28th February 2020 - AUD gets some relief, concerns for further selling exist



Good morning


OVERNIGHT DATA AND HEADLINES


• Coronavirus update: The growth in cases outside China jumped significantly on 26 Feb to 569, from 335 on 25 Feb, marking a new peak. The US announced the appointment of a key Coronavirus Response Coordinator to guide US actions around the virus, and Pelosi and Pence stated that bi-partisan funding for responses was close to being agreed.

• The 2nd update of US 4Q GDP was unchanged at 2.1% ann., but the core PCE fell to 1.2% from 1.3%. The non-defence/ex-air component of Jan. durable goods orders beat expectations at +1.1%m/m (vs 0.0% expected). US Jan. pending home sales rose +5.2%m/m (est. +3.0%). Kansas City Fed’s survey rose to +5 (est. unch at -1).

• In the Eurozone, EC consumer confidence rose from 102.6 to 103.5 (vs 102.8 expected), suggesting little concern about the initial outbreak of the coronavirus pandemic.

• Stocks across the globe and oil prices continued to tumble and U.S. Treasury yields hit record lows as traders fretted over the economic impact of the spreading coronavirus. Wall Street's main indexes tumbled for the sixth straight session with the S&P 500 on track for its fastest correction in history as the global spread of coronavirus intensified investor uncertainty about the economic impact. Dow Jones fell 3.24% to 26,080, the S&P 500 lost 3.18% to 3,017 and the Nasdaq dropped 3.76% to 8,540.


CURRENCIES


• The USD fell as Treasury yields continued to plumb new lows – DXY index off 0.53% from 98.94 to 98.36 lows.

• EUR gained 1.00% in NY close, jumping up from 1.0905 towards 1.1005 highs.

• GBP fell from 1.2946 highs down towards 1.2858 lows.

• CNY improved as China reported the slowest daily increase in coronavirus deaths in almost a month – CNY traded 0.25% firmer at 7.0036 from 7.0268.

• AUD ended the overnight session higher 0.58%, jumping up from 0.6550 towards 0.6590 highs.

• NZD also improved towards 0.6333 highs from 0.6280 lows.

• AUDEUR continued its downward move, breaking through 0.6000 to a 0.5980 low.

• AUDNZD saw a 0.24% jump higher from 1.0390 to 1.0430.


TREASURIES


• U.S. Treasury yields steadied following sharp declines as coronavirus concerns led investors to pile into safe-haven assets, with the yield on the benchmark 10-year note reaching an all-time low for the third consecutive day.

• A volatile trading session left the yield on the 10-year note down 1 basis point in afternoon trading at 1.3004%, having earlier reached a new record low of 1.2408% and then briefly turning positive.

• Yields on other Treasuries also fell, including on the 30-year bond, which also hit a new low before steadying.

• The U.S. yield curve was at 19 basis points, up 5 basis points from Wednesday.

• The two-year note fell more than the yield of the 10-year. The yield on the two-year was 3.8 basis points lower in afternoon trading at 1.1071%, close to its lowest since late 2016.

• European government bond yields tumbled and investors ratcheted up bets on a rate cut earlier in the year from the ECB as the spread of the coronavirus undermined risk sentiment. Yields on benchmark German 10-year maturities fell as much as 6 basis points to -0.56%, their lowest in 4-1/2 months.


COMMODITIES


• Gold pared gains as investors booked profits after prices climbed more than 1% earlier in the session on mounting worries about how the coronavirus outbreak might hurt the global economy. Spot gold was down 0.05% into the NY close at $1,638 per ounce after hitting $1,660 session high.

• Benchmark Dalian and Singapore iron ore futures fell on Thursday as China's rapidly rising steel inventories amid weakening demand fuelled worries that mills will keep their purchases to a minimum for some time.

• Copper prices hit three-week lows as the market worried about the spread of the coronavirus from China to other countries. Benchmark LME copper ended 1% down at $5,616 a tonne.

