iron ore shipments from Australia and Brazil fell by 3.17 million tonnes last week to 19.81 million tonnes. Spot prices for iron ore with 62% iron content for delivery to China rose by $0.2 to $84.5 a tonne on Monday. 

  • Copper prices hit a four-week high, boosted by coronavirus-linked supply disruptions and expectations of stronger demand, although gains were capped by caution over the pace of an economic recovery. Benchmark LME copper was up 2.9% at $5,163 a tonne (prices touched $5,200 earlier, the highest level since March 17).

  • Oil prices fell around 6% as investors doubted that record OPEC+ supply cuts would soon balance markets as demand plunges due to the coronavirus pandemic. Brent crude futures fell $1.74, or 5.5%, to $30.00 a barrel. U.S. West Texas Intermediate (WTI) crude was down $1.51, or 6.7%, at $20.90 a barrel.


ECONOMIC CALENDAR TODAY

  • Australia - April WBC-MI consumer sentiment (Coronavirus and shut downs to hit hard).

  • New Zealand - March REINZ house prices and house sales.

  • US - March retail sales (last -0.5%, forecast -6.40%). Shard decline expected for discretionary spending.

  • US - April Fed Empire State index (NY activity and sentiment crushed by virus spread).

  • US - March industrial production (last 0.6%, forecast -4.1%). To be hit by supply chain disruptions and demand shock.

  • US - Feb business inventories (last -0.1%, forecast -0.4%). 

  • US - April NAHB housing market index (a soft read should mark the start of a declining trend).

  • US - Federal Reserve’s Beige book.

  • Canada - Bank of Canada policy decision (last 0.25%, forecast 0.25%). At its effective lower bound, the BoC has begun QE.


AUD THOUGHTS AND TECHNICAL OUTLOOK

The recent AUD rally extended overnight, driving higher from 0.6375 dips to 0.6444 highs late into the NY session. The risk on mood continues to drive stocks, commodities and safe haven currencies lower, the USD falling as a result. Speculators have been short on the USD for four consecutive weeks.


Yesterday’s record falls in Australian business conditions hardly concerned AUD investors, the survey falling to -66 from -2, the lowest in the history of the series and even lower than the recession of the early 1990s.

Focus has shifted on the ongoing improvement in global investor risk sentiment in the near term. China's March trade data showed much better-than-expected imports, suggesting its economy is on the mend from COVID-19 impacts. 

Gains in copper and iron-ore futures improve sentiment that China's economy is improving. 


Today we have the Australian April consumer sentiment numbers - poised to fall very sharply in April as the dramatic escalation in the Coronavirus outbreak hits hard. Sentiment has been under pressure in 2020 with bushfires impacting in Jan, the initial virus outbreak in China weighing in Feb and the worsening virus situation impacting in March. The March reading of 91.9 was the second lowest since the GFC. However, April update is shaping up as much weaker with virus threats and disruptions becoming large and pervasive. Tonight will be dominated by U.S. Economic releases (see above) - most, if not all, should record -ve results post Coronavirus.


For the AUD, opens this morning at 0.6440. Technically, the break of a key Fibonacci level, 55-DMA & rising daily/monthly RSIs continue to highlight a bullish landscape. A close and sustained hold above those techs should bolster bulls' confidence. AUD could extend its rally as overall risk sentiment seems to be driving it higher. Optimism that more countries are easing coronavirus restrictions has helped buoy risk sentiment, in turn driving broad-based USD selling against major and emerging market currencies. Should current market conditions persist, AUD will target the March monthly high at 0.6685 followed by the 200-DMa which currently sits at 0.6723.



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