OVERNIGHT DATA AND HEADLINES
The Federal Reserve on Wednesday left interest rates near zero and repeated a vow to use its "full range of tools" to shore up the U.S. economy amid an ongoing coronavirus pandemic that will not only slam growth in the near term but pose "considerable risks" in the medium term as well. "We are doing all we can" to help American households and businesses weather the public health emergency, Fed Chair Jerome Powell told journalists at the end of a two-day policy meeting that was held via videoconference. He added that the novel coronavirus could threaten economic growth for another year. "We will continue to use our tools to ensure that the recovery, when it comes, will be as robust as possible." For now, he said, monetary policy is calibrated appropriately, but added that could change. "It may well be the case that the economy will need more support from all of us if the recovery is to be a robust one," Powell said. The Fed said it expects to maintain the target range for its benchmark overnight lending rate at the current 0% to 0.25% "until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals," the same phrasing it used in its last policy statement on March 15. It also said it will continue to buy U.S. Treasuries and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth markets, and to offer large-scale overnight and term repurchase agreement operations.
The U.S. economy contracted in the first quarter at its sharpest pace since the Great Recession as stringent measures to slow the spread of the novel coronavirus almost shut down the country, ending the longest expansion in the nation's history. GDP declined at a 4.8% annualised rate last quarter, weighed down by a collapse in spending on healthcare as dentists' offices closed and hospitals delayed elective surgeries and non-emergency visits to focus on patients suffering from COVID-19, the potentially lethal respiratory illness caused by the virus. That was the steepest pace of contraction in GDP since the fourth quarter of 2008. Households also drastically cut back on purchases of motor vehicles, furniture, clothing and footwear. Receipts for transportation, hotel accommodation and restaurant services also plunged. Businesses further tightened their purse strings and liquidated inventory, helping to overshadow positive news from a shrinking import bill, the housing market and more spending by the government. Economists polled by Reuters had forecast GDP falling at a 4.0% rate last quarter. The economy, which grew at a 2.1% rate in the fourth quarter, was in its 11th year of expansion, the longest on record.
Australian inflation accelerated to its highest in over five years last quarter, data showed on Wednesday, but the long-desired pick-up is likely to be fleeting in the face of a coronavirus lockdown and collapsing energy prices. The headline consumer price index (CPI) rose 0.3% in the first quarter, from the previous quarter, lifting annual inflation to 2.2% from 1.8%. That was the highest reading since the third quarter of 2014 and topped forecasts of 2.0%. It was also the first time inflation reached the Reserve Bank of Australia's (RBA) 2-3% target band since early 2018 and could have led to a much-needed pick up in wage growth. A key measure of underlying inflation rose a surprisingly firm 0.5% in the quarter and 1.8% for the year, driven mainly by food, education, drugs and tobacco taxes. The RBA has already flagged a long period of very subdued inflation ahead, one reason it cut rates to a record low of 0.25% and launched a major campaign of bond buying.
German annual inflation slowed further in April to well below the ECB's target - German consumer prices rose by 0.8% year-on-year after a 1.3% increase in the previous month. The reading was the lowest since November 2016 and came in above a Reuters forecast for 0.5%.
U.S. stocks surged as expectations of an effective COVID-19 treatment prompted a broad rally and helped investors shrug off bleak GDP data and words of warning from U.S. Federal Reserve Chair Jerome Powell. Dow Jones rose 527.85 points, or 2.19%, to 24,629.4, the S&P 500 gained 76.17 points, or 2.66%, to 2,939.56 and the Nasdaq added 306.98 points, or 3.57%, to 8,914.71.
USD fell after the Federal Reserve left interest rates unchanged. The DXY index fell 0.32% to 99.54, but held above a two-week low of 99.44 reached on Tuesday.
EUR gained 0.55%, jumping up towards 1.0886 highs from 1.0817.
GBP dropped initially to around 1.2400 but rebounded towards 1.2469.
USDJPY fell down to a 106.36 low but weakened into the NY close towards 106.70.
AUD climbed to a seven-week high, rising 0.90% to a 0.6552 high.
NZD added 1.20% to a 0.6135 high from a 0.6075 low.
AUDNZD sold off from the last 24 hours impressive gains to 1.0752, falling back under 1.0700 to 1.0672 lows.
AUDEUR maintained a solid performance through 0.6000 but capped ahead of 0.6025.
U.S. Treasury yields moved in mixed directions as the Fed repeated its vow to use every tool in its toolbox to rescue the coronavirus-ravaged economy.
The benchmark 10-year U.S. yield was last up 1.2 basis points at 0.6221%.
The two-year U.S. Treasury yield was last down 1 basis point at 0.1994%.
