30th July 2019 - AUD/USD treads water on 0.69 handle, licking wounds ahead of key events this week


Good Morning,


Market Headlines

- US 2yr treasury yields drifted sideways between 1.84% and 1.85%, while 10yr yields ranged between 2.05% and 2.07%. Markets continued to 30bp of easing at the 31 July meeting.


- Australian 3yr government bond yields eked a lower range of 0.78% to 0.80%, 10yr yields between 1.19% and 1.22% - the former a fresh record low. Markets priced a 25% chance of an RBA rate cut in August.


- Brent crude oil rose 0.6% ahead of an expected Fed rate cut and US-China trade talks, and gold rose 0.6%.


- No-deal Brexit risks continue to grow. Newly installed UK PM Boris Johnson said he would not commence talks with EU leaders until they first agreed to reopen the deal struck with predecessor PM May, and scrapped the backstop guarantee for the Irish border. Senior UK officials also said that ministers were “turbo-charging” no-deal preparations.


Currencies

- The US dollar index is up 0.1% on the day, nudging up to a two-month high.

- EUR rose from 1.1115 to 1.1149.

- Underperformer GBP fell from 1.2365 to 1.2212 – a two-year low – as new UK PM Johnson stepped up preparations for leaving the EU without an agreement.

- USD/JPY rose from 108.60 to 108.90.

- AUD slipped further, from 0.6910 to 0.6895 – a one-month low.

- NZD similarly made a fresh multi-week low at 0.6616.

- AUD/NZD ranged between 1.0405 and 1.0435.


AUD Thoughts

- AUD/USD hangs in the balance of major risk events for the week ahead.

- AUD/USD bears in control, hoping for a hawkish cut from the Fed.


AUD/USD has been licking its wounds following a 2.6% drop from the prior swing highs up in the 0.7080s as markets get set for more of the same from the RBA and the Australian economy while presuming that the U.S. the economy can hold up better to potential adverse geopolitical and global economic conditions. Indeed, the slightly better than expected Consumer Price Index, solid jobs performance and Friday's stronger-than-expected US GDP data has all been taken positively by US markets.


Sino/US trade war noise is a risk this week

Global trade will be a major concern for the Federal Open Market Committee this week of which their two-day meeting starting tomorrow will clash with that of U.S. and Chinese trade negotiators collaborating in a two-day meeting in Shanghai this week for their first in-person talks since a G20 truce last month. However, where there is a slight chance of “goodwill” gestures and a clearer path for future negotiations, with the U.S. presidential elections in 2020, many expect that the Chinese will want to wait and see how those pan out, hoping that a new President would be elected.


FOMC to conclude in a prolonged downside trend for AUD/USD?


However, the immediate risk does stay with the Fed this week and should the Dollar find traction on the notion that recent domestic will make it too difficult to justify an outlook of sustained interest rate reductions by the FOMC, the recent downside could be the start of a prolonged bear trend for AUD/USD.


Event Risk Data Today

- NZ: Building permits for June are expected to have risen just 0.2%.


- Australia: Jun dwelling approvals are anticipated to increase 0.2%, having shown signs of levelling out in recent months after a 30% drop in 2018.


- Japan: The BOJ policy meeting is expected to be on hold. The focus will be on forecast updates and guidance at Governor Kuroda’s press conference with the BOJ having expressed willingness to increase stimulus if their baseline expectation disappoints, albeit caveated by wariness on the side effects of even easier policy.


- Europe: Jul European Commission business surveys are expected to show declines in both economic confidence and the business climate indicator. Q2 French GDP is seen to increase 0.3%, ahead of the Euro Area release on Wednesday.


- US: Jun personal income is expected to lift 0.4% with personal spending up 0.3%, while annual core PCE inflation rises to 1.7%yr from 1.6%yr. Jul Conference Board consumer confidence is expected to remain buoyant, edging up to 125.0 from 121.5. US trade representative Lighthizer and his team will meet their Chinese counterparts in Shanghai for two days of trade talks.


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