20th May 2019 - Aussie Shorts Bracing for Higher Opening Amid Surprise Election Results

Good Morning,

Market Headlines

- AUD pops higher after Coalition election victory defies the odds

- Trump does not implement auto tariffs but agrees with the Commerce Department’s finding that foreign carmakers represent a threat to national security

- Sets a 180d period for auto negotiations ; Toyota arcs up in response

- US removes steel and aluminium tariffs on Canada and Mexico; Canada responds in kind

- USD still in the ascendancy into week’s end

- GBP testing toward year’s lows as Labour Party talks; European elections this week with a Withdrawal Bill vote in the week of 3 June

- Tomorrow’s speech from RBA Governor Lowe on the economy and monetary policy a tantalising prospect with markets now priced for a June cut


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

- EUR fell from 1.1180 to 1.1155.

- USD/JPY rose from 109.50 to 110.20.

- AUD fell from 0.6890 to 0.6865 – marking a fresh three-year closing low – but opens strongly at 0.6930 this morning in the wake of the Liberal coalition win in the Australian Federal election.

- NZD fell from 0.6545 to 0.6514 – a seven-month low.

- AUD/NZD ranged between 1.0525 and 1.0555, and opens at 1.0595 this morning.

AUD Thoughts

As currency markets open this morning, the AUD popped initially higher to a high of 0.6939 after the Coalition pulled off a remarkable victory, defying predictions from the polls and betting markets. It’s very likely that the Coalition will either have an outright majority (76 seats needed of the 151 seat House) or in minority Government. The ABC is projecting the Coalition at 75 seats, Labor at 65, six independents, and five yet to be decided.

After popping higher, the AUD has given back some of those initial gains ahead of the tantalising prospect of a speech on the economy and monetary policy from the RBA Governor Lowe tomorrow at lunchtime, with the market looking for confirmation of a firm monetary policy easing bias and the read through that June is “on”. Trade war news is also present as a headwind.

In the trade war front, the mood music out of China late last week has been less than friendly, a WeChat blog run by the state-owned Economic Daily noting that “we can’t see the U.S. has any substantial sincerity in pushing forward the talks. Rather, it is expanding extreme pressure, adding that “If the U.S. ignores the will of the Chinese people, then it probably won’t get an effective response from the Chinese side”. The blog reiterated tariff removal, achievable purchase plans and a balanced agreement text as China’s three main concerns.

Adding to the unsettling trade news, there were more unsettling developments on the US auto tariffs front on Friday. Following a report that the US Commerce Department had found that auto imports are a threat to national security, President Trump agreed and has proclaimed a 180 day period for negotiations.

Meanwhile, while last week’s US Retail Sales report was ordinary, the UoM Consumer Sentiment Survey for May jumped to its highest level since January 2004. It’s a clear indication that the US consumer is doing just fine and should assuage concerns, especially given the still strong labour market and the rebound happening in the US housing market.

The Pound continues to eke lower. Writing in The Sunday Times, PM May said she will “not be simply asking MPs to think again” on the same deal that they have repeatedly rejected – but on “an improved packaged of measures that I believe can win new support”.

UK Retail Sales loom at the end of the week, while BoE Governor Carney speaks tomorrow.

Technical Outlook

Unless clearing a downward sloping trend-line since mid-April, at 0.6960, chances of the AUD/USD’s pullback to 0.6880 and then to a recent low around 0.6860 can’t be denied. However, quote’s further downturn could be stopped by oversold levels of 14-day relative strength index (RSI) near January 2016 lows adjacent to 0.6830.

In a case where prices rally past 0.6960 trend-line resistance, 0.7000, 0.7030 and 0.7055 can please the buyers.

Event Risk Data Today

- No Australian Economic data today.

- NZ: Services PMI for April is out, in March services activity expanded at the slowest pace since 2012.

- Japan: Q1 GDP is expected to contract 0.1% following a 0.5% recovery in Q4, but due to base effects, annual growth is seen to increase to 0.4% from 0.3%.

- US: Fedspeak involves Harker on management science. 

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