15th October 2021 - Bulls have broken the weekly trendline resistance but face a critical level.

Market Headlines

Equity sentiment was boosted by a strong start to the US company earnings season, the S&P500 up 1.7%. Bond yields and the US dollar are lower, producer inflation not as strong as expected. FOMC member Bullard thought QE tapering should begin in November. He believes activity dipped in Q3 but should rebound in Q4 and into 2022, and added that the labour market is tight with workers hard to find. US 2yr treasury yields ranged sideways between 0.34% and 0.36%, while the 10yr yield fell from 1.56% to 1.51%.

Commodities, Brent crude oil futures rose 1.1% to $84, copper rose 2.2%, gold rose 0.3%, and iron ore rose 3.4% to $126.

Overnight Currency Range

AUD/USD 0.7375 0.7426

EUR/USD 1.1584 1.1624

GBP/USD 1.3659 1.3734

USD/JPY 113.21 113.715

NZD/USD 0.6965 0.7040

USD/CAD 1.2355 1.2445

USD/CNH 6.4273 6.4391

AUD/JPY 83.49 84.40

AUD/NZD 1.0536 1.0596

AUD Thoughts

AUD/USD is up some 0.5% on the day and the pair have travelled from a low of 0.7372 to a high of 0.7426 as the commodity currencies continue to top the forex leader boards on a daily basis. Commodities are strong with the CRB index moving to fresh cycle highs on the day in what has been a monumental rally since April 2020. AUD, in particular, is enjoying a comeback in iron ore prices with a fresh corrective high made at the start of the week.

Evergrande remains a dark cloud for AUD

However, the Evergrande crisis is a dark cloud hanging over the Australian economy and its reliance on its biggest export, iron ore. Prices sat just over $US120 ($164) per tonne of 62 per cent at the end of last week, well below the prices reached in mid-July this year, when they topped $US200 per tonne. Considering the Chinese property shake-out, the fastest and largest iron ore crash in history would be expected to resume its southerly trajectory. Analysts estimates there are 10 developers with potentially risky positions with combined contract sales of 1.86tn yuan – or 2.7 times Evergrande’s size. In other words, Evergrande is only the tip of the iceberg.

Chinese construction is likely to fall over the next year and that would be expected to equate to hundreds of millions of tonnes of less steel that will be needed. This would equate to hundreds of million tonnes of iron ore equivalent also. This puts iron ore on track to fall below $100 a tonne and perhaps to even match its 2015 price crash to somewhere below $50 in the near future and weigh heavily on AUD.

USD profit-taking in play

Meanwhile, the US dollar edged down against major peers on Thursday, touching a 10-day low as rising risk appetite and profit-taking ensued at the same time. Producer price growth slowed in September to the lowest level this year as airline passenger service costs plunged. The seasonally adjusted producer price index rose 0.5%, compared with a 0.7% gain in August, the Bureau of Labor Statistics said Thursday. The latest print was the lowest since December and came in line with the consensus.

Nevertheless, there are expectations that the US Federal Reserve is going to tighten monetary policy more quickly than previously expected amid an improving economy and surging inflation that had fuelled a rise in the greenback since early September. The minutes of the Fed's September meeting was more hawkish than expected and have confirmed the tapering of stimulus is likely to start as soon as November. The dollar index is back to being flat at the time of writing at 93.999. However, it had met its lowest since Oct 5 at 93.759. On Tuesday this week, it had reached a one-year high at 94.563.

AUD/USD chewed through significant offering interest overnight on its way to a high of 0.74265. The next level of resistance can be found at 0.7460 and again at 0.7580 while demand has likely followed spot higher and rests ahead of 0.7370

Event Risk Data Today

New Zealand: September is expected to see a bounce in the manufacturing PMI as alert levels were eased in the month.

Europe: The trade surplus is expected to show further signs of stabilisation in August having narrowed through the first half.

United States: Today’s key US release will be September retail sales. The market is expecting the rotation to services and delta to weigh on activity in the month. October’s University of Michigan consumer sentiment release will also be in focus given recent weakness and lingering uncertainties over the outlook. The FOMC’s Harker and Williams are also due to speak.

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