22nd May 2019 - The AUD Slides as Market Eyes June and August Rate Cuts after Lowe's speech

Good Morning,


Market Headlines

- US equities rose overnight as markets continued to fluctuate on US-China trade war news. Yesterday, the US temporarily eased some restrictions on Chinese firm Huawei, lifting stocks.


- US bond yields and the USD also rose. The US 10yr treasury yield rose from 2.41% to 2.44%, the 2yr yield from 2.22% to 2.26%.


- The chance of a Fed rate cut by December, implied by Fed fund futures, fell from 110% to 100%.


- Dow Jones rose 197 points (0.77%) to 25,877.33, S&P 500 gained 24 points (0.85%) to 2,864.36 and the Nasdaq added 83 points (1.08%) to 7,785.72.


- Gold prices dropped to the lowest in more than two weeks, as the USD strengthened along with equities and other riskier assets. Spot gold fell 0.3% to $1,273.70 per ounce.


- China's steel futures rose nearly 4% despite concerns over the escalating trade dispute with the U.S. as investors expect stronger steel demand from the property market.


- Aluminium ended barely changed after a day of choppy trade, as a boost from a temporary easing of U.S. trade restrictions on China's Huawei was offset by expected higher output from Norsk Hydro's Alunorte refinery.


- LME aluminium ended at $1,796 a tonne after falling as low $1,784.50, the lowest since May 9. LME Copper finished 0.6% lower at $5,996 a tonne.


Currencies

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

- EUR rose from 1.1140 to 1.1160.

- USD/JPY rose from 110.20 to 109.65.

- AUD ranged sideways around 0.6875, preserving yesterday’s negative reaction (0.6920 to 0.6870) to the RBA Governor’s signal that it could cut the cash rate early next month.

- NZD, which fell in sympathy yesterday from 0.6540 to 0.6505, also preserved the loss overnight.

- AUD/NZD remained in a 1.0560-1.0590 range.

- AUD/EUR was range bound between 0.6150 / 0.6170


AUD Thoughts

AUD slid after the country's top central banker said interest rates might be cut as soon as next month, leading investors to wager an imminent easing was all but a done deal.


AUD dropped off to 0.6870 from around 0.6910, and threatened to re-test the recent 19-week low of 0.6865. The last time AUD spent any length of time at these depths was in early 2016.


The retreat came after Reserve Bank of Australia (RBA) Governor Philip Lowe said the policy board would consider a rate cut at the next meeting on June 4, an unusually blunt statement for the often circumspect central banker.


The pullback in the AUD wiped out all the gains made on Monday and also eradicated a brief early rally made when Australia's banking regulator proposed a major relaxation in rules on mortgage lending, essentially allowing would-be home buyers to borrow more and the banks to oblige.

AUD bears cheered the dovish tone from the RBA minutes and when Governor Lowe said a rate cut is being considered for June's policy meeting. While the minutes and Lowe have increased the odds of a June 4 RBA cut to over 90%, AUD is not reflecting those increased odds.


Technical studies highlight the downside risks but oversold conditions are approaching. Despite the bearish signs, AUD remains somewhat resilient owing to several factors. Investors have expected RBA cuts for a long time and have priced them into markets, so once enacted their impact is likely to be limited. A proposal from the Australian Prudential Regulation Authority to relax mortgage lending standards could help revive Australia's slumping housing market.


Expected fiscal stimulus from Australia's government and elevated net-short AUD positions likely help temper AUD bears. While risks to AUD remain tilted to the downside it seems likely that any downside progress will be slow.


Technical Outlook

AUD hovers just above last week's low during NY trading. Downside progress hampered on upbeat risk; stocks & AUD/JPY rally. AUD below 10- & 21-DMAs, RSIs drop but cannot break to new short term lows.


Downside risks present but price action not reflecting them. AUD might hold 0.6850-0.7075 range until a new catalyst comes along.


Event Risk Data Today

- Australian Economic data today : April Westpac-MI Leading Index. Q1 construction work is expected to be flat with declines in home building and flat private construction offset by a resumed uptrend in public works.


- NZ: Q1 retail sales is expected to have grown by 0.6%. Government stimulus is seen as benefiting household activity.


- Euro Area: ECB President Draghi delivers a welcome address at an ECB event titled “Monetary policy in an incomplete Monetary Union”.


- UK: Apr CPI is expected to show annual core inflation remaining well contained at 1.9% from 1.8%.US: Apr/May FOMC minutes will provide an update on members’ assessment of risks to the outlook.

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