26th May 2021 - AUD/USD seeks fresh clues to overcome indecision around 0.7750

Good Morning,

Market Headlines

US equities were little changed overnight, Fed officials continuing to emphasize that rising inflation will be temporary. Bond yields fell, and the US dollar is lower. US 2yr treasury yields fell from 0.15% to 0.14%, while the 10yr yield fell from 1.61% to 1.56%. Australian 3yr government bond yields (futures) fell from 0.22% to 0.20%, while the 10yr yield fell from 1.64% to 1.59%.

Commodities, Brent crude oil futures rose 0.1% to $68.50, copper fell 0.5%, and gold rose 1.0%, while iron ore rose 0.5% to $188.65 following a sharp decline over the past week.

Overnight Currency Ranges

AUD/USD 0.7733 0.7776

EUR/USD 1.2212 1.2266

GBP/USD 1.4116 1.4210

USD/JPY 108.56 109.07

NZD/USD 0.7209 0.7250

USD/CAD 1.2030 1.2078

USD/CNH 6.3925 6.4153

AUD/JPY 84.26 84.66

AUD/NZD 1.0715 1.0746

AUD Thoughts

AUD/USD extends its sideways grind around 0.7750, picking up bids of late, amid the early Wednesday morning in Asia. The Aussie pair struggled to deviate from the stated level the previous day amid mixed clues and hence traders are looking for today’s second-tier data from home for clear direction, howsoever small it may be.

Bulls & bears jostle over inflation, tapering…

Tuesday turned out to be another downbeat day for the US dollar index (DXY) but the market reaction was timid as the Federal Reserve (Fed) officials couldn’t convince traders that the inflation fears are transitory. A slew of Fed policymakers, including Vice Chair Richard Clarida, tried soothing the reflation fears but couldn’t come to a single page, like always, which in turn seems to have magnified the market’s indecision and weighed down the risk-on mood even. It’s worth mentioning that the recovery in the coronavirus (COVID-19) conditions, steady vaccinations and gold’s run-up also tried to please the bulls, but couldn’t.

Talking about the economics, US New Home Sales and Richmond Fed Manufacturing Index flashed mixed signals for April and May respectively whereas CB Consumer Confidence Index for May also eased, offering extra obstacles to the market moves.

Although inflation and tapering are the key catalysts, Australia’s Westpac Leading Index figures for April, prior 0.38% MoM, will be the key to watch. The six-month annualized growth rate in the Westpac-MI Leading Index lifted from 3.0% in February to 3.3% in March, consistent with comfortably above-trend growth continuing through the remainder of 2021. The April reading is likely to show something similar although there has been a mixed bag of component updates over the last month

At the risk of sounding like a broken record, the AUD/USD remains range bound and demand is still expected ahead of 0.7700 while topside resistance should materialise between 0.7815/20

Event Risk Data Today

Australia: Westpac-MI Leading Index lifted from 3.0% in February to 3.3% in March, consistent with comfortably above trend growth continuing through the remainder of 2021. The April reading is likely to show something similar although there has been a mixed bag of component updates over the last month. On the positive side: equities, commodity prices; dwelling approvals and consumer unemployment expectations have shown substantial improvements. Against this: broader consumer sentiment has retraced from last month's 11 year high, US industrial production and total hours worked have declined, and the yield spread has narrowed slightly.

For Q1 2021, markets anticipate a rise of 0.8% in construction work done, with another strong showing for housing but further falls in business construction. The housing market is on fire - dwelling approvals have spiked alongside record low rates and government incentives. The swing factor is public works - the Q4 drop of -3.6% looks to be overdone, with the prospect of a modest lift in Q1 as governments commit to new projects.

New Zealand: Markets expect the RBNZ Monetary Policy Statement will leave policy settings unchanged. The economic outlook has improved on balance, despite a soft patch in growth over the summer period. Inflation is expected to rise well above 2% this year, but the RBNZ has already foreseen this and will regard it as temporary. We expect the April trade balance will print a wider surplus of $390mn, with imports easing after a catch up in March.

US: The Fed’s Vice Chair for Supervision, Randal Quarles, will speak at 00:00 AEST and 05:00 AEST.

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