OVERNIGHT DATA AND HEADLINES
• There was a positive mood overnight across the markets in a reduction in global political tensions. Risk assets enjoyed the shift in sentiment, with global equity markets responding positively. US benchmarks cheered easing tensions in Hong Kong, along with word that the PBoC will cut the reserve ratio requirement to boost stimulus for the Chinese economy and growing hopes that the U.K. could avoid a disorderly exit from the European Union.
• The U.S. July trade deficit narrowed to USD54bn (from USD55.5bn in the month prior) while exports climbed 0.6% m/m whilst imports fell 0.1% m/m. The deficit with China closed to USD199.8bn in the first seven months of this year, and was down 10.3% YoY.
• U.S. stocks : Dow Jones put on 237.45 points to reach 26,355.47 (+0.9%), S&P 500 index added 31.51 points at 2,937.78 (+1.1%), Nasdaq up 102.72 points (+1.3%) at 7,976.88.
• British lawmakers had passed a bill aimed at preventing a no-deal Brexit, which was yet another blow for Prime Minister Boris Johnson who subsequently called for an election on Tuesday, October 15. Following the defeat, PM Johnson told lawmakers in the House of Commons that the Government can't function when Parliament is passing laws "that destroy the ability of government to negotiate." Therefore, he says, a new election is necessary. I don't want an election, the public does not want an election, the country doesn't want the election. But this house has left no other option than letting the public decide who they want as Prime Minister.
• The Bank of Canada (BoC) kept the key interest rate unchanged at 1.75%. The statement was dovish as the central bank highlighted risks and downplayed the positive growth surprise of the second quarter. The no-change decision was largely expected. The tone of the statement, however, was dovish, with the BoC downplaying the Q2 upside surprise on GDP growth and emphasizing instead the escalating trade war and potential negative impacts on the Canadian economy.
• In its closely watched Beige Book, the US Federal Reserve on Wednesday said that the majority of businesses that were surveyed remained optimistic about the near-term outlook despite concerns about tariffs and the persistent trade policy uncertainty.
• Copper prices rose from a two-year low in the previous session, helped by a weaker USD, rising global stock markets and arbitrage trading after London prices dropped below levels in China. Benchmark LME copper closed up 2.5% at $5,748 a tonne after hitting $5,518 on Tuesday, the lowest since May 2017.
• Other Metals : LME aluminium finished up 1.3% at $1,775 a tonne, zinc rose 4.8% to $2,310, lead gained 3% to $2,050 and tin closed 3% higher at $17,200.
• Iron ore futures in China rose to a 3-1/2-week high, fuelled by hopes of stable demand as anti-pollution curbs in top steelmaking cities ahead of the National Day holiday were more lenient than expected. Benchmark 62% iron ore for delivery to China settled at $91 a tonne.
• Gold rose favoured by the combination of an improvement in risk sentiment, a weaker USD and also a decline in US yields. The move higher was strong enough to break above the $1,550 barrier. Gold peaked at $1,556 reaching the highest intraday level since April 2013.
• US 2yr treasury yields fell from 1.47% to 1.43% - a two-year low, while the 10yr yield ranged sideways between 1.44% and 1.50%. Markets are pricing 31bp of easing at the 19 September Fed meeting, and a terminal rate of 0.90% (Fed funds rate currently 2.13%).
• Australian 3yr government bond yields extended yesterday’s post-GDP data bounce, from 0.72% to 0.75%, the 10yr yield from 0.94% to 0.98% before retracing to 0.94%. Markets are pricing 12bp of easing at the October RBA meeting, and a terminal rate of 0.42% (RBA cash rate currently at 1.0%).
• The US DXY down 0.5% on the day, USD hurt by the improved sentiment.
• EUR rose from 1.0975 to 1.1038.
• Outperformer GBP rose from 1.2100 to 1.2230.
• USD/JPY rose from 106.20 to 106.44, the defensive yen underperforming.
• AUD extended recent gains, from 0.6780 to 0.6801.
• NZD similarly rose, from 0.6340 to 0.6364.
• AUD/NZD raged sideways between 1.0670 and 1.0705.
• AUD/EUR maintained it’s recent lift higher trading above 0.6150 (0.6180 highs)
EVENT RISK TODAY
• NZ: Q2 construction activity is estimated to have risen 1.3%, indicating sector remains buoyant.
• Australia: Jul trade balance is expected to be a $7.2bn surplus (Westpac fcs $7.8bn), holding around the record high of $8.0bn made in Jun.
• US: Jul factory orders are seen to be up 1.0%, although note the preliminary read on core durable orders were soft again. Aug ISM non-manufacturing is anticipated to be at 54.0, slightly up from 53.7 in Jun.
AUD thoughts :
Australia's economy grew at its slowest pace in a decade last quarter as cash-strapped consumers went on strike, an urgent argument for more monetary and fiscal stimulus as headwinds mount globally. Gross domestic product (GDP) rose just 1.4% in the June quarter from a year earlier, data showed on Wednesday, matching the worst of the global financial crisis and well short of the 2.75% considered "trend". If there was a bright spot in Wednesday's numbers it was that quarterly growth of 0.5% matched market forecasts, when there had been fears it would be even weaker. That was enough to see the AUD firm slightly to 0.6780 with the positive momentum extending through the overnight session towards the 0.6800 handle.
The mentioned barrier has been capping AUD since early August, which if cleared should trigger aggressive short-covering and pave the way for up-move. Above the mentioned resistance, AUD is likely to surpass an intermediate resistance near the 0.6815-20 region and aim towards testing the 0.6850-60 supply zone. However, markets are likely to wait for a sustained move beyond the said hurdle before placing aggressive bullish bets amid uncertainty surrounding the US-China trade talks.
Technical outlook : AUD adds to overnight gains, pierces 0.6800, near high late in day. Positive Brexit & Hong Kong developments drive risk rallies. Global icon data as expected or above forecast, helps boost risk. Stocks, commodities & JPY crosses rally, AUD/JPY nears 72.30. USD/CNH dips below 7.1450, EM currencies gain vs. USD buoys AUD.
AUD above 10 & 21-DMAs, RSIs rise. Not overbought - techs lean bullish. Test of 0.6825/35 resistance likely, if breaks big short squeeze likely.
Short covering likely to put 0.6910/15 & 0.6980/90 zones in play.