• Oil prices tumbled for a fifth day to their lowest since January 2019. Brent crude dropped $1.88, or 3.5%, at $51.55 a barrel, off the session low of $50.97 a barrel, the lowest since December 2018. WTI futures sank $2.13, or 4.4%, to $46.60, after hitting their lowest since January 2019.

EVENT RISK TODAY


• Australian Economic data - Jan private sector credit (last 0.2%). Soft overall, although housing credit is lifting, gradually.

• NZ - Feb ANZ consumer confidence 122.7 - Confidence will be challenged by negative headlines.

• Japan - Jan industrial production (last 1.2%, forecast 0.2%). Weakness to persist into 2020...

• Europe - Feb CPI %yr (last 1.4%, forecast 1.2%). Preliminary estimate. Inflation well away from target.

• Germany - Feb CPI %yr 1.6% 1.6% – Inflation to bounce back in Feb, but offset by base effect.

• UK - Feb GfK consumer sentiment –9 –9 – Outlook highly uncertain.

• Feb Nationwide house prices 0.5% 0.4% – Labour market continues to support modest gains.

• US Jan wholesale inventories –0.2% – – Likely to drag on growth in early 2020. Jan personal income 0.2% 0.3% 0.3% Wage gains are solid, but non–wage income has softened. Jan personal spending 0.3% 0.3% 0.2% Consumption slowing after period of outperformance.

• Fedspeak – Fed's Bullard Discusses the Economy and Monetary Policy. Feb Chicago PMI 42.9 46.3 – Materially weaker than other regional surveys. Feb Uni. of Michigan sentiment 100.9 100.7 – Present situation key source of strength.


AUD THOUGHTS


AUD found renewed strength overnight as the USD battled to make further gains, staving off any further falls from 0.6550 to jump up towards 0.6590.

The AUD’s bounce and daily RSI's turned from oversold territory should delight longs but price action suggests the party won't last. The rise above 0.6580 is being driven by sharply higher probabilities for Fed rate cuts and USD/CNH falling below 7.0100.

The bounce has been meagre, suggesting AUD bias swings back towards downside. Bolstering that bearish view was the downbeat Australian Q4 CAPEX (released yesterday), which has helped boost chances for RBA cuts.

Commodity markets continue to suffer under the weight of coronavirus fears and economic development – copper, iron-ore and oil futures are sliding.


Today we have Australian January private sector credit due, and expected to increase by 0.2%. Although this extends the soft trend of 2019, a gradual rise is anticipated in the coming months as the housing credit cycle builds momentum.

In New Zealand, February ANZ consumer confidence will be released, and is likely to be challenged by negative headlines surrounding COVID-19.

Tonight in the Euro Area, preliminary estimates of February CPI are expected to print at 1.2%, well below the ECB’s inflation target. Turning to the US, January personal income is expected to increase by 0.3%, reflecting solid wage gains but a softening of non-wage income. In addition, January personal spending is expected to grow by 0.2% as consumption slows after a period of outperformance. The January PCE deflator is expected to edge up by 0.2% to 1.8%, the core measure up 0.1% to 1.7%. Finally, the Federal Reserve’s Bullard will speak on the economy and monetary policy.


For the AUD, suggest some relief at hand from further losses for the moment as the fall in US rates up’s the Fed chances of a rate cut. Targeting 0.6635/0.6640.


TECHNICAL OUTLOOK


AUD barely manages to rally above 0.6580 despite USD/CNH drop below 7.0000.

Extension of commodity price drop, RBA cut chances temper AUD bulls. Barely reacts to rally in global bond yields & US stocks off day's lows.

While daily RSI suggests AUD has some upside potential, the falling monthly RSI and significant resistance from September-October monthly lows should help limit any AUD upside.

U.S. economic data continues to suggest the economy is robust and should concern AUD longs. If COVID-19 worries begin to fade, the economic disparity could hold greater sway and lead AUD lower.

Unless AUD longs can get it above 0.6750/0.6780 resistance, downside risks remain.




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