OVERNIGHT DATA AND HEADLINES
European stocks were heavy (Euro Stoxx -0.5%) and US equities were marginally firmer (S&P +0.20% at 3327) and yields drifted (US 10yr held 1.77%, 10yr Bund slipped to -26bps) whilst USD was broadly unchanged from its late Asian levels. Concerns over the impacts of the increasing cases of the new coronavirus weighed on markets, especially evident in slide of some 2% in the oil complex but encouraging, if contingent, comments suggesting that EU and US will achieve a trade deal and agreement on digital taxes provided support to broader sentiment.
Of note in Europe was UK’s CBI business optimism index which had a post-election spike up to +23 from -44 and further unwound some of the recent bias that BoE might ease next week, boosting GBP +0.65% and cutting the pricing of a cut back to 50:50.
Softer Dec. CPI added to the mixed to weak 4Q data in Canada and led to a decidedly more dovish stance from BoC who actually suggested that a rate cut was possible “if needed”. AUD and NZD were little changed from their Sydney closing levels.
USD was solid but focus shifted to the +0.65% rise in (GBP/USD 1.3135, EUR/USD 0.8440) on the CBI report and CAD softening on the back of the easing tone of the BoC (USD/CAD 1.3150). Other majors were tightly contained and little changed from their Asian closes (USD/JPY at 109.90 and EUR/USD at 1.1090). Both AUD (-0.1% at 0.6835) and NZD (-0.1% at 0.6590) were also little changed.
The potential of reduced air traffic should the coronavirus become more widespread weighed on the oil complex (Brent fell -2.2% to USD63.20/bbl, WTI -2.7% to USD56.80/bbl) as did the delay in API weekly inventory data. Copper (LME -0.9% to USD6105/ton) continued to pullback from recent gains on the back of larger LME stock reports, though palladium continued a volatile path this week and bounced +1.2% to USD2430/oz and gold was unchanged at USD1558/oz.
US Treasuries yields drifted (10yr 1.77%) into the European as bonds maintained a more bid tone, despite the lack of real shifts in broad sentiment, and curves were little changed. UK yields did lift on the CBI report (Gilts curve had a minor bear flattening) as short end reacted to the reduced likelihood of a BoE cut. However, 10yr Gilts were little changed at 63.5% and 10yr Bunds dipped -1bps to -26bps.
Market pricing for RBNZ and RBA were unchanged though the shift in BoC’s stance did see some mild pressure to price in easing more broadly.
ECONOMIC DATA TODAY
The December labour force survey for Australia is expected to see the trend deceleration in employment growth apparent since May persist. Following November’s outsized 37k gain, markets look for a 5k decline in December (mkt +12k). Holding participation flat, the unemployment rate is likely to lift to 5.3%.
The ECB’s January policy meeting is today’s other major event. The December meeting minutes were more sanguine on the outlook, showing a belief that downside risks had diminished. Given market sentiment, this view will be reaffirmed in January. Nonetheless, expect support for the current asset purchase program to remain in place and a clear willingness to act further, should conditions warrant it, to be shown.
- AUD/USD Risks a Breakdown on Soft Jobs Data
- Key Trend-line Support Holding
- RBA Rate Cut Probability at 42%
Last week, we highlighted that upside in AUD/USD could be limited with resistance at 0.6930-35 capping the pair. Since then, the Australian Dollar has extended its recent downside amid the rising concerns over the Chinese virus outbreak, which in turn prompted a dip across risk assets. However, looking forward, much of the focus will be on the Australian jobs report, which will be pivotal for the near-term outlook for the currency.
Given that market pricing for an RBA rate cut is at 42% we see two-way risks for AUD/USD, whereby a weaker than expected employment report would likely see the pair break the 0.6800 handle to test 0.6780. While a firm report could see a retest of 0.6900 as markets price out the likelihood of near-term easing. As it stands, with employment indicators signalling the labour market will continue soften, we see risks are tilted to the downside.
On the technical front, DMI’s (directional movement indicator’s) signal that bearish momentum is intact and thus raises the risk of a firm break below the rising trend-line stemming from the 2019 low. In such case, this would likely see a dip towards 0.6800 with a follow through to 0.6780.
AUD/USD Vanilla Options: 0.6780 (516mln), 0.6900 (411mln)
Implied Daily range (0.6807 – 0.6865)