Italian government bond yields rose but showed relatively little reaction to a downgrade of the country's credit rating by Fitch, given that a further, immediate downgrade to junk territory appeared less likely. Italy's bond yields rose in early trade, with the two-year yield up as much as 12 basis points at one stage, but most of the losses were retraced by the close of trading. The 10-year yield rose as much as 10 bps to 1.83% and was last up 4 bps at 1.77%.
Germany's 10-year benchmark yield fell 4 bps to -0.50%, the lowest in more than a week, before closing at -0.49%.
Gold staged a late stage recovery towards $1.717 after falling 0.4% to $1,701 per ounce overnight.
China steel futures drifted in a narrow range. The most traded construction rebar contract on the Shanghai Futures Exchange, for October delivery, closed with a 0.03% dip to 3,302 yuan ($466.74) per tonne. Spot prices for iron ore with 62% iron content for delivery to China fell to $84 per tonne on Tuesday.
Copper prices climbed to a six-week high as the prospect of stronger demand in China and output disruptions outweighed expectations of rising supplies from producers emerging from new coronavirus lockdowns. LME 3 month copper was up 0.7% at $5,261 a tonne.
Other metals: Aluminium was up 0.1% at $1,506, lead added 0.3% to $1,648, tin fell 0.3% to $15,295 and nickel rose 0.5% to $12,350 a tonne.
Oil prices surged more than 10% after U.S. crude stockpiles grew less than expected and gasoline posted a surprise draw, feeding optimism that fuel consumption will recover as some European countries and U.S. state ease coronavirus lockdowns. U.S. WTI crude futures settled at $15.06 a barrel, jumping $2.72, or 22%. Brent crude futures settled at $22.54 a barrel, up $2.08, or 10.2%.
ECONOMIC CALENDAR TODAY
Australia - March private sector credit (last 0.4%, forecast 0.3%). On a firmer footing in Q1, ahead of COVID led slowdown.
Australia - Q1 import / export price index. Prices generally higher on lower AUD, fuel prices down and commodity prices flat.
New Zealand - April ANZ business confidence.
Japan - March industrial production (last -0.3%, forecast -5.0%). In line with the broad contraction in economic activity.
China - April manufacturing PMI (last 51, forecast 52). After recovering from a collapse in February, PMIs should remain in marginally positive territory.
China - April non-manufacturing PMI (last 52, forecast 52.3).
Europe - March unemployment rate (last 7.30%). Labour market to weaken as activity contracts sharply applying downward pressure to price inflation.
Europe - Q1 GDP (last 0.1%, forecast -4.2%).
Europe - ECB policy decision, deposit rate (last -0.5%, forecast -0.5%). ECB will call on fiscal authorities to do more.
US - March personal income (last 0.6%, forecast -1.5%).
US - March personal spending (last 0.2%, forecast -4.2%).
US - Initial jobless claims (last 4.427mio). Deterioration to date puts unemployment above 15% in April.
US - Q1 employment cost index & April Chicago PMI.
AUD THOUGHTS AND TECHNICAL ANALYSIS
AUD pushed higher overnight, remaining within its recent uptrend to record a fresh high this morning at 0.6558 from the 0.6505 lows overnight.
Another round of risk on rallies saw a repeat of the previous day’s actions whereby equities higher, commodities higher, AUD/JPY higher & USD index sold. The AUD continues to push ahead, in part because of declining volatility in other asset markets. The run up this month has extended far beyond what the improvements in risk metrics most pertinent to the AUD would justify. AUD has surged over 6.3% on the USD so far in April, outpacing all its major peers, which can be viewed as quite an extraordinary move in markets and does leave many a little cautious about the near-term outlook, especially as the calendar clicks over into May. Australia's success in containing the virus has helped the AUD rise, though much of the economic damage done by the lockdown is yet to fully show in the economic data releases. The huge impact of the economic shutdown will see deflation persist for a few quarters. This unwelcome outlook is a major reason why the RBA has committed to keeping the cash rate at a record low of 0.25% for the next three years.
Australian Economic data today remains on the lighter side, focus will first shift to the Chinese PMI releases followed by a raft of releases in Europe and U.S. overnight. The ECB to remain at -0.5% with eyes on the weekly jobless numbers in the U.S.
For the AUD, longs continue to gain confidence as the rally extends and a test of key resistance near 0.6700 seems likely.
Price action has bolstered already bullish technicals. Daily and monthly RSIs indicate upside momentum is intact and AUD is holding above the 61.8% Fibo of 0.7032-0.5510.
Should risk sentiment remain upbeat a test of 0.6670/0.6700 resistance is likely. The March monthly high, 76.4% Fibo of 0.7032-0.5510 and 200-DMA sit in that zone.
A break above that resistance will likely see longs target the January and December monthly highs.