27th September 2021- US dollar strength on both the Evergrande risks and possible FED tightening


Market Headlines

US equities remained upbeat, despite China’s curbs on cryptocurrencies and recent hawkish shifts by global central banks. The S&P500 closed up 0.2%, and bond yields rose, although so too did the defensive US dollar. Commodities, Brent crude oil futures rose 1.1% to $78, copper rose 1.4%, gold rose 0.4%, and iron ore rose 0.7% to $109.


Overnight Currency Range

AUD/USD 0.7235 0.73165

EUR/USD 1.1701 1.1747

GBP/USD 1.3659 1.3756

USD/JPY 110.20 110.79

NZD/USD 0.6997 0.7080

USD/CAD 1.2642 1.2730

USD/CNH 6.4593 6.4730

AUD/JPY 79.97 80.75

AUD/NZD 1.0316 1.0352


AUD Thoughts

AUD/USD ended Friday under pressure as the US dollar strengthened on both the Evergrande risks and as markets contemplate Federal Reserve tightening. AUD/USD closed the New York session at 0.7256 and had travelled from a high of 0.7316 to a low of 0.7236.


Evergrande debacle a major risk to AUD

China Evergrande Group owes $305 billion and has run short on cash, missing a Thursday deadline for paying $83.5 million. However, the company has a 30-day grace period but the question is whether it will make the payments before the deadline. A collapse of the company could create systemic risks to China's financial system which has negative ramifications for global markets.


The safe-haven dollar had its biggest one-day percentage drop in about a month on Thursday after Beijing injected new cash into the financial system and Evergrande announced it would make interest payments on an onshore bond, boosting risk sentiment. While Wall Street's bellwether, the S&P 500, posted a slim gain on Friday, major European markets slumped as investors weighed a potential fallout from debt-laden China Evergrande. Additionally, MSCI's gauge of stocks across the globe shed 0.15% after three days of gains, leaving the index little changed for the week.


The Evergrande debt resolution is far from clear which is an overhang of immense risk for Australia's iron-ore market and ultimately, the Australian dollar. Positioning in the currency is already very negative, but a short squeeze is not insight given both domestic and downside risks continue to pile up.


Australia is the most China-dependent country in G10 and has already lost about $6.6 billion in revenue to the Chinese market between July 2020 and February 2021. This came as a direct consequence of Beijing targeting its exports with heavy tariffs, claiming they were part of ‘anti-dumping measures. Another hit to the iron ore market could be the straw that broke the camel's back with respect to the Aussie.


Incidentally, the Reserve Bank of Australia has officially “frozen” its policy until February 2022. Therefore, data in the next few weeks may have a somewhat more limited impact on the currency and the focus will remain off-shore for the week ahead. August Retail Sales will be eyed, however.


AUD/USD closed last week at 0.7257 with demand expected ahead of the recent low of 0.7220 while offering interest has likely grown in the 0.7310/20 region.


Event Risk Data Today

US - US durable goods orders in August are expected to rise 0.6%, after a 0.1% fall in July. Re–opening should beget confidence and investment. The Dallas Fed activity survey is expected to see the index rise from 9.0 to 11.0, in a timely update on manufacturing in Texas. Fed speakers include Evans, Brainard, and Williams

Recent Posts

See All

Disclaimer

This material is provided by Navigate Global Payments (Navigate) ACN 615 699 888, AFSL 502711.  The material contains general commentary only and does not constitute investment or any other advice.  Certain types of transactions, like futures, options and high yield securities can be risky, and not suitable for all investors.  This information has been prepared without considering your objectives, financial situation or needs.  Please seek your own independent legal or financial advice before proceeding with any investment decision.  The information is believed to be accurate at the time of compilation and is provided in good faith.  Navigate does not warrant the accuracy or completeness of any information contributed by a third party. The information is subject to change without notice and Navigate is under no obligation to update the information. The information contained in this material are opinions of the author at the time of writing and does not constitute an offer, recommendation to act, a solicitation of an offer, or an inducement to subscribe for, purchase or sell any financial instrument or to enter a legally binding contract.  This information, including any assumptions and conclusions is not intended to be a comprehensive statement of relevant practise or law that is often complex and can change.  Past performance is not a reliable indicator of future performance. Any forecasts given in this material are predictive in character.Navigate Global Payments Pty Ltd nor its related parties or officers accepts no liability whatsoever for any loss or damages suffered through any act or omission taken as a result of reading or interpreting any of the information contained or related to this site.