17th May 2021 - AUD remains on the way to 0.7820 hurdle ahead of China data dump

Good Morning,

Market Headlines

Sentiment was mostly upbeat, as inflations concerns appear to have been fully priced. US equities rose (the S&P500 up 1.5%) and the US dollar fell. Bond yields also fell though, partly due to some US economic data disappointments. US Dollar fell on Friday, following worse-than-expected US data. Retail Sales showed no growth in April, down from 10.7% in the previous month, while the core reading fell 1.5%. Also, the preliminary estimate of the Michigan Consumer Sentiment Index resulted in 82.8 in May, down from the previous 88.3 and the expected 90.4. Also, Industrial Production rose a modest 0.7% in April.

Speculation that the US Federal Reserve would need to tighten its monetary policy amid increased inflationary pressures cooled down, to the detriment of the American currency. Stocks surge while government bond yields retreated.

Commodities, Brent crude oil futures rose 2.4% to $68.71, copper fell 0.9%, and gold rose 0.9%, while iron ore fell 3.7% to $209.65.

Overnight Currency Ranges

AUD/USD 0.7714 0.7787

EUR/USD 1.2072 1.2147

GBP/USD 1.4037 1.4111

USD/JPY 109.18 109.65

NZD/USD 0.7170 0.7252

USD/CAD 1.2081 1.2179

USD/CNH 6.4318 6.4521

AUD/JPY 84.54 85.17

AUD/NZD 1.0722 1.0768

AUD Thoughts

AUD/USD begins the week mostly unchanged, around 0.7770-80, as bulls stay hopeful after Friday’s upbeat mood. Fresh hopes backing the US Federal Reserve’s (Fed) easy money policies, due to the recent weakness in American data, helped the quote on Friday. The Aussie pair’s recent strength could also be considered as a consolidation to the last week’s heavy fall, the biggest since late February.

Can China spoil the mood?

On Friday, no growth of the US Retail Sales for April joined May’s downbeat Michigan of Consumer Sentiment Index backed the Fed policymakers trying to defend versus the rate hike and/or tapering woes. The positive sentiment could also be traced to the modest strength in the US Industrial Production, a 0.7% upside, for April.

With the inflation concerns seem mostly priced, coupled with the recently mixed data and the Fed’s strong defence to monetary policy, US equities managed to close the week on the positive side. Also portraying the risk-on mood was the US dollar index (DXY) that dropped the most in a week on Friday while the US 10-year Treasury yield also shed 3.3 basis points to 1.635% by the end of the week’s trading. Other than the reflation fears, geopolitical unrest in the Middle East and covid woes in Asia remains the challenging factors for the markets. However, steady vaccinations and hopes of strong economic recovery in the West outweigh them.

Hence, the commodities remained mostly on the front foot, mainly the gold prices, which in turn offered extra support, in addition to the upbeat trading sentiment, to the AUD/USD bulls. It should, however, be noted that markets await China’s Industrial Production and Retail Sales for April, expected 9.8% and 24.9% YoY respectively versus 14.1% and 34.2% in that order. Although the key figures from Australia’s major customer are likely to come in weaker, suggesting a downside risk to the AUD/USD prices and market sentiment, any upside surprise will be welcomed with zeal.

AUD/USD traded firmly into the weekend with offering interest now expected ahead of 0.7820 while demand should materialise should we dip to 0.7700.

Event Risk Data Today

New Zealand: With Alert Level 1 resumed for the whole month, there will be upside risk for the April Business NZ PSI. March net migration will remain subdued on the border closures.

China: April industrial production (market f/c: 21.1%yr ytd), fixed asset investment (market f/c: 19.8%yr ytd) and retail sales (market f/c: 31.9%yr ytd) are coming off a pandemic rebound peak, but momentum will remain strong with capacity and income gaining at a robust pace.

US: The May Fed Empire State index is expected to print at 23.9, with the previous read showing conditions expanding at the fastest pace since 2017. The NAHB housing market index is expected to hold at 83, off its record high but still at a historically elevated level. March total net TIC flows have increased in recent reads, in part due to stronger buying from China as yields rise. Vice Chair Clarida will speak at 00:05 AEST, and then speak again with the FOMC’s Bostic at 00:25 AEDT.