3rd February 2021 - The aggressive monetary easing is a double-edged sword for the aussie

Good Morning,

Market Headlines

The US dollar strengthened further, surging to fresh 2021 highs against EUR, AUD and CHF. Nevertheless, it appreciated against all of its major rivals with the catalyst being progressing US stimulus talks. Talks between US President Joe Biden and Republican senators were productive, according to Senator Susan Collins. Nevertheless, there’s a huge difference between Biden’s $1.9 trillion package and Republicans counter offer of roughly $ 600 billion. Additionally, Democratic congressional leaders pushed forward a budget resolution, allowing them to pass Biden’s coronavirus relief bill without Republican support.

Commodities, Brent crude oil futures rose 2.2% to $57.60 – an 11-month high, copper fell 0.6%, iron ore fell 4.4% to $149.55 (for a total 15% fall since 21 December), and gold fell 1.4%. The bi-monthly GDT dairy auction resulted in an overall price rise of 1.8%, with whole milk powder up 2.3% - slightly more than expected. Equities soared on optimism, with global indexes closing in the green.

Coronavirus immunization continues at a choppy pace. Delivery delays persist in Europe, while Israel and the UK accelerate the pace of vaccination. Restrictive measures have been extended in Scotland and Japan. The global number of new cases receded from record lows and stands at October 2020 levels, although the death toll remains elevated. Hopes persist that an economic comeback will take place in the second half of the year.

Overnight Currency Ranges

AUD/USD: 0.7564 – 0.7638 (one-month low)

EUR/USD: 1.2012 – 1.2088 (two-month low)

GBP/USD: 1.3611 – 1.3710

USD/JPY: 104.86 – 105.17 (three-month high)

USD/CAD: 1.2785 – 1.2870

NZD/USD: 0.7136 – 0.7193

AUD/JPY: 79.51 – 80.15

AUD/NZD: 1.0599 – 1.0629 (two-month low)

AUD Thoughts

The aggressive monetary easing is a double-edged sword for the AUD, the RBA kept rates unchanged after Tuesday’s meeting and doubled the size of its purchase program. RBA Governor Lowe is speaking in Canberra today at 12.30pm AEST and is expected to reiterate the dovish statement released yesterday. To recap, the RBA announced a A$100 bn extension to its QE programme, which will kick in as soon as the first round ends in April. There will be no tapering – QE under the extended programme will continue at the same pace as before.

AUD/USD chewed through significant bids on its way to a low of 0.7564 overnight. Further demand is expected at 0.7540 and again at 0.7500 while offering interest has likely followed spot lower and rests between 0.7640/60

Event Risk Data Today

Australia: The January AiG PCI will be published. Construction pushed above 50 in October and November, buoyed by new orders in the housing sector. December dwelling approvals are expected to show a strong 7.5% rise, driven by reopening rebounds and the boost from the HomeBuilder scheme. At 12:30pm AEDT, RBA Governor Lowe will deliver an address titled “The Year Ahead” at the National Press Club of Australia Conference.

New Zealand: Market expects that the Q4 Household Labour Force Survey will show that the unemployment rate rose to 5.6% in the three months to December, from 5.3% in Q3. Employment is expected to remain unchanged. Meanwhile, we expect a 0.5% increase in the Q4 Labour Cost Index measure of wage growth. This would see the annual growth rate slow from 1.9% to 1.6%. January ANZ commodity prices will be lifted by the recent dairy price surge.

China: The January Caixin services PMI is expected to moderate to 55.5 from 56.3. Although the index remains firmly in expansionary territory, the consumer recovery has lagged that of manufacturing.

US: The market will be looking for further job losses in the January ADP employment change measure (f/c: -50k). Although the ISM non-manufacturing index has improved ahead of the January update, the rise in Dec was largely a result of supply chain issues (market f/c: 56.7). Finally, the FOMC’s Bullard and Harker will speak.