4th February 2020 - AUD steady ahead of RBA meeting today

Good morning


• The USD strengthened and a gauge of global stocks jumped, lifted by an unexpected rebound in U.S. manufacturing that helped temper fears that caused stocks overnight in Asia to plunge on the potential impact of the coronavirus in China. Gold fell more than 1%, retreating from a four-week high, as China's efforts to protect its economy from the virus helped stem inflows into safe-haven assets.

• U.S. stocks climbed as gains in Amazon and Nike as well as a surprise rebound in U.S. factory activity helped markets. Dow Jones up 0.68% (28,448), S&P 500 up 0.86% at 3,253, Nasdaq up 1.48% at 9,124.

• A raft of December manufacturing PMI release numbers. Spain kicked things off at 48.5 (48.7 expected) with Italy at 48.9 (47.3 forecast). France and Germany printed at 51.1 and 45.3 respectively, with both readings 0.1 above what was recorded in the preliminary results. The EZ measure came in at 47.9 vs the flash of 47.8. UK manufacturing PMI came in at 50.0, beating the forecast of 49.8. Canadian Manufacturing PMI for January printed at 50.6, up from 50.4 while in the US, it was revised up to 51.9 from an initial reading of 51.7. Little reaction to the data.

• US ISM Manufacturing for January rose to a 6 month high of 50.9, up from a positively revised 47.89 and beating expectations of 48.5 with gains seen across key sub-indices such as New Orders, Prices Paid and Employment. December Construction Spending fell by 0.2% comparted to forecasts of a 0.5% increase.


• U.S. DXY index gained ground overnight, rising from 97.45 towards 97.85.

• JPY & Swiss franc retreated, as risk sentiment improved. JPY weakened from 108.45 towards 108.75.

• EUR sold off from 1.1085 down towards 1.1034 lows. Closed slightly higher at 1.1058.

• GBP was heavy, falling from 1.3165 down towards 1.2981.

• The Chinese yuan blew past the 7-per-dollar mark – it began onshore trade at its weakest this year and was down 1.2% to close at 7.0257.

• AUD was precariously poised near a decade trough as it hung on at 0.6680/90, having dived as deep as 0.6683 and high 0.6707.

• NZD remained range bound towards lower levels, lows at 0.6450.

• AUDNZD traded in similar 1.0335 / 1.0365 ranges.

• AUDEUR found some buying interest, jumping up from 0.6030 towards 0.6070.


• U.S. Treasury yields ticked up as traders took stock of the international response to the coronavirus epidemic.

• The benchmark 10-year yield was up less than 1 basis point at 1.523% in afternoon trading, down from 1.575% earlier.

• The two-year U.S. Treasury yield was up 2.6 basis points to 1.355% in afternoon trading.

• Euro zone bond yields inched up but remained within sight of multi-month lows. Germany's 10-year Bund yield was just one basis point higher on the day at -0.44%.


• Gold fell nearly 1% as the USD firmed and investors opted for riskier assets. Spot gold was down 0.82% at $1,576.76 per ounce.

• China's iron ore and steel futures fell by their daily limits, with the material plunging the most in almost 15 months, on fears that a virus epidemic would curb demand and deliver a sharp blow to the economy. The Dalian Commodity Exchange's most-traded iron ore contract closed down 8% - the maximum amount by which the price is allowed to drop for the day - at 606.5 yuan ($87.85) a tonne, the lowest since Dec. 2 last year.

• Benchmark LME copper ended 0.8% lower at $5,523 a tonne - down around 7.5% from its close on Jan. 23, 13% from a high in mid-January and near a two-year low of $5,518 reached last September.

• LME benchmark aluminium finished down 2.1% at $1,686.50 a tonne after hitting its lowest since January 2017.

• Oil prices fell to the lowest in more than a year as the coronavirus outbreak curtailed Chinese demand and sparked potential supply cuts by OPEC and its allies. Brent crude settled down $2.17, or 3.8% at $54.45 a barrel, its lowest since January last year. U.S. West Texas Intermediate (WTI) crude fell $1.45 a barrel to $50.12 after touching a session low of $49.91, also the lowest since January 2019.


• Australian Economic data today - RBA policy announcement (last 0.75%, forecast 0.75%). Pause for now. Rates to move lower throughout the year.

• NZ - Dec building permits (last –8.5%). Bounce after last month's fall. Issuance flattening off.

• US - Fedspeak - Fed's Bostic Discusses Big Data, AI and Machine Learning

• US - December factory orders (last –0.7%, forecast 0.7%). Core durable orders disappointed again in Dec.


AUD continued to tread water down at the lows overnight, trading to a 0.6682 low and 0.6707 high as the USD retraced losses.

AUD bulls remain side lined and a break to new trend lows may be likely as investors' concerns about global trade and growth increase.

The spread of the coronavirus is likely to have negative impacts on global commerce. Travel curbs have led to rising numbers of flight cancellations to and from China. Commercial airlines contribute largely to global trade and Australia's economy is highly dependent on cross-border commerce. There are possible signs the virus is affecting trade as commodities prices extend recent losses.

Iron-ore fell sharply after China returned from Lunar New Year's holidays while recent slides in copper and oil futures keep sliding. Investors are reacting by adding to net-short AUD positions. The latest CFTC stats show an increase in net-short positions due to virus concerns. Technicals highlight downside risks for AUD.

The RBA monetary policy decision will take centre stage today (2.30pm) with the central bank widely expected to keep rates on hold at 0.75%. Focus will turn to Governor Lowe’s words which will set the direction for the AUD. We expect the Governor to maintain an easing bias although to sound slightly more positive at the margin. The market is currently priced for a 26% chance of a rate cut. Any surprise RBA cut today will likely drive AUD much lower.


AUD lingers below 0.6700 for most of NY trade despite risk rally. Virus concerns sinks AU rates, commodities, lifts USD/CNH.

AUD tried to break 0.6710 but fails; then slides & is near 0.6690 late NY close.

Long upper wick forms on daily chart, suggests bears feel confident. Risks for AUD longs remain, keeps them side lined into RBA meeting today.

Daily and monthly RSIs are falling and a gravestone doji has formed on daily charts. The 2019 low set back in October remains threatened (0.6668).

A break of that low is likely to trigger stops, which could lead to a test of 0.6665/70 and 0.6510/25 supports.

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