19th June 2019 - AUD/USD climbs higher on trade talk and Fed optimism..FOMC now the focus

Good Morning,

Market Headlines

- An action packed session overnight with headlines suggesting the proposed meeting between US President Trump and Chinese President Xi would go ahead at the G20 summit while further headlines from the White House indicated there had been additional scrutiny on Fed Chair Jerome Powell ahead of tonight’s FOMC meeting. US equities bounced on the increased optimism with the S&P500 gaining 1%, and the Nasdaq rallied 1.4%. Commodities performed well across the board - highlighted by a 4% gain in oil, and a 5% gain in iron ore. AUD/USD managed to bounce out of the lows to trade to a high of 0.6882 while EUR/USD retreated to a 1.11 handle on the back of some dovish rhetoric from the ECB.

- The results of the second vote to become the new Tory leader were released with Boris Johnson again the clear leader. GBP/USD little changed on the result though making new highs above 1.2560 ahead of the Sydney open with little movement amongst the other majors.


- The US dollar index is up 0.1% on the day.

- EUR fell from 1.1243 to 1.1181 after the Draghi comments.

- USD/JPY was buffeted by that news, as well as the Trump-Xi news, leaving it net higher at 108.45 vs 108.20.

- AUD rose from 0.6832 to 0.6885.

- Outperformer NZD rose from 0.6491 to 0.6538.

- AUD/NZD dipped to 1.0507 before rebounding to 1.0540.

Equities/Commodity Markets

- FTSE +1.2% at 7443, DAX +2.0% at 12332, CAC +2.2% at 5510, Nikkei -0.7% at 20973, ASX 200 +0.6% at 6570, Shanghai Comp +0.1% at 2890

- Dow +1.4% at 26465, S&P +1.0% at 2922, NASDAQ +1.4% at 7953

- Commodity CRY +1.0% - 176.10, Nat. gas -2.5%, Cotton 0.5%, Crude +4.1%, Copper +1.8%, Wheat -1.5%, Sugar -0.4% Iron ore +5.2% Gold at $1346/oz

- Commodity CRY +1.0% - 176.10, Nat. gas -2.5%, Cotton 0.5%, Crude +4.1%, Copper +1.8%, Wheat -1.5%, Sugar -0.4% Iron ore +5.2% Gold at $1346/oz.

AUD Thoughts/Technical Outlook

- AUD/USD is trading at 0.6869, in a range of 0.6832 and 0.6881.

- Trade talk prospects are supporting the bid in AUD/USD.

AUD/USD has recovered from the lowest levels since the Jan 2019 flash crash lows on trade talk optimism. Despite the RBA minutes of the June RBA Board meeting that showed the decision to cut the cash rate by 25bp was due to a revised assessment of spare capacity in the labour market and that the Board expects to ease policy further, the confirmations that US President Donald Trump and Xi will be at the G20 summit was enough to fuel a risk-on rally.

Subsequently, AUD/USD is currently trading on the bid and has stepped out of a descending channel resistance implemented from early June highs. Chinese state media report sealed the deal for the Aussie when it too reported that President Xi had agreed to talk with Trump next week.

Next focus

Focus now shifts to tonight’s FOMC monetary policy decision. Markets may find relief on a dovish outcome which too can support the Aussie. Analysts at TD Securities summed up the outlook as follows:

- The Fed should signal readiness to ease policy but stop short of committing to a near term cut.

- They will likely stress that they are monitoring risks on the economy and taking appropriate action to sustain the expansion.

- I expect the median 2019 dot to remain unchanged (reflecting a Fed on-hold) and the median 2020 dot to decline.

- Rates: Treasuries likely to bear flatten modestly as the Fed doesn't commit to a cut, but leaves the door open instead.

- FX: Stronger DXY but weaker broad USD, reflecting possible EM impact if rate cut narrative remains intact.

Technical levels to watch for

AUD/USD has been attempting to recover from its 78.6% retracement at 0.6857: It remains directly offered below the 55-day ma at 0.7004, 0.7022 the June peak and the April peak at 0.7069.

This targets the 0.6738 January 2019 low... "the December 2018 high is at 0.7394"

Event Risk Data Today

- NZ: Balance of payments data for Q1 is out, with a 3.5% current account deficit expected.

- Australia: May Westpac-MI leading index is released.

- UK: May CPI is expected to show core inflation well contained at just below 2%

- US: the FOMC policy decision is expected to be on hold with pricing reflecting a roughly 20% chance of a cut. Key to the press conference and quarterly forecasts will be any suggestion of potential near-term easing after recent speeches expressed a greater willingness to adjust policy if necessary, as compared to the previous ‘patient’ stance.

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