24th May 2019 - AUD/USD remains on the road to recovery despite challenges to global risk sentiment


Good Morning,


Market Headlines

- Sentiment deteriorated as the US-China trade war intensified. The S&P500 is down 1.2%, and oil (-5%), bond yields and the USD fell.


- The US 10yr treasury yield fell from 2.38% to 2.29% (the lowest since Oct 2017), the 2yr yield from 2.21% to 2.12%.


- The chance of a Fed rate cut by December, implied by Fed fund futures, rose from 100% to 130%. Australian 3yr yields fell from 1.18% to 1.11%, 10yr yields from 1.60% to 1.52%.


- U.S. stocks slumped as investors dumped shares of companies in growth and cyclical sectors, with energy and technology leading declines, on fears that the escalating U.S.-China trade war would stymie global economic growth. Dow Jones fell 286.14 points (1.11%) to 25,490.47, the S&P 500 lost 34.03 points (1.19%) to 2,822.24 and the Nasdaq dropped 122.56 points (1.58%) to 7,628.28.


- Gold prices jumped 1% as the U.S. dollar pulled back from a two-year peak scaled earlier in the session, and global equities and U.S. Treasury yields slid on escalating U.S.-China trade tensions. Spot gold climbed 0.9% to $1,284.78 per ounce.


- China's iron ore futures extended gains on Thursday, but the upside was capped as the Dalian Exchange called for a rational trade after hitting a fresh record high in the previous trading session.


- Copper prices hit their lowest since January as fears grew that a worsening confrontation between the U.S. and China will damage economic growth and metals demand. LME copper dropped to $5,880 a tonne in intraday trading, the weakest since Jan. 14, before pulling back to close down just $2 at $5,926. Prices were being dictated by a stronger USD and worries over the U.S.-China dispute.


- Oil prices plunged, losing about 5% as trade tensions dampened the demand outlook, on course for their biggest daily and weekly falls in six months. Oil coursed downward with other global markets as concerns grew that the China-U.S. trade conflict was fast turning into a technology cold war between the world's two largest economies. Brent crude futures settled down $3.23, or 4.6%, at $67.76 a barrel. U.S. WTI crude futures dropped $3.51, or 5.7%, to $57.91 a barrel.


Currencies

- The US dollar index is down 0.2% on the day.

- EUR initially fell from 1.1150 to 1.1107 – a two-year low, but then rose to 1.1187 following the fall in US interest rates.

- USD/JPY fell from 110.40 to 109.46, the safe-haven yen outperforming.

- AUD bounced from 0.6865 to 0.6900, at odds with the risk-off theme but reflecting the USD’s weakness.

- NZD similarly bounced from 0.6482 – a seven-month low – to 0.6525.

- AUD/NZD did capture the risk-off theme, falling from 1.0600 to 1.0570.

- AUD/EUR remained in its recent trading ranges 0.6160 / 0.6180


AUD Thoughts

Near-term strong support played its role at the time of greenback weakness.

Global risk sentiment remains under pressure.


Fewer economic data on hand highlights qualitative catalysts.

The AUD/USD pair has the ability to disappoint bears as soon as it hits near 0.6860 levels off-late. The quote is on the road to recovery by taking rounds near 0.6900 during the early Asian session on Friday.


Aussie has often been considered as a global risk barometer and uses to rise in times of market optimism. However, the quote took advantage of the US Dollar (USD) weakness on Thursday and registered a U-turn from the latest lows marked since last one week. The greenback couldn’t withstand disappointment front the economic calendar while its trade rift with China is in the spotlight.


Global risk sentiment was challenged yesterday as not only the trade rift between the US and China but disappointing stats of purchasing manager index (PMI) from leading economies also spread macro disappointment.


The US 10-year treasury yield, another risk gauge, recently slipped to a multi-year low of 2.322%.


Looking forward, the economic calendar at Australia offers no major data/event to follow while the US durable goods orders for April could become important to watch.

The forecast suggests another hit to the US Dollar via headline data as durable goods orders bear the consensus to dive into contraction region to the tune of -2.0% whereas non-defence capital goods orders ex-aircraft might also decline to -0.3%.


Technical Outlook

Even if the 14-day relative strength index (RSI) and repeated reversals from 0.6860 signal brighter chances of the pair’s U-turn, a five-week-old descending trend-line at 0.6910 can question near-term buyers targeting 0.6930 and 0.7000 numbers to the north.


Should prices sneak below 0.6860, January 2016 low surrounding 0.6830 and 0.6800 round-figure could become bears’ favourite.


Event Risk Data Today

- No Australian Economic data today


- NZ: the April trade balance is expected to show a $450m surplus, reducing the annual deficit slightly to -$5.5bn.


- Japan: Apr CPI is expected to show annual inflation rising to 0.9% from 0.5% and core (ex-fresh food & energy) up to 0.5%yr.

- US: Apr durable goods orders are anticipated to decline 2.0% following a 2.6% increase in Mar. Similarly, core capital goods orders are seen to edge down 0.3% after a 1.4% gain in Mar.

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