AUD/USD clings to 0.6930 amid fewer catalysts to follow
• US markets resumed after the long weekend in a bearish mood, US-China trade tensions remaining at the fore. US bond yields are lower, and the USD is higher.
US 10yr treasury yields fell from 2.32% to 2.26% - the lowest since Sep 2017, taking it further below the 2.38% Fed funds rate which some consider a harbinger of recession, 2yr yields fell from 2.17% to 2.12%.
• The chance of a Fed rate cut by December, implied by Fed fund futures, increased from 130% to 140%.
• Australian 3yr yields fell from 1.12% to 1.10%, while 10yr yields fell from 1.55% to 1.52%. Markets continued to price a 100% chance of an RBA rate cut on 4 June.
• Gold slipped from the previous session's one-week peak, pulled down by a firm USD as the currency was the preferred safe-haven amid uncertainty over U.S.-China trade tensions. Spot gold fell 0.5% to $1,278.12 per ounce.
• China's iron ore jumped to a fresh record, but the rally fizzled out, as bets continued that there could be a further squeeze in supply of the steelmaking feedstock from Brazil, while domestic demand remained brisk. Spot iron ore with 62% fines for delivery to China climbed to a five-year peak at $108.50 a tonne, from Friday's $103.50 level.
• Copper prices rose alongside Chinese equities, supported by expectations of further economic stimulus though sentiment remained fragile because of the U.S.-China trade dispute. LME copper ended up 0.1% at $5,960 a tonne.
• U.S. crude futures gained almost 1% after flooding throughout the Midwest constrained crude flow from the main U.S. storage hub in Cushing, Oklahoma. U.S. West Texas Intermediate (WTI) futures settled at $59.14 a barrel, up 51 cents, or 0.9%, from its close on Friday before the long Memorial Day holiday weekend. Brent crude futures settled flat at $70.11 a barrel, after repeatedly veering above and below the $70-mark.
• The US dollar index is up 0.4% on the day.
• EUR fell from 1,1198 to 1.1160.
• USD/JPY roundtripped from 109.60 to 109.20 and back.
• AUD was resilient, given the stronger USD, ranging between 0.6915 and 0.6935.
• NZD fell from 0.6560 to 0.6540.
• AUD/NZD rose from 1.0555 to 1.0587.
• FTSE -0.1 at 7269, DAX -0.4% at 12027, CAC -0.4% at 5313, Nikkei +0.4% at 21260, ASX 200 +0.5% at 6485, Shanghai Comp +0.6% at 2910
• Dow -.90% at 25347, S&P -1.1% at 2801, NASDAQ -0.4 at 7607
• US 2yr yield -4bps at 2.12%. US 10yr -6bps at 2.26%. VIX Volatility +10.40% at 17.50
• Commodities CRY +.9% at 180.26, Natural gas -0.8%, Cotton +1.6%, Crude Oil +0.7%, Copper +0.1, Wheat +3.1%, Sugar +0.7% Gold at $1279/oz
• Weak US manufacturing data helped the Aussie to remain strong despite risk-off.
• Lack of scheduled events on economic calendar shifts the focus on qualitative catalysts with the US-China trade tensions being on the frontline.
With fewer fresh catalysts to follow, AUD/USD trades modestly unchanged to 0.6930 at the initial trading hours of the Asian session on Wednesday. The pair did take advantage of soft manufacturing data from the US in order to register an uptick on Tuesday despite broader risk-off market sentiment.
Global risk barometer, the US 10-year treasury yield, dropped nearly 5 basis points to 2.27%, the lowest since October 2017 by the end of Tuesday while stretching losses overnight at the time of writing.
The much-anticipated reasons for the change in risk tone are the US traders’ reaction to the EU election and latest statements from the US President Donald Trump that signals additional problems for Chinese goods to arrive the US.
Investors remained clueless during early-day trading as no major data/events were up for release either from Australia or from the US while trade tensions remained in place. Hence, political news and risk tone are likely to be a major driver of price change for the sessions to come.
Frequent pullbacks from 0.6940 indicate brighter chances for the pair’s U-turn towards 0.6900 and 0.6860 support with 2016 low near 0.6830 likely being in the bears’ radar then after.
Alternatively, an upside clearance of 0.6940 can question 0.7000 and 50-day simple moving average (SMA) level around 0.7040.
Event Risk Data
• Nothing due in Australia (where the calendar kicks off in earnest with Capex and Building Approvals both on Thursday).
• In NZ the RBNZ Financial Stability Report is just out (see above) but still to come is the ANZ Business Confidence survey where particular interest is in seeing whether the government’s decision not to proceed with a capital gains tax has prompted a bounce.
• Offshore tonight it’s EC unemployment, ECBs Rehn speaking (a potential successor to Draghi), the Richmond Fed Manufacturing Index and the latest Bank of Canada rates decision (where we expect to hear they are comfortably on hold with the prevailing 1.75% policy rate).