1st June 2020 - The wind is still from the East


Good Morning,


Market Headlines

Sentiment remained upbeat after US Pres. Trump’s press conference on China was less confrontational than feared. The S&P500 closed up 0.5%, US 2yr treasury yields ranged between 0.15% and 0.17%, while the 10yr yield fell from 0.68% to 0.64% as benchmark index lengthening caused buying of long maturity bonds. Australian 3yr government bond yields ranged between 0.26% and 0.27%, while the 10yr yield ranged between 0.87% and 0.90%. Brent crude oil futures were unchanged at $35.30, copper rose 0.5%, iron ore rose 4.6% to $101.05 (highest since August 2019), and gold rose 0.7%.


Currencies

The US dollar index closed unchanged on the day after recovering from a dip.

EUR initially rose from 1.1080 to 1.1145 – a fresh two-month high, but later retraced to 1.1080.

USD/JPY rose from 107.10 to 107.90, the defensive yen under-performing.

AUD initially rose to 0.6683 – a fresh three-month high – before consolidating between there and 0.6620.

NZD initially rose to 0.6240 – a three-month high – before falling to 0.6170.

AUD/NZD broke above the past week’s range, to 1.0754.


AUD Thoughts

• AUD/USD rallies to just below pre-pandemic levels

• US-China trade and Hong Kong dispute may limit gains

• Technical resistance at 0.6700 a considerable obstacle

• US to revoke Hong Kong's most favoured trade status


The substantial AUD/USD rally this week capping a two-month return from the pandemic panic and almost two decade low in March has reached a technical and possibly fundamental hold point. Even without the potential damage to the China sensitive Aussie from the renewed Washington Beijing confrontation, now primarily on pandemic and political topics rather than trade.


That technical rationale is compounded by the US-China dispute, which, even if it is papered over sufficiently to keep the trade agreement intact will likely cool Western interest and investment in China and limit the mainland’s own recovery even as many US manufacturers are looking to repatriate some of their operations. If the Chinese economy does not gear up quickly the drag will be felt almost immediately in the mines and farms to the southeast in Australia.


US pulls Hong Kong trade status

President Trump announced that the US will begin steps to remove Hong Kong's most favoured trade status in response to Beijing's new security law for the former British colony which effectively bans political protest. "I am directing my administration to begin the process of eliminating policy exemptions that give Hong Kong different and special treatment," said Mr Trump. Hong Kong has been exempted from the tariffs imposed by the US on Chinese goods but Mr. Trump did not specify which steps would be taken or when and the future status of the duties was not clear.


Financial markets reacted favourably to the announcement, relieved that the US did not take more punitive measures that might have included additional tariffs on Chinese goods or even withdrawing from the trade pact.

AUD/USD Outlook

The immediate AUD/USD direction hinges on three factors: the very sharp ascent since March; the 11 year resistance line at 0.6700 that saw considerable trading in the second half of last year; and the above mentioned US-China political and trade acrimony.


If the two governments manage find a formula that lets the politics and rhetoric fade, the damage to the relationship, barely friendly but hopeful before the January trade deal was subsumed by the pandemic, will take many months or years to repair.

The Reserve Bank of Australia has said that it expects the downturn to be less severe than it initially feared. Australia has one of the lowest fatality counts from COVID-19 among advanced nations and has started reopening its economy barely halfway into the six-month shutdown originally envisioned by the government.


Still RBA governor Philip Lowe called the outlook “uncertain” suggesting that interest rates will stay at their record low of 0.25% for a long time. The problem for the Australian economy and the AUD/USD remains its close association to the People’s Republic. Unless there is concrete evidence from the mainland of rapid growth, the Aussie will be a resource currency without resource buyers.


Event Risk Data Today

Australia: May house prices, although a thin market could potentially produce a large fall in prices, various support policies including easing temporary mortgage repayment, Job Keeper Payment scheme and temporary access to draw on superannuation designed to prevent a spike in distressed sales.

New Zealand: Has a public holiday (Queen’s Birthday).

Canada: May manufacturing PMI

US: ISM manufacturing – consensus is to stabilise as the outlook gradually recovers. Construction spending there is expectations of a record monthly contraction in April.


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