24th November 2021 - pulls back under 0.7250 as Powell renomination prompts dollar strength

Market Headlines

The risk-averse mood in equity markets extended to a second day, the S&P500 currently down by 0.3%. Bond yields rose slightly further, while the US dollar is little changed. Currencies: The US dollar index is unchanged on the day. EUR ranged between 1.1240 and 1.1275. USD/JPY ranged between 114.40 and 115.15 – a five-year high. AUD slipped from 0.7230 to 0.7207 – a two-month low. NZD fell to 0.6916 – a two-month low – before recovering to 0.6955. AUD/NZD rose to 1.0431 before retreating to 1.0385.

US 2yr treasury yields rose further, from 0.59% to 0.64% - a 20-month high – before retreating to 0.61%. The 10yr yield rose from 1.63% to 1.67%. Markets now fully price the first Fed funds rate hike to be in July 2022. Australian 3yr government bond yields (futures) ranged between 1.19% and 1.22%, while the 10yr yield rose from 1.88% to 1.93%. Markets fully price the first RBA rate hike to be in June 2022.

Commodities, Brent crude oil futures rose 3.4% to $82, copper rose 5.0%, gold fell 1.2%, and iron ore fell 3.9% to $99.

Overnight Currency Range

AUD/USD 0.7207 0.7235

EUR/USD 1.1226 1.1275

GBP/USD 1.3344 1.3408

USD/JPY 114.50 115.16

NZD/USD 0.6917 0.6959

USD/CAD 1.2682 1.2744

USD/CNH 6.3835 6.3948

AUD/JPY 82.62 83.23

AUD/NZD 1.0387 1.0431

AUD Thoughts

The AUD/USD grinds lower to an eight-week low during the New York session, barely down 0.04%, trading at 0.7219, at press time. The market sentiment is downbeat, as portrayed by US equity indices down. In the FX market, risk-sensitive currencies, like the Australian and the New Zealand dollar and the British pound, fall against the buck. Safe-haven currencies are also down, except for the US Dollar, as it seems that market participants were waiting for the renomination of current Federal Reserve Chairman Jerome Powell for another term.

In the overnight session, the AUD/USD remained subdued in a 0.7210-38 range, as investors kept bidding the greenback on the Powell propelled rally. Nevertheless, it reached a new eight-week low at 0.7207, bouncing off those levels towards the Monday low at 0.7220.

Fed speakers more vocal about a faster bond taper…..On Monday, Fed Bank of Atlanta President Raphael Bostic said that the Fed might need to speed up the removal of monetary stimulus and allow for an earlier than expected increase in interest rates. That is in the tune of what Fed Governor Christopher Waller, and Vice-Chairman Richard Clarida, expressed each. On the macroeconomic front, the US economic docket featured the IHS Markit PMI’s for November. Manufacturing PMI heightened to 59.1, better than the 59 expected. The Services Index rose but lower than the 59.1 foreseen, to 57. Moreover, the Richmond Fed Manufacturing Index for November increased to 11, better than the five expected.

The Australian dollar keeps extending its losses. On Monday, the pair broke below an upslope support trendline that accelerated the downtrend. The daily moving averages (DMA’s) are above the spot price. The Relative Strength Index (RSI) is at 32, edges lower, indicating that USD bulls could push the pair further down before reaching oversold conditions.

On the way down, the first support would be the September 30 low at 0.7169. A breach of the latter would expose the August 20 low at 0.7105. On the flip side, the first resistance would be the upslope trendline around the 0.7240s region. A break would expose crucial levels, with the November 18 high at 0.7292, followed by the November 15 high at 0.7370.

Event Risk Data Today

Australia: Stringent restrictions during the NSW and Vic delta lockdowns weighed heavily on construction work in Q3 (f/c: -3.2%). The RBA’s Assistant Governor (Financial System) will appear on two panels: one on central bank digital currencies at 9:15am; then another on the future of payments in Australia at 11:40am.

NZ: The market anticipates a follow-up 25bp increase in the RBNZ’s official cash rate to 0.75% at the November meeting; a 50bp hike is a clear risk.

Japan: The Nikkei manufacturing PMI should remain expansionary in November as a much-reduced delta case count builds support for the services PMI.

Germany: The November IFO business climate survey should reflect the underlying strength of the recovery despite supply disruptions and energy uncertainty.

US: The downtrend in initial jobless claims will likely remain in place (market f/c: 261k) while wholesale inventories for October should report modest growth (market f/c: 1.0%). A small revision in the second estimate for Q3 GDP is also anticipated (market f/c: 2.2%), and October’s durable goods orders are expected to point to solid investment growth at the start of Q4 (market f/c: 0.2%). Cost shocks from energy and supply disruptions will lift core PCE inflation to a new 30-year high in October (market f/c: 0.4%mth; 4.1%yr). Personal spending should see robust gains across goods and services (market f/c: 1.0%) as personal income stabilises after the conclusion of fiscal support (market f/c: 0.2%). The final release for November’s University of Michigan sentiment will again reflect the disparity between weak sentiment and strengthening activity (market f/c: 66.9) while new home sales are expected to hold steady in October with supply issues hindering construction (market f/c: 800k). The FOMC’s November meeting minutes will subsequently be scrutinised for any details regarding the Committee’s views on inflation and how they plan to pivot to rate hikes after tapering.