3rd March 2020 - Momentum increases for RBA rate cut today



Good morning


OVERNIGHT DATA AND HEADLINES


• Equity markets around the world surged as the prospect for central banks cutting interest rates to soften the economic blow of the coronavirus heartened investors and drove U.S. government debt yields to record lows. Global factories took a beating in February from the coronavirus, with activity in China shrinking at a record pace, surveys showed, raising the prospect of a coordinated policy response by central banks to prevent a global recession.

• U.S. factory manufacturing activity slowed in February as new orders contracted, reflecting worries about supply chain disruptions related to the fast-spreading coronavirus outbreak, which has revived financial market fears of a recession. The Institute for Supply Management (ISM) said its index of national factory activity fell to a reading of 50.1 last month from 50.9 in January. Economists polled by Reuters had forecast the index would slip to 50.5 in February.

• A separate report on Monday from the data firm IHS Markit showed its final U.S. Manufacturing Purchasing Managers' Index slid to 50.7 in February from 51.9 in January.

• The U.S. central bank will deliver a big dose of stimulus starting this month in a bid to protect the world's biggest economy from the impact of the coronavirus, traders of futures contracts tied to Federal Reserve policy are betting. Traders see a 100% chance of a half percentage-point rate cut at the Fed's March meeting, according to CME Group's FedWatch, which translates fed funds futures pricing into traders' monetary policy expectations. Another half a percentage point-cut is priced in by July. That is up from no chance of large cuts seen last week, and reflects rising global expectations that global central banks will take coordinated action to fend off the worst effects of a world economic slowdown as factories and schools close and public events are cancelled in efforts to slow the virus' spread. Last Friday Powell said the central bank would "act as appropriate" to support the economy, and early Monday Bank of Japan Governor Haruhiko Kuroda said he would "strive to stabilise" markets roiled by virus fears. U.S. President Donald Trump on Monday renewed his call for the Fed to lower interest rates, tweeting that the central bank has been "slow to act."

• U.S. stock indexes rose, recovering from steep declines amid a spell of bargain hunting, while investors hoped that monetary stimulus from central banks would help tide over the potential economic impact of the coronavirus. Dow Jones was up 3.43% at 26,278, S&P 500 surged 2.85% to 3,038 and the Nasdaq added 3.02% to 8,717.

CURRENCIES


• The USD slipped to a fresh one-month low against a basket of currencies. The DXY was 0.79% lower at 97.36; after slipping to a 1-month low of 97.18.

• EUR continued its remarkable traction higher as it surpassed other currencies to trade up 1.18% from 1.1038 to a 1.1185 high, settling lower at 1.1155.

• GBP reversed its direction lower, falling from 1.2850 toa 1.2738 low.

• China's CNY jumped to a near three-week high, underpinned by rising bets the U.S. central bank will cut rates this month to protect its economy from the coronavirus outbreak. CNY opened at 6.9761 per dollar and jumped to a high of 6.9502 at one point, the strongest since Feb. 12.

• USDJPY price action remained firm after losing some ground from 107 lows towards 108.57. Managed to gain strength back down towards 107.50.

• AUD edged away from 11-year lows, as speculation mounted the world's major central banks were planning a coordinated barrage of stimulus. AUD recovered from a drop towards 0.6460 to trade as high as 0.6568. Settled slightly lower at 0.6535.

• NZD steadied around 0.6250 after recovering from a 0.6176 low towards 0.6276 highs.

• AUDNZD gave up fresh gains towards 1.0483 (from 1.0390 lows last Friday), falling back down towards 1.0450 late in the session.

• AUDEUR struggled to make any gains higher, instead falling to fresh 0.5836 lows.


TREASURIES

• U.S. Treasury prices rose sharply, pushing long-dated yields to record lows, as bond investors braced for a slew of stimulus measures including interest rate cuts from global central banks to ease the economic impact of the coronavirus.

• U.S. two-year yields fell to the lowest in nearly four years, with U.S. yield curves steepening as investors priced in easing from the Federal Reserve.

• U.S. 10-year yields fell to a 10-year record low of 1.03% but managed to recover back up towards 1.10% in late NY. Yields on U.S. 30-year bonds were at 1.644%, down from 1.668% on Friday, after touching an all-time trough of 1.583%.

