21st January 2020 - AUD volumes thinly traded as US markets closed for Martin Luther King Day


OVERNIGHT DATA AND HEADLINES

US markets were closed for Martin Luther King Day and so a very light data calendar elsewhere meant that activity was very low and moves were limited. European equity markets hovered underneath Friday’s closing levels (Euro Stoxx -0.3%) whilst bonds drifted (10yr Bund yields were unchanged at -21.5bps and 10yr Gilt yields rose 1.5bps to 65bps). The IMF presented slightly lower forecasts within its latest World Economic Outlook in Davos at the opening of this year’s World Economic Forum, at which Trump is due to speak tomorrow, but the impact was minor given the accompanying stance of a bottoming in their view of growth. Oil prices also drifter lower through the day. Although UK again stated its intention to pull away from alignment with EU, GBP rebounded to 1.30 into the European close

CURRENCIES

- USD was again steady though ranges in FX were generally limited.

- As noted, GBP managed to unwind early losses though remained slightly down on the day.

- EUR (1.1085), JPY (110.15) and other majors were little changed but AUD (-0.15% to 0.6870) and NZD (-0.23% to 0.6600) remained offered as sentiment sagged.

TREASURIES


COMMODITIES

- Despite concerns over Libyan and Iraqi supply, oil unwound the majority of its price gains before a late squeeze in late London trading. Brent had tested USD65.00/bbl before bouncing back towards USD65.40/bbl but (+0.75%). Gold was steady (+0.23% at USD1560/oz) and palladium (USD2493/oz) continued to consolidate after its recent strong gains with base metals becalmed in the absence of US trading.


ECONOMIC DATA TODAY

The data calendar remains light today, with just NZ’s Dec Business NZ PSI, Europe’s ZEW sentiment survey and the UK ILO unemployment rate due.

The market is instead likely to focus on the Bank of Japan’s January policy meeting, specifically their revised growth forecasts and current assessment of risks, and thereafter the World Economic Forum in Davos, which runs 21–24 January.


AUD THOUGHTS

The Australian Dollar exchange rates remained largely flat on Monday as trading volumes were thin due to the closure of US markets for Martin Luther King Day. Despite the global risk-on sentiment, the ‘Aussie’ opened this week down for the third consecutive week, with the Australian Dollar US Dollar exchange rate currently trading flat at $0.6865.

While encouraging signs from China provided some support for AUD, the currency was left largely muted against a handful of currencies.


On Monday, Chinese Minister of Industry and Information Technology Wei said the country is confident of maintaining steady industrial growth over the course of 2020 despite huge pressures.

Australian Dollar Exchange Rates Left Flat on Hard Brexit Fears

The risk-sensitive Australian Dollar remained flat against the Pound following an upswing in fears the UK will suffer a hard Brexit. This left the Australian Dollar Pound (AUD/GBP) exchange rate trading at around £0.5282 on Monday.


UK Finance Minister, Sajid Javid sparked fears of weak ties between the UK and European Union after Brexit. Saturday saw Javid say the UK would not commit to sticking to the bloc’s rules in post-Brexit discussions, a threat to many businesses that wish to ease cross-border checks once the transition period concludes at the end of the year. Commenting on this, RBC Capital Markets chief currency strategist Adam Cole noted: ‘It’s about the UK diverging from Europe, and that would necessarily result in limiting access to European markets. Markets are taking that negatively.’

50% Chance US-China ‘Phase One’ Deal Will Fall Apart


The Australian Dollar was able to benefit from the ‘phase one’ US-China trade deal as the truce is good for global confidence. However, on Monday reports suggested that there is a 50% chance the deal could fall apart in one year, weighing on AUD.


Richard Martin, managing director at management consulting firm IMA Asia told CNBC’s ‘Squawk Box Asia’: ‘There’s a very poor track record on government-mandated trade flows working out and that’s what we got right now. ‘We don’t like governments to go out and say this is the volume of trade and this is the price point we want done at — that’s meant to be said at the markets’ He also added that this deal allows U.S. Trade Representative, Robert Lighthizer, to ‘pretty much determine when China’s breaking the rules and inflict any penalty he wants.’


Australian Dollar Outlook: Will Consumer Confidence Send AUD Lower?

Looking ahead, the Australian Dollar (AUD) could slide against a handful of currencies following the release of Westpac’s consumer confidence data. If January’s confidence slumps further than expected, the ‘Aussie’ is likely to fall.

Meanwhile, the ‘Aussie’ could remain under pressure as investors predict the Reserve Bank of Australia (RBA) will cut rates at the start of next month. Markets will likely focus on this week’s Australian labour market data, and if this disappoints, the chance of a rate cut from the RBA is likely to increase, weighing on AUD. Commenting on this, Commonwealth Bank of Australia’s strategist, Joseph Capurso, said: ‘We expect the RBA will deliver more policy stimulus with a 25bp rate cut on 4 February. Australian futures are pricing a 55% chance of a cut. A ‘high’ unemployment rate above 5% will reinforce the view that further stimulus is required to push unemployment towards the RBA’s 4.5% full employment target.’


TECHNICAL OUTLOOK

AUD/USD is under bearish pressure below the main SMAs (simple moving average) and the 0.6900 figure. Bears are trying to drag the market below the 0.6854/35 support zone. A daily close below this level can lead to further weakness towards the 0.6792 level, according to the Technical Confluences Indicator.

Resistance is seen at the 0.6892, 0.6920 and 0.6937 level.


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