28th January 2020 - AUD pounded by risk aversion, finds fresh 2020 lows



Good morning


OVERNIGHT DATA AND HEADLINES


• Stocks markets tumbled worldwide and investors worried about the possible economic impact of the coronavirus drove up the price of safe-haven assets such as the Japanese yen and government debt.

• Sales of new U.S. single-family homes fell unexpectedly in December, likely held down by a shortage of more affordable homes, but lower mortgage rates supported the overall housing market. New home sales slipped 0.4% last month to a seasonally adjusted annual rate of 694,000 units, with sales in the South dropping to the lowest in more than a year. It was the third straight monthly decline in sales. November's sales pace was revised down to 697,000 units from the previously reported 719,000. September and October sales were also marked down.

• Wall Street's main indexes fell more than 1% as investors worried about the economic fallout of a virus outbreak in China that has prompted the country to extend the Lunar New Year holidays and businesses to close some operations. Dow Jones slipped 1.35% to 28,600, S&P 500 fell 1.33% to 3,251 and the Nasdaq dropped 1.68% to 9,158.

CURRENCIES


• The U.S. dollar index, the JPY and the Swiss franc rose, while the offshore CNY tumbled to a 2020 low as growing fears about the spread of a coronavirus from China pushed investors into safer assets.

• The US DXY was up 0.11% at 97.95.

• EUR fell 0.08% from 1.1037 towards 1.1008 lows.

• GBP fell towards 1.3044 lows.

• CNY fell to a two-week on Thursday at 6.9364 and was set to clock its largest weekly fall in five-and-a-half months.

• AUD headed lower to its lowest level this year – AUD fell 1.04% to a 0.6750 low.

• NZD followed AUD lower down to 0.6542 (also its lowest level for 2020).

• AUDEUR continued the downtrend falling from 0.6170 down towards 0.6125 lows.

• AUDNZD fell from 1.0355 highs down towards 1.0305 but was up in smalls to 1.0325 on the NY close.

TREASURIES


• Benchmark U.S. Treasury yields fell to three-month lows as concerns grew about the economic impact of China’s spreading coronavirus.

• Benchmark 10-year note yields fell to 1.625%, from 1.680% late on Friday. The yields reached 1.604% overnight, which was the lowest since Oct. 10.

• The yield curve between two-year and 10-year notes also flattened to 17 basis points, the flattest since Dec 11.

• The safety bid comes before the Treasury Department will sell $40 billion in two-year notes and $41 billion in five-year notes. It will also sell $32 billion in seven-year notes on Tuesday.


COMMODITIES


• Gold climbed 1% to a near three-week high as mounting concerns over the economic fallout of the coronavirus outbreak sent investors scurrying for safe havens. Spot gold was up 0.65% at $1,580 per ounce.

• Shanghai steel futures hit one-month lows on Thursday ahead of a week-long Lunar New Year break on worries that a new coronavirus outbreak in the country would hit construction activity. Spot prices of the benchmark 62% iron-content ore fell by $0.40 to $96.8 per tonne on Wednesday.

• Copper fell for a ninth consecutive session, the longest losing streak in six years. Benchmark 3-month LME copper dropped 3.1% trading to $5,743 a tonne, its lowest since Oct. 18.

• Oil prices dropped 3% to three-month lows - Brent crude was down $1.77 a barrel, or 2.9%, at $58.92. U.S. crude was down $1.51, or 2.8%, at $52.68 a barrel.

ECONOMIC DATA TODAY


• Australian Economic data today – December NAB business survey

• UK - Jan Nationwide house prices (last 0.1. market forecast 0.2). House price growth weak.

• US - Dec durable goods orders %mth (last –2.1, market f/cast +1.2). Underlying trend remains weak.

• US - Nov S&P/CS home price index %yr (last 2.2, market f/cast 2.4). Price growth stabilising broadly in line with wages growth.

• US - Jan consumer confidence index (last 126.5, market f/cast 128.0). Confidence above average, thanks to strong labour market.

• US - Jan Richmond Fed index (last –5, market f/cast –3). Regions mixed of late.


AUD THOUGHTS


The spread of China's coronavirus fears continued overnight with AUD pummelled lower to fresh 2020 lows (0.6750) as risk aversion sent flows into safe haven currencies, driving AUD/JPY down near 73.50.

The AUD faces other risks too, including a potentially deteriorating global inflation outlook, positioning and bearish technicals. The current environment is already negative for the AUD, with global equities, bond yields and commodities such as copper and oil tumbling on concerns about the virus' broader economic impact.

AUD shorts took advantage, sending it to a 3-month low after breaking below November's 0.6755 trough. AUD longs might be well advised to assess other factors. Global inflation expectations are falling after peaking in mid-January. The drop in swap rates will put added focus on Australia's Q4 inflation report due on Wednesday. The RBA's month-on-month trimmed mean is forecast to hold steady at 0.4% but year-on-year is estimated to drop to 1.5% from 1.6%. A below-estimate result should pressure Australian rates and the AUD lower. Reduced net-short AUD positions should concern AUD longs as the reduction indicates there are fewer shorts looking to buy to book profits.


TECHNICAL OUTLOOK


AUD longs get no relief as risk-off dominates. Soured risks keeps equity markets, global bond yields, commodities heavy.

AUD bears take advantage of the risk-off environment. Tighter AU-US yield spreads, Fed expectations can't deter bears.

AUD slide extends through November's low, stops short of Oct 17 0.6752 low. Almost no bounce seen & RSIs imply bear momentum remains; slide may extend.

Falling daily and monthly RSIs should worry AUD longs as they suggest downside momentum remains. A test of 2019's low cannot be ruled.

Next support lies at 0.6700 followed by the 02/10/19 low at 0.6668 (see below).



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