30th January 2020 - Fed leaves rates on hold, AUD remains under pressure



Good morning


OVERNIGHT DATA AND HEADLINES


• The Federal Reserve held interest rates steady on Wednesday at its first policy meeting of the year, with officials pointing to continued moderate U.S. economic growth and a "strong" job market. "Job gains have been solid ... and the unemployment rate has remained low," the Fed's policy-setting committee said in a statement announcing its unanimous decision to maintain the key overnight lending rate in a range of between 1.50% and 1.75%. The Fed's statement was little changed from the one issued after its December meeting, saying that the current federal funds rate was "appropriate to support sustained expansion of economic activity," including ongoing job growth and a rise in inflation to the central bank's 2% target. It did not specifically mention economic risks arising from the recent coronavirus outbreak in China, which has led to fears of a further slowdown in the world's second-largest economy. The absence was notable to some economists. The Fed did not give new guidance about its current practice of buying $60 billion monthly of U.S. Treasury bills to ensure adequate short-term liquidity in bank funding markets. That program will remain in place at least into April, while a related offering of repurchase agreements will continue at least through April.

• Global equity markets edged higher on strong results from Apple and others but concerns about the coronavirus outbreak dampened investor enthusiasm, keeping a safe-haven bid in gold and the USD. U.S. stock indexes edged higher - Dow Jones was up 0.49% at 28,863, S&P 500 gained 0.36% to 3,288 and the Nasdaq rose 0.49% at 9,317.

• The U.S. goods trade deficit rose sharply in December as imports rebounded and businesses became more cautious on accumulating inventory, prompting some economists to cut their fourth quarter economic growth estimates. The goods trade gap, which had dropped for three straight months due to declining imports, surged 8.5% to $68.3 billion last month. The overall trade deficit is on track for its first annual fall since 2013, with economists saying the Trump administration's "America First" agenda, underscored by an 18-month trade war with China, has restricted the flow of goods, particularly imports.

• U.S. Pending home sales index fell 4.9% in December, the biggest drop since May 2010, likely because of a shortage of houses on the market. Compared with one year ago, pending sales were up 4.6%. Pending home contracts become sales after a month or two, and last month's decline suggests a slowdown in existing home sales, which raced to a near two-year high in December. Still, demand for homes remains strong.


CURRENCIES

• Demand strengthened for the US DXY index , holding held near two-month highs and last trading up 0.4% at 98.05.

• EUR fell to a 1.0990 low overnight but retraced all losses jumping up towards 1.1020 into NY close.

• GBP was down at 1.2987 but also gained towards 1.3022 after the Fed announcement.

• AUD edged higher towards 0.6765 after falling to three-month overnight lows (0.6735).

• NZD jumped up towards 0.6535 late into the close from 0.6504 lows.

• AUDNZD saw gradually selling from 1.0368 highs but remained supported around 1.0330 / 1.0335.

• AUDEUR also sold off from 0.6150 levels down towards 0.6125.


TREASURIES


• U.S. Treasury yields fell overnight even after the Fed statement which kept interest rates on hold.

• Benchmark 10-year note yields fell 4 basis points to 1.585 from 1.62%. They dropped to 1.57% on Tuesday, the lowest since Oct. 10, before bouncing.

• U.S. 2 year yields fell from 1.445% down towards 1.416%.

COMMODITIES


• Gold gained 0.64%, jumping up from session lows $1,564 to trade $1,576 after the Fed announcement.

• Copper prices fell, taking losses over the last seven trading days to 10%. Benchmark LME copper ended 1.1% lower at $5,642 a tonne, down from around $6,250 at the start of last week.

• Oil was mixed as worries about the impact of the coronavirus outbreak and swelling crude inventories in the U.S. weighed on prices, while talk that OPEC could extend oil output cuts provided support. Brent crude gained 9 cents to $59.60 a barrel. U.S. crude was down 32 cents at $53.16.


ECONOMIC DATA TODAY


• Australian Economic data today - Q4 import price index %qtr (last 0.4%, f/cast 0.4%). Modest rise on lower dollar, as well as higher fuel prices. Q4 export price index %qtr (last 1.3%, f/cast –5.2%).

• NZ - December trade balance $m (last –753). Seasonal lift in dairy exports.

• Europe - Jan economic confidence, Jan business climate indicator, Dec unemployment rate

• Germany - Jan CPI %yr (last 1.5, f/cast 1.7).

• UK BoE policy decision - 0.75% 0.75% 0.75% On hold in January, but a cut is close.

• US Q4 GDP %ann 2.1 2.2 1.7 Softening consumer pulse to see growth at trend in Q4. Initial jobless claims 211 – – Very low.


AUD THOUGHTS


AUD remained on the defensive overnight, trading back under 0.6750 (0.6735 lows) but managed a brief bounce up towards 0.6765 after the Fed announcement this morning which kept interest rates on hold.

Yields on U.S. Treasury securities were little changed after the Fed's statement, while benchmark U.S. stock market indexes ticked up to the day's highs. The USD held on to its gains against the EUR & JPY.

The interest rate decision was widely expected, with recent economic data showing the economy on track for continued growth, and no sign inflation is rising so fast that it poses a risk the Fed might need to counter with higher borrowing costs to slow the economy. The Fed cut rates three times last year to bolster an economy buffeted by trade wars, and has set a high bar for any further rate changes. Fed Chair Jerome Powell has said a "material reassessment" of the economic outlook would be required for any shift.


Yesterday’s Australian Q4 inflation ticked higher yesterday with the CPI index rising to 0.7% in the December quarter, higher than forecasts of a 0.6% increase, driven by gains in cigarettes, domestic holidays, travel, fuel and fruit prices. The annual pace rose to 1.8%, still below the floor of the Reserve Bank of Australia's (RBA) 2-3% target band. Indeed, a key measure of core inflation was stuck at an even slower 1.6% marking four straight years below target. This persistent weakness was one reason the RBA cut interest rates three times last year to an all time low of 1.75%, and why markets are still pricing in at least one more easing.


The concern on the economic impact of virus will likely weigh on AUD for the remainder of this week. A break & close below 0.6737 will negate a bearish signal, suggesting somewhat of a resumption of the bear trend.


TECHNICAL OUTLOOK


AUD falls below 76.4 Fib of 0.6670-0.7032 (0.6754) & November monthly low.

A break below Fib & falling daily, monthly RSIs suggests bears are in control

Very little reaction after no Fed surprises, AUD near 0.6740 late in day. Falling daily, monthly RSIs, break of 76.4 Fib keep techs bearish.



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