1st July 2019 - AUD hits 7 week high as China’s PMI confront trade truce ahead of 2nd tier data

Good Morning,

Market Headlines

- Markets on Friday were cautiously optimistic about the weekend’s Trump-Xi trade talks, lifting equities (S&P500 up 0.6%) and the AUD and NZD slightly. The talks did result in a return to negotiations and deferral of tariffs, markets reacting slightly positively at the open this morning.

- Iron ore rose to a five-year high of $118.05.

- Eurozone consumer prices firmed in June, the core rate hitting a more comforting 1.1% from 0.8%.

- China manufacturing PMI remained at 49.4 in June, slightly below expectations of 49.5.

- US 2yr treasury yields ranged sideways between 1.73% and 1.76%, while 10yr yields slipped from 2.03% to 2.00%. Markets continued to price around 32bp of easing at the July meeting, with a total of four cuts priced by mid-2020.

- Australian 3yr government bond yields rose from 0.92% to 0.94%, 10yr yields from 1.34% to 1.36%. Markets are pricing a 65% chance of an RBA rate cut at the July meeting.


- The US dollar index closed down 0.1% on the day.

- EUR ranged between 1.1351 and 1.1393.

- USD/JPY rose from 107.60 to 107.93, and opens this morning higher at 108.25.

- AUD slightly extended a two-week old rally, from 0.7010 to 0.7023, and opens higher this morning at 0.7035 – a two-month high.

- Outperformer NZD similarly ground slightly higher on Friday to 0.6721, and opens this morning at 0.6730 – a two-month high.

- AUD/NZD continued to probe lower on Friday, to 1.0437 – a three-month low – but opens higher at 1.0465 this morning.

AUD Thoughts

AUD/USD pops and drops as China’s PMI confront trade truce ahead of second-tier data

- Weaker than forecast China PMIs question trade sentiment despite US-China trade truce.

- Aussie housing, TD inflation, and China’s Caixin Manufacturing PMI can offer near-term trade directives.

Having popped to fresh 7-week high, the AUD/USD retraces some of its gains to 0.7030 during early Monday as traders ascertain recently weaker PMIs from China in comparison to the US-China trade truce headlines.

The trade truce between the US and China offered a sigh of relief to market players at the start of the week’s trading session in Asia. However, optimism couldn’t last long as traders also emphasized China’s official Manufacturing and Non-Manufacturing Purchasing Managers’ Index (PMI) numbers.

The US and China agreed to put a halt on the further trade war and restart negotiations to carve out differences on the future trade terms. The US President Donald Trump agreed not to levy fresh tariffs on Chinese goods and considered releasing some pressure off China’s Huawei in return of higher farm imports from China.

Additionally, key differences between the US and China about technology transfer and intellectual property rights are still unresolved and will be discussed starting from July 02.

While a trade truce between the world’s two largest economies, including Australia’s largest customer China, should have pleased the Aussie buyers, weaker than forecast China PMI confined the optimism. China’s June month Manufacturing PMI weakened to 49.4 from 49.5 forecasts whereas Non-Manufacturing PMI flashed 54.2 versus 54.5 expected on Sunday morning.

Looking forward, Australia’s May month HIA New Home Sales, TD Securities Inflation and China’s Caixin Manufacturing PMI could offer fresh directives to near-term trading sentiment. While the Aussie housing market indicator slumped -11.8% during the previous release, the inflation gauge flashed 0.0% mark earlier. Further, China’s manufacturing index could follow official readings while likely flashing 50.0 mark versus 50.2.

Technical Outlook

A 100-day exponential moving average (100-day EMA) at 0.7024 acts as immediate support for the pair ahead of highlighting 0.7000 and 21-day EMA level of 0.6965 whereas April 30 top near 0.7050 could cap near-term upside.

Event Risk Data Today

- NZ: RBNZ Deputy Governor Bascand speaks this morning on “Macroprudential policy: past, present and future”.

- Australia: Jun CoreLogic home value index is expected to decrease 0.2% as the pace of price declines slows.

- Japan: Q2 Tankan survey is expected to ease to 9 from 12.

- China: PBOC Governor Yi speaks at a conference in Helsinki. Jun Caixin manufacturing PMI follows the NBS release on Sunday.

- Euro Area: May M3 money supply and credit data are released. May unemployment rate is anticipated to hold at 7.6%.

- US: Jun ISM manufacturing index is expected to decline to 51.2 from 52.1, mirroring the move lower in the Markit measure. Fedspeak involves Clarida on policy (4:15 pm Sydney time).

- Jun Markit manufacturing PMI final results are released for the US, Europe and a number of other major economies.