• U.S. two-year yields fell to 0.84% from Friday's 0.88%, after hitting a nearly four-year low of 0.71%.

• The yield curve steepened, with the spread between the two-year and 10-year widening as much as 34.5 basis points, the widest since early January. The gap was last 27 basis points.

• Safe-haven German bond yields fell to six-month lows with the 10 year yield at -0.637%.

COMMODITIES


• Gold rose nearly 1% after suffering its largest daily fall in nearly seven years. Spot gold was up 0.60% at $1,594 an ounce in late NY after falling from $1,628 to $1,565 last Friday.

• China's iron ore futures hit the upside limit as declining stockpiles at ports indicated steel mills' improving appetite for the raw material, while expectations grew Beijing will roll out further support for its paralysed economy. Benchmark 62% iron ore's spot price settled at $84.50 a tonne, the lowest since Feb. 10.

• Copper and other industrial metals prices bounced back on hopes that global central banks will inject stimulus into sagging economies shaken by the coronavirus outbreak. Three-month LME copper rose 1.2% to $5,700 a tonne after sliding to a low of $5,533 on Friday.

• Oil prices rose over 5%, reversing an early fall to multi-year lows as hopes of a deeper cut in output by OPEC and stimulus from central banks countered worries about damage to demand from the coronavirus outbreak. Brent crude futures gained $2.54, or 5.1%, to $52.21 a barrel. The session low of $48.40 was its lowest since July 2017. U.S. West Texas Intermediate (WTI) crude futures rose $2.36, or 5.3%, to $47.12 a barrel. The session low of $43.32 a barrel was the lowest since December 2018.

ECONOMIC DATA TODAY


• Australian Economic data releases today – RBA policy decision (last 0.75%, forecast 0.75%). The Pause to continue – ahead of national accounts.

• Australian January dwelling approvals (last –0.2%, forecast 1.0%). Unwinding high rise spike offset by uptrend in non-high rise.

• Australian Q4 net exports, ppts cont'n (last 0.2, forecast 0.2). Exports, modest uptrend & imports lower.

• Australian Q4 current account (last 7.9, forecast 2.3). Surplus narrows, trade dented by lower export prices.

• Europe - Feb CPI %yr (last 1.4%, forecast 1.2%). European Jan unemployment rate (last 7.4%, forecast 7.4%). Labour market in robust shape.

• US Fedspeak – Fed's Mester to Address UK Society of Professional Economists


AUD THOUGHTS


Despite the dismal Chinese PMI data over the weekend, AUD continued higher over the Monday night session rising towards 0.6568 highs at one stage but falling back to 0.6535 into the NY close.

Commodities bounced and key FX currencies USD/CNH improved below 6.9600, JPY sold-off which lifted AUD/JPY above 71.15.


Today we have the Reserve bank of Australia announcement which, up until the weekend, seemed most likely for a no move lower and rates to remain at 0.75% until events suggested otherwise. As a result of the ongoing Coronavirus outbreak, many now expect the RBA to cut by 25 bps at today’s monetary policy meeting. Following the joint central bank calls for further market stimulus, markets seem to have given the RBA Board the green light to cut. Since Friday, market pricing has shifted from little chance of an interest rate cut today to now pricing in slightly more than one 25bp easing.

For today, the path of least regret for the RBA is also to deliver a 25bp rate cut, with assurances that further easing will be delivered if necessary. It’s too early to say a follow-up rate cut is a foregone conclusion.


AUD bounced on the back of the improved risk sentiment overnight with demand now expected to rest ahead of 0.6500 while offering interest likely remains thick on any bounce toward 0.6575/0.6595.


TECHNICAL OUTLOOK


AUD lifts on better risk but the trend remains intact – still within Friday's 0.6435-0.6585 range and the recent downward trend from the 0.7030 high on 01/01/20.

Daily RSI needs oversold unwind, monthly RSI implies long term momentum is down. Consolidation could take hold as investors await latest news on virus impact.

RBA & Fed risks loom; investors expect rate cuts. AUD longs likely need above 0.6660/0.6720 for bear trend to get damaged.

Immediate resistance coming in at 0.6573 followed by 0.6595 (10 day moving average). A break suggests momentum to build as it faces critical 0.6660 topside resistance.



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