20th January 2020 - Heavy below 0.6900 as Libyan headlines renew geopolitical fears


OVERNIGHT DATA AND HEADLINES

US data on Friday (Dec. housing starts, solid Dec. industrial production as well as a very firm U. Michigan consumer sentiment survey) maintained the market’s improving outlook for US economy and the continued rhetoric from the Fed (Harker on Friday) suggests that they are content to maintain current policy as they monitor the economy in early 2020. Although moves softened into Europe’s close, US stocks (hit new highs), yields and USD (Bloomberg index +0.25%) all rose around the data releases. In sharp contrast to the notably sharp fall in UK’s Dec. retail sales report (-0.6%mm/, est. +0.6%m/m) triggered a further slide in UK yields and further pricing of an end-Jan. BoE cut to 50bps and GBP to reverse its earlier squeeze to 1.3115.


CURRENCIES

- USD’s steady grind higher was the key driver in majors, though activity remained relatively contained.

- GBP was the standout mover in FX due to its reversal of early gains (fell -0.4% to 1.3020-30) and aided a broader lift in USD prior to the strong US data releases.

- EUR/USD (1.1095), AUD/USD (0.6875) and NZD (0.6610) all slipped around -0.4% (USD/JPY was unchanged at 1.1015).


TREASURIES

US Treasury yields saw further general curve steepening (2yr yields were unchanged at 1.56%) as 10yr yields pushed towards 1.85% before consolidating back to 1.83% (+2bps). The fall in UK yields increased the pricing of BoE easing (end January OIS now implies 0.535%) and UK 10yr Gilts yields closed at 63bps (-1bp).


COMMODITIES

The progress on US-China and USCMA trade agreements and the stream of solid US data through the week continued to underpin industrial commodities despite the lift in USD. Brent oil was unchanged at USD54.65bbl but USD gains halted LME copper’s weekly gains (of +1.1%) with a -0.2% dip to USD6,268/ton on the day. The standout mover in metals was palladium which posted a +8% rise (breaching USD2500/oz) on Friday to round of a steady rally this year as supply constraints


ECONOMIC DATA TODAY

- US markets are mostly closed for Martin Luther King Day and there are no key data releases in AU or NZ.

- UK Dec. Right move house prices (likely to remain subdued, prior +0.8%y/y) is the only release of note in Europe.


AUD THOUGHTS

• Upbeat data from China failed to help AUD gather strength during Asian session.

• Broad-based buying pressure on USD drags AUD/USD lower.

• Industrial Production in US is expected to contract in December.


After posting modest daily losses on Thursday, the AUD/USD pair edged higher to 0.6912 on Friday but reversed its course ahead of the American session. As of writing, the pair was down 0.08% on the day at 0.6875.


The data published by the National Bureau of Statistics of China on Friday showed that Industrial Production in 2019 expanded 6.9% to beat the market expectation of 5.9%. Additionally, Retail Sales rose 8% on a yearly basis to match November's reading. Finally, the Gross Domestic Product (GDP) expanded by 6% (YoY) in the fourth quarter as expected.


Nevertheless, the positive impact of the upbeat Chinese data on the AUD remained short-lived and the AUD/USD pair erased its gains ahead of the US session.


Focus shifts to US data, Fedspeak

The broad-based USD strength seems to be driving the pair lower on Friday. The poor performance of the major European currencies helps the greenback find demand with the US Dollar Index adding 0.19% on the day at 97.50.


The US economic docket will feature Building Permits, Housing Starts, and the University of Michigan's Consumer Confidence Index data on Friday. The Federal Reserve will publish its Industrial Production, which is expected to show a contraction of 0.2% in December, as well. Moreover, Philly Fed President Harker, The Fed's vice chairman of supervision Quarles and Fed Governor Bowman will be delivering speeches.


TECHNICAL OUTLOOK

AUD/USD: Increased bearish potential, The AUD/USD pair settled in the 0.6870 price zone, down for a third consecutive week. The pair has fallen Friday despite encouraging Chinese data released at the beginning of the day.


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