31st May 2019 - AUD held steady in the face of poor economic data

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Market Headlines

• 10yr treasury yields fell from 2.28% to 2.21%, keeping it below the Fed funds rate at 2.38%. 2yr yields similarly fell from 2.13% to 2.05%. The chance of a Fed rate cut by December, implied by Fed fund futures, rose, with the September meeting now a 100% chance.

• Australian 3yr yields fell from 1.14% to 1.12%, while 10yr yields fell from 1.56% to 1.52%, Markets pricing for the 4 June meeting remained around 100%.

• US Fed Vice-chair Clarida said that the Fed would consider interest rate cuts in a speech in NY, noting during the Q&A that, “Let me be very clear that we are attuned to potential risks to the outlook and if we saw a downside risk to the outlook then that would be a factor that could call for a more accommodative policy”.

• Q1 GDP was revised a touch lower to 3.1% from 3.2%, the price deflators notably trimmed, the core PCE deflator revised to a soft 1% annualised in Q1 from an initial estimate of 1.3%. Pending home sales fell 1.5% in April, weaker than expected.

• Spanish CPI for May pulled back more than expected to 0.8%y/y headline, 0.9%y/y EU harmonised (est. 1.1%y/y from 1.5%y/y and 1.1%y/y from 1.6%y/y respectively). Given the similar miss in French CPI yesterday, this highlights the risk of a larger than mere base effect pullback in German May CPI which will be released tomorrow and Eurozone on Tuesday.


• The US dollar index is unchanged on the day.

• EUR ranged sideways between 1.1115 and 1.1145.

• USD/JPY round-tripped from 109.50 to 109.93 and back.

• AUD slipped from 0.6937 to 0.6899.

• NZD similarly slipped from 0.6527 to 0.6496.

• AUD/NZD ranged sideways between 1.0610 and 1.0630.

Equities/Commodity Markets

• FTSE +0.5% at 7218, DAX +0.5% at 11902, CAC +0.5% at 5249, Nikkei -0.3% at 20943, ASX 200 -0.7% at 6392, Shanghai Comp -0.3% at 2906

• Dow +0.2% at 25169, S&P +0.3% at 2789, NASDAQ +0.3% at 7567

• US 2yr yield -5bps at 2.06%. US 10yr -5bps at 2.21%. VIX Volatility -3.3% at 17.30

• Commodities CRY -0.9% at 178.76, Natural gas -2.5%, Cotton +0.4%, Crude Oil -4.1%, Copper -0.5%, Wheat +4.8%, Sugar -0.9% Gold at $1288/oz

AUD Thoughts

AUD held steady in the face of poor economic data, but only because the market had priced in so much bad news that bond yields were already at all-time lows on expectations of steep rate cuts.

AUD kept calm at 0.6915, having spent four sessions now in a tight range of 0.6904/6941. Major support remains at the recent five-month trough of 0.6865.

Australia's data yesterday showed business investment fell 1.7% in the March quarter, when analysts had hoped for a rise of 0.5%, though firms did revise up their future spending plans. The miss only added to expectations figures for gross domestic product (GDP), due next week, would also be soft. Annual growth may well have slowed to 1.8% or less, the worst performance since the global financial crisis.

The outlook was also uncertain with approvals to build new homes falling 4.3% in April, heralding marked weakness in housing construction ahead.

AUD is trading heavy but hardly lower on the day, which may lead markets to grow frustrated as downside risks fail to spur price action. Another round of dismal economic data from Australia enhanced views economic growth is stumbling while U.S.-Sino trade tensions remain on the front burner. The combination of disappointing data and trade tensions have increased chances of an RBA cut on June 4 and additional easing thereafter.

Despite those downside risks AUD is unable to trade to new 4-month lows and it maintains a foothold above 0.6900.

A sharp pullback in Australian government bond yields also failed to push AUD significantly lower. Investors have likely priced in much of the expected RBA cuts and downside risks. A new bearish catalyst is needed to send the pair markedly lower -- such as a sharp dovish shift from the RBA next week.

Positioning and options continue bears' frustration. Net-short AUD positions remain elevated and covering of those positions could be underpinning AUD.

Technical Outlook

AUD resilient in face of rising global growth concerns. Action in US Treasuries & key commodities warn of slowing global growth. Offsetting fall in commodities is puzzling rise in EM ETF (EEM) - up 0.54%. EEM ETF up 1.55% so far this week despite other risk assets slumping.

AUD support at 10-day MA (0.6908 today) and close below would be bearish. Resistance at 21-day MA at 0.6936 and sellers lined up ahead of 0.6950

Event Risk Data

• Australian Economic data today : Apr private sector credit consensus expectation is for a 0.3% gain.

• China: May NBS PMIs are anticipated to show the manufacturing index dipping back into contractionary territory at 49.9 from 50.1 while the non-manufacturing index holds steady at 54.3.

• Euro Area: ECB Visco speaks at the Bank of Italy annual gathering.

• US: Apr personal income is expected to rise 0.3% and personal spending 0.2% following respective gains of 0.1% and 0.9% in Mar. Annual core PCE inflation is seen to hold at 1.6%.

• Fedspeak involves Williams on monetary policy theory and practice, and Bostic on the global economy.

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