• The US dollar index is down 0.7% on the day.
• EUR rose from 1.1160 to 1.1262.
• USD/JPY fell from 108.40 to 107.90 – a fresh five-month low. The weaker USD helped AUD rise from 0.6940 to 0.6983.
• NZD similarly rose from 0.6540 to 0.6604, and was the outperformer on the day – an unusual response given the risk averse backdrop.
• AUD/NZD fell from 1.0610 to 1.0570, more in keeping with the negative global mood.
• The risk-averse mood and concerns global growth could slow further affected commodities, Brent crude oil down 2.1%, while safe-haven gold rose 1.6%.
• Fed's Bullard kicks the dollar while it's down on rate cut comment.
• AUD/USD pops 13 pips on Fed member comment.
• AUD/USD is currently trading at 0.6972 between a range of 0.6926 and 0.6973 ahead of RBA.
AUD/USD has been drifting higher of late following a sell-off in U.S. yields and the market's increasing sense of the Federal Reserve's (Fed's) dovishness, looking to front run the Fed on their timings of an interest rate cut. The risk-off theme in the markets had been supporting the dollar as being perceived as the cleanest shirt in the dirty laundry basket of currencies.
However, considering how a turn in heightened global growth complications would weigh on the U.S. economy, coupled with higher importation costs for businesses trading with Chinese exporters due to a prolonged tariff war, markets are expecting that the Fed will need to cut interest rates, perhaps as soon as within H2.
Today, Fed's James Bullard has vocally adopted such a sentiment and voiced his concerns for the same. Bullard noted the yield curve inversion and said that it supports the case for lower rates. Bullard said that a rate cut may be warranted soon, citing trade and inflation risks and highlighted the chances of a recession, when saying, 'trade uncertainty means expected U.S. growth slowdown could be sharper than expected,' and that a 'trade dispute may have a larger impact on global markets.
Eyes on RBA today
Meanwhile, due to recent soft data and the concerns about trade wars, the RBA is expected to cut rates at its meeting tonight. A rate cut of 0.25% was already priced in which will take the rate down to 1.25%. However, the market has been short of the Aussie going into this meeting and we have seen a paring back of those shorts in recent trade, with the CFTC report showing that the Aussie bucked the trend of commodity-FX last week where both funds and asset managers were overall net sellers of commodity currencies, apart from the Aussie. They were net AUD buyers, with their net shorts falling by USD0.1bn to USD0.6bn. Asset managers increased their net AUD and NZD shorts by USD0.3bn and USD0.2bn to USD3.8bn and USD1.7bn respectively.
Considering the recent shorter positioning in the dollar where leveraged funds sold it for the third straight week, this does set the stage for an almighty sell-off in the Aussie again should the RBA be particularly dovish in the statement, citing prospects for additional cut this year. However, on a surprise hold, the Aussie could well find its-self back into bullish territory towards or above 0.7080 with a confluence of the 61.8% Fibo of the mid-April swing high and recent low - This guards a run towards 0.7207, the late February high.
AUD/USD has eroded its 23.6% retracement at 0.6945 and looks set for further gains to its 55-day ma at 0.7037.
It remains upside corrective near term and continues to recover from the 78.6% Fibonacci retracement at 0.6857. Initial resistance is the March low at 0.7004 as well as the 55 day moving average at 0.7037. Further up resistance can be spotted at the 0.7207 February high. A rise above the 0.7207 late February high would target the December 2018 high at 0.7394
Event Risk Data Today
• NZ: Q1 terms of trade is expected to have risen by 0.5%.
• Australia: The RBA policy meeting is widely expected to deliver a 25bps cut. The key focus will be any indication in the Governor’s Decision Statement for further easing with RBA Governor Lowe’s speech at the RBA Board Dinner (Sydney 7:30 pm) to provide more detail on their outlook. Q1 Balance of Payments is expected to show the current account deficit shrink to $2.9bn (Westpac fcs 3.5$bn) and net exports make a 0.2ppt contribution to GDP (Westpac fcs 0.3ppt). Apr retail sales are expected to rise 0.2% with underlying momentum in volumes weak.
• US: Apr factory orders are seen to decline by 1.0% following a 1.9% gain in Mar. The Chicago Fed Conference on “Monetary Policy Strategy, Tools and Communications Practices” begins - Fed Chair
• Powell and Brainard are speaking tonight. Other Fedspeak involves Williams on bank culture (Will be interesting …..)