OVERNIGHT DATA & HEADLINES
• Markets were in a largely neutral mood overnight, awaiting the outcome of the FOMC meeting, with the S&P500 up 0.2%, and US interest rates and the USD slightly lower.
• Wall Street ended higher as the impact of weekend attacks on Saudi Arabia's biggest oil refinery faded and investors awaited a widely expected interest rate cut from the Federal Reserve on Wednesday. Dow Jones rose 31.47 points (0.12%) to 27,108.29, S&P 500 gained 7.49 points (0.25%) to 3,005.45 and the Nasdaq added 32.47 points (0.4%) to 8,186.02.
• The US NAHB Housing Market Index for September rose modestly to 68, beating expectations of 66. Little reaction to the data with Wall St opening modestly lower.
• The FOMC meeting has started and will announce its decision in around 24 hours time, a 25bp cut widely expected. Money market rates have risen recently, though, causing the Fed to inject cash into the system overnight using treasury repos for the first time since 2008.
• German ZEW survey was mixed with the current situation weaker than expected at -19.9 while the expectations bounced back to -22.5.
• Canadian Manufacturing Sales for July fell by 1.3%, worse than expectations of a 0.1% decline. Released a little later, US August Industrial Production rose by 0.6% to easily beat expectations of +0.2% while Capacity utilisation was 77.9%, better than expectations of 77.6%.
• U.S. Treasury yields fell on Tuesday, ahead of an expected interest rate cut by the Federal Reserve at the conclusion of its two-day policy meeting on Wednesday.
• US 2yr treasury yields slipped from 1.76% to 1.72%, the 10yr yield from 1.84% to 1.80.
• Australian 3yr government bond yields slipped from 0.84% to 0.81%, the 10yr yield from 1.14% to 1.11%. Markets are pricing 10bp of easing at the 1 October RBA meeting, and a terminal rate of 0.55% (RBA cash rate currently at 1.0%).
• Market pricing for RBNZ is for 4bp of easing on 25 September, with a terminal rate of 0.64%.
• Gold rose, propped up by expectations for an interest rate cut by the U.S. Federal Reserve, but traded within a relatively narrow range as investors awaited further clarity on the central bank's stance on future monetary policy. Spot gold was trading 0.5% higher at $1,505.07 per ounce.
• China steel futures slipped, retreating from a 1-1/2-month high hit in the previous session on high inventories of steel products and concerns about demand from the real estate market. Benchmark 62% iron ore for delivery to China settled higher at $98 a tonne on Monday.
• Copper edged lower as investors doubted that U.S-China talks this week would lead to a speedy resolution of a long-running trade dispute and a recovery in metals demand. Benchmark LME three-month copper was down 0.8% at $5,821 a tonne in final open-outcry trading.
• Oil prices dropped about 6% after Saudi Arabia's energy minister said the kingdom has fully restored its oil production hit by an attack this weekend that shut 5% of global oil output. Brent crude futures sank $4.47 (6.5%) to settle at $64.55 a barrel. U.S. West Texas Intermediate (WTI) crude futures fell $3.56 (5.7%) to settle at $59.34 a barrel.
• The US dollar index is down 0.4% on the day, from 98.22 to 97.86.
• EUR rose from 1.0978 to 1.1070.
• CNY weakened - The onshore yuan was down almost 0.3% at 7.0892, CNH down 0.3% at 7.0845.
• USD/JPY eked an elevated range of 108.05-108.25 (six-week high).
• AUD rose from 0.6830 to 0.6868.
• NZD rose from 0.6322 (two-week low) to 0.6358.
• AUDNZD ranged sideways between 1.0790 and 1.0815.
• AUDEUR fell from 0.6250 highs towards 0.6200.
EVENT RISK TODAY
• Australian Economic data today : August Westpac–MI Leading Index will be released. Jul was the first above-trend outcome since Nov 2018, but in Aug sizeable headwinds loom.
• NZ: The Q2 current account is expected to rise from -3.6% GDP to -3.4%, reflecting higher export prices earlier this year.
• Euro Area and UK: CPI inflation for August is expected to come in below target, but Canada’s CPI should be broadly in line.
• US: FOMC meeting. With a 25bp cut widely expected, the market’s attention will quickly shift to the Committee’s revised forecasts as well as guidance from Chair Powell. Risks have clearly increased since the Committee last met, with growing evidence of softening employment growth in addition to weak business investment.
AUD thoughts :
AUD rebounded strongly out of yesterday’s lows near 0.6830 back to recent trading ranges towards 0.6870.
Markets await tonight’s US Federal Reserve announcement to see whether its policy easing satisfies market expectations. With market expectations for Fed easing significantly pared back and a de-escalation in US-China trade wars, there is less downside risk if the Fed under-delivers. Rates markets are priced for a 25bps cut at this week’s meeting. The biggest market moves will come from the implied future path of Fed’s policy with the market pricing in a cumulative three rate cuts by mid-2020. Emerging market and high-beta assets will rally or fall based on whether the Fed signals it’s at the start of an easing cycle or still in a ‘mid-cycle adjustment’. The latter appears more probable at this juncture, though any sell-off in risk will be limited given recent progress in US-China trade negotiations.
Technical outlook :
AUD key support holds as Fed decision looms. Yesterday’s RBA minutes & Chinese data led to a test of 0.6825/30 support zone. AUD bounces as risk sentiment recovered.
AUD steadily climbs above 10 day moving average, nears 0.6870 & 55-DMA late in the day.
Long lower wick on daily candle suggests bulls put up a good fight - Fed decision is key, if Fed not as dovish as expected AUD likely falls back lower.
*AUD technical daily chart*