21st May 2020 - AUD trending higher ahead of strong resistance


Good morning

OVERNIGHT DATA AND HEADLINES

  • Crude prices rose and a gauge of global equities broke out of a three-week trading range as investors bet on a rapid recovery from the coronavirus-induced recession. Oil prices climbed 3%-4% on signs of improving demand and a drawdown in U.S. crude inventories, while a surge in Facebook Inc and Amazon.com Inc to record highs lifted the Nasdaq to within 5% of its all-time high. U.S. Treasury yields were little changed and gold edged higher, but gains were limited as risk appetite improved. 

  • Federal Reserve policymakers re-upped a pledge to keep interest rates near zero until they are confident the U.S. economy is on track to recovery, a detailed summary of their most recent policy-setting meeting shows. Members of the Fed's policy setting panel agreed they "would use the Committee’s tools and act as appropriate to support the economy," according to minutes of the Federal Open Market Committee's April 28-29 meeting, released Wednesday with the usual three-week lag. They agreed that their recent actions had been "essential in helping reduce downside risks to the economic outlook." But with a number of participants seeing "a substantial likelihood of additional waves of outbreak in the near or medium term," the minutes suggested central bankers may expect to use their extraordinary powers to shore up the economy for some time to come. 

  • UK inflation fell below 1% to its lowest in nearly four years - inflation sank to 0.8% in April, its lowest since August 2016. The drop in inflation fuelled speculation that the Bank of England (BoE) would cut interest rates below zero to bolster an economy hammered by the coronavirus pandemic.

  • The three major averages on Wall St notched their fourth gain in five sessions - S&P 500 stands at a two-month high and was briefly above its 100-day moving average, a closely watched technical indicator that has acted as a resistance level. Dow Jones rose 369.04 points, or 1.52%, to 24,575.9, the S&P 500 gained 48.67 points, or 1.67%, to 2,971.61 and the Nasdaq added 190.67 points, or 2.08%, to 9,375.78.

CURRENCIES

  • The USD fell with the DXY index down 0.42% at 99.13, on pace for its third straight day of losses. 

  • As a result, EUR was up 0.52% at 1.0983, earlier reaching 1.0999.

  • GBP fell 0.16% to 1.2225 after data showed UK inflation fell to 0.8% in April, its lowest in nearly four years. 

  • USDJPY found early strength, dropping to a 107.33 low from a near 108.

  • AUD rose 0.98% to a 10-week high, breaking through 0.6600 to a 0.6616 high.

  • NZD jumped from an early 0.6084 low up towards a 0.6158 high. 

  • AUDNZD dropped early London session to 1.0713 but managed a bounce near 1.0750. 

  • AUDEUR was back up 0.41%, through 0.6000 to a 0.6019 high.

TREASURIES

  • U.S. Treasury yields slipped after a somewhat underwhelming debut of the first 20-year bond in decades left the market uncertain how the new government financing tool will fit in. For the first time since 1986, the U.S. Treasury sold $20 billion in 20-year bonds at a high yield of 1.22%. The bid-to-cover ratio was 2.53. Primary dealers took 24.6% of the deal. The 20-year joins the Treasury's debt toolbox in financing trillions of dollars in U.S. stimulus spending aimed at combating the fallout from the COVID-19 pandemic.

  • The 10-year yield was last down 2.6 basis points at 0.685%, just below its level before the sale results were announced and extending a decline from Tuesday's late levels.

  • The 30-year bond yield tumbled 3.2 basis points to 1.4037%.

  • The 2-year U.S. Treasury yield was last down a basis point at 0.1633%.

  • Italian bond yields held near 5-1/2 week lows - Italy's 10-year bond yield was up only 1 basis points at 1.65% while German 10-year yields were flat at -0.46% but are up around 6 basis points this week

COMMODITIES

  • Dalian iron ore futures rose for a sixth straight session as concerns over supply from Brazil and China's strong appetite pushed spot prices to an eight-month high. The Dalian Commodity Exchange's most-traded September iron ore contract ended up 0.9% at 704.50 yuan ($99.17) a tonne. Benchmark spot 62% iron ore bound for China climbed to $97.20 a tonne on Tuesday, the highest since Sept. 16.

  • Gold rose but gains were limited as risk appetite improved on hopes of an economic recovery. Spot gold was up 0.3% at $1,749.29 per ounce 

  • Copper prices hit a 2 month high ahead of a Chinese government meeting this week expected to boost demand with pledges of higher spending on infrastructure, and on hopes for a global economic recovery. Benchmark LME copper gained 1.6% to $5,441.50 a tonne after touching a March 13 high of $5,455. 

  • LME tin gained 0.9% to $15,500 a tonne, aluminium rose 1.3% to $1,511, zinc climbed 0.4% to $2,041, lead added 0.6% to $1,692.50, while nickel was up 1.7% to $12,670.

  • Oil prices rallied after U.S. crude inventories fell in the most recent week, but gains were capped by worries over the economic fallout from the coronavirus pandemic and weak refining margins. Brent crude settled up $1.10, or 3.2%, at $35.75 per barrel while July U.S. crude futures ended up $1.53, or 4.8%, at $33.49

ECONOMIC CALENDAR TODAY

  • Australia - RBA Gov Lowe speaking

  • Japan - May Nikkei manufacturing PMI (last 41.9) & Japan - May Nikkei PMI services (last 21.5)

  • UK - May manufacturing PMI (last 32.6, forecast 33.5) & UK - May services PMI (last 13.4, forecast 15.0).

  • US - May Phily Fed index (last -56.6, forecast -40.0). Expected to recover slightly from the 40yr low in April.

  • US - Initial jobless claims (last 2.981mio). Rate of job loss moderating but remains at a high level.

  • US - May manufacturing PMI (last 36.1, forecast 37.8) & US - May services PMI (last 26.7, forecast 32.5). 

  • US - April leading index (last -6.7%, forecast -5.7%). Labour market collapse has been a strong negative driver.

  • US - April existing home sales (last -8.5%, forecast -18.4%). Lockdowns in April will lead to a collapse in turnover.

AUD THOUGHTS AND TECHNICAL ANALYSIS


AUD broke through 0.6600 to a 0.6616 high overnight, aligning itself to U.S. equities gains and underlying stronger commodity prices (iron ore, copper etc). The gains in AUDJPY through 71.00 and USD/CNH through 7.10 all lent a hand in lifting AUD to fresh 10 week highs. Iron-ore trades at 8-month highs while copper and oil trade at 2-month highs. For the moment, upbeat risk is driving sales of USD & JPY.  Option investors are less fearful of AUD downside. Risk reversals show vol premiums for AUD puts over calls is quickly eroding, while technicals bolster bullish sentiment.  No Economic data released today however RBA Governor Lowe will be speaking at ’The Regulators: Priorities Updates’ online 12.30pm.  Tonight all eyes will be focused on the U.S. initial jobless claims release with an expectation in moderation of jobs but nonetheless a high number expected.    For the AUD, opens this morning at 0.6593. Bulls have regained their footing and appear intent on testing 0.6665/85 resistance as focus shifts more towards upbeat risk than the lingering Australian-China trade tensions. Daily and monthly RSIs are rising, AUD trades above the daily bull pennant top and a monthly bull hammer is forming. AUD bulls look set to test the 200-DMA, 76.4% Fibo of 0.7032-0.5510 and March 9 daily high.  If risk sentiment remains upbeat and those resistances break, a test of 0.7020/35 resistance is possible.



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