· US data weighing on the USD into the Memorial Day long weekend with AUD/USD and NZD/USD both benefitting to highs of 0.6935 and 0.6556. News of UK PM's Theresa May’s resignation sparked some volatility in Sterling, eventually chopping higher and trading to a fresh high of 1.2754 in early Monday trade.
· As the European session got underway, we were greeted with headlines from China suggesting that it is “firmly against US abusing export restriction measures”. Given the numerous headlines we’ve seen of late, there was little reaction in currency markets.
· The major news story out of the UK was the announcement of the resignation of Prime Minister Theresa May.
· Shortly thereafter we had announcements out of the EU suggesting that the Bloc’s stance was unchanged despite the change of UK leader. MBL Strategy writing that the “EU already dampened expectations that the Withdrawal Agreement including the contentious Northern Ireland backstop could be changed under a new PM. This is the avenue by which a Eurosceptic new PM, who is unable to accept the NI backstop, could trigger a no-deal Brexit.”
· GBP was the big mover of the UK morning, trading from around 1.2660 up to 1.2719, supported by better than expected April retail sales data, which came in at -0.2% compared to expectations of a 0.5% decline while core measures were also better than expected. The gains were temporary however as the jockeying to replace May began with Boris Johnson on the wires saying that the UK must be prepared to walk away with no deal, this seeing GBP/USD briefly to new lows of 1.2647.
· Wall St opening in the black with early gains of around 0.5% though markets drifted modestly lower thereafter. European markets also coming off their highs though still closing firmly in the black with gains either side of 0.5% though the MIB outperformed to be up 1.2% at the closing bell.
· The US 10yr treasury yield ranged sideways in a 2.31%-2.33% range, the 2yr between 2.15% and 2.17%. The chance of a Fed rate cut by December, implied by Fed fund futures, remained at 130
· Australian 3yr yields rose from 1.10% to 1.13%, while 10yr yields range sideways between 1.53% and 1.56%. Markets are currently pricing a 100% chance of an RBA rate cut on 4 June.
- The US dollar index closed down 0.3% on the day.
- EUR rose from 1.1180 to 1.1210.
- USD/JPY fell from 107.75 to 109.27.
- AUD rose from 0.6885 to 0.6935.NZD rose from 0.6515 to 0.6556.
- AUD/NZD rose from 1.0555 to 1.0580.
· FTSE +0.7% at 7278, DAX +0.5% at 12011, CAC +0.7% at 5317, Nikkei -0.2% at 21117, ASX 200 -0.5% at 6456, Shanghai Comp +0.02% at 2853
· Dow +0.4% at 25586, S&P +0.1% at 2826, NASDAQ +0.1% at 7637
· US 2yr yield +2bps at 2.16%. US 10yr +1bps at 2.32%. VIX Volatility -6.3% at 15.85
· Commodities CRY +1.0% at 178.63, Natural gas +0.8%, Cotton +1.4%, Crude Oil +1.9%, Copper flat, Wheat +4.1%, Sugar +0.8% Gold at $1284/oz.
- US-China trade tensions playing against the commodity-linked currency.
- Aussie recovered on improved mood but RBA's upcoming cut keeping the upside limited.
The AUD advanced at the end of the week to close it at 0.6925, not far from a weekly high of 0.6934, a result of broad dollar's weakness and a modest recovery in Wall Street, as US major indexes closed the day with gains, trimming part of their weekly losses. The release of the RBA's latest Minutes mid-week and trade tensions between the US and China hurt Aussie's demand earlier in the week, and will likely keep the bullish potential contained, as Australian policymakers paved the way for a rate cut as soon as next June after almost three years of keeping the cash rate at a record low of 1.5%. As for the US-Sino trade relationship, US President Trump said Friday that he will meet his Chinese counterpart, Xi-Jinping in the next G20 meeting, adding that he was hopeful of getting a trade deal with China "at some point." His words had a short-term positive effect on high-yielding assets, yet a resolution seems still far away.
The AUD/USD spent the week consolidating at the lower half of the previous one, having bottomed at 0.6984 for a second consecutive week. In the daily chart, the pair continues trading below a bearish 20 DMA, currently at 0.6960, providing a dynamic resistance, while technical indicators continued recovering from oversold readings, still unable to enter positive ground, which limits chances of a steeper recovery. In the shorter term, and according to the 4 hours chart, the possibility of additional gains is also limited, as the pair is now above the 20 SMA, but below a firmly bearish 100 SMA, while technical indicators hold within positive ground, although with the Momentum flat and the RSI maintaining a positive slope. The bullish case will be firmer on a break above the 0.6965 level.
Support levels: 0.6896 0.6865 0.6825
Resistance levels: 0.6935 0.6965 0.7000
Event Risk Data
· Locally the Q1 capex survey on Thursday – the second of the GDP partials after last week’s construction work done – is the main economic event. NAB expects overall capex lifted 1% in Q1 (mkt: 0.5%), with a 1.3% lift in equipment investment, which is the component that feeds into GDP. Building approvals (also Thursday) and credit data (Friday) are likely to point to the ongoing deterioration in the housing market. NAB forecasts approvals fell 5% in April (mkt: flat) with monthly credit growth slowing to 0.2% (mkt: 0.3%).
· Thursday’s NZ Budget is likely to continue to report a robust fiscal path of growing cash surpluses. Wednesday’s RBNZ Financial Stability Report promises to be interesting in the context of the bank capital proposals, with a press conference and testimony to Parliament the same day. Wednesday’s ANZ business survey should capture the government’s 17 April announcement that it was ditching its capital gains plans.
· China official manufacturing and non-manufacturing PMIs are due on Friday, where the market is expecting a slight deterioration on both measures. The manufacturing PMI is expected to stay at around 50 pts after deteriorating (like many other global PMIs) late last year.
· US core PCE inflation (Friday) has of late continued to print below the Fed’s target at 1.6% y/y and there is little sign of a rebound. There is only one scheduled Fed speaker this week (Clarida on Thursday). Revised Q1 GDP is due Thursday.
· The Bank of Canada meets on Wednesday and economists unanimously expect rates to hold at 1.75%. March GDP is due on Friday and there is a speech from BoC’s Wilkins Thursday.