16th July 2021 - AUD/USD struggles to defend 2021 bottom around 0.7400 on sour sentiment

Market Headlines

A slightly risk-averse mood prevailed, without obvious news catalyst. The S&P500 is down 0.4%, and bond yields are slightly lower, while the US dollar and defensive currencies outperformed. US 2yr treasury yields ranged between 0.22% and 0.23%, while the 10yr yield fell from 1.35% to 1.29%.

US industrial production rose 0.4% in June (vs est. +0.6%, prior +0.7%). Manufacturing disappointed, with a 0.1% drop after downward revisions, with vehicle sector weakness noted. Utility output and mining rose, as did capacity utilization to a 16-month high of 75.4% from 75.1%.

Fed Chair Powell repeated his semi-annual testimony, this time to the Senate. He said that inflation is "well above 2%" and that they are uncomfortable with that. But the jump is seen as due to the shock to the system and the reopening in the economy. The challenge is how to react to the pressures. To the extent the strength is "temporary" it would be inappropriate to react to the rise in prices, but to the extent it persists, the FOMC would have to re-evaluate the risks that it could be of a longer duration, and that it could impact inflation expectations, and that's what they are monitoring.

Commodities, Brent crude oil futures fell 2.0% to $73, copper rose 0.9%, and gold rose 0.1%. Iron ore rose 1.2% to $219.

Overnight Currency Ranges

AUD/USD 0.7411 0.7487

EUR/USD 1.1796 1.1850

GBP/USD 1.3805 1.3898

USD/JPY 109.71 110.08

NZD/USD 0.6966 0.7044

USD/CAD 1.2503 1.2613

USD/CNH 6.4570 6.4716

AUD/JPY 81.44 82.31

AUD/NZD 1.0629 1.0659

AUD Thoughts

AUD/USD remains dismal around the yearly low, despite a recent uptick to 0.7430, amid the early Friday morning in Asia. The risk barometer pair aptly portrays subdued market sentiment while also bearing the burden of downbeat data at home, as well as from the largest customer China. Unlike today, the AUD began Thursday on a softer footing as the coronavirus (COVID-19) woes escalated in Australia, pushing Victoria for a lockdown. Also on the negative side were the doubts over Fed Chair Jerome Powell’s support for easy money policies.

The virus-led pessimism got extra support from downbeat Australia Employment Change, +29.1K versus +30.0K expected and 115.2K prior, ignoring the surprise downtick in Unemployment Change to 4.9% from 5.5% forecast and 5.1% previous readouts. Additionally, China’s Q2 GDP eased on YoY even as QOQ figures joined monthly Retail Sales and Industrial Production to battle the bears.

On the other hand, US Philadelphia Fed Manufacturing Index and New York Empire State Manufacturing Index also came in mixed for July whereas the weekly Indian Jobless Claims matched 360K forecasts. Confusion over the economic conditions of the US, Australia and China teases bears. Further, Fed’s Powell reiterated his bearish bias support no change in monetary policy required whereas St. Louis Fed President Bullard occupied the other side and added to the market’s risk-off mood.

Against this backdrop, the Wall Street benchmark marked another sluggish day and the US 10-year Treasury yields dropped 5.5 basis points (bps) to 1.30% by the end of Thursday’s North American session.

Looking forward, a lack of Aussie data may push AUD/USD traders to look for trans-Tasman figures for fresh impulse in Asia. However, the US Retail Sales and the preliminary readings of the Michigan Consumer Sentiment Index, expected 0.4% for June and 86.5 for July respectively, will be important to watch afterward. Above all, qualitative risk catalysts will be crucial to observe.

A horizontal area comprising August­ - September 2020 highs and the yearly low around 0.7415-10 becomes the key for sellers. Meanwhile, a three-week-old descending resistance line around 0.7475 and 200-DMA level surrounding 0.7585 challenge the AUD/USD pair’s corrective pullback.

Event Risk Data Today

New Zealand: Markets expect Q2 CPI growth of 0.8%, which would see the annual rate rising to 2.9% (well above the RBNZ’s last published forecast). In terms of specifics of the June report, markets expect particular strength in food prices (in part due to the recent increase in the minimum wage), higher construction costs and a further rise in used car prices. The June manufacturing PMI is likely to remain strong on robust domestic demand.

Euro Area: The May trade balance is expected to pull back to EUR 8bn, continuing the decline from the peak at the start of the year.

US: University of Michigan Consumer Sentiment is expected to rise to 86.5 in July – sentiment is beginning to gather momentum after initially lagging the broader economic recovery. Business inventories have been choppy over recent months, but should expand 0.4% in May. The market is looking for another contraction, -0.5%, in June retail sales – goods trade remains elevated, but consumption is shifting toward services spending as the economy reopens. Ahead of the May update, total net TIC flows have oscillated on net flows from Asia. The FOMC’s Williams will partake in an event on culture in the workplace.

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