6th July 2021- AUD/USD to benefit from commodities short covering, softer greenback

Good Morning,

Market Headlines

Markets were fairly stable during the US holiday. The Eurostoxx 50 closed up 0.4%, while the US dollar and bond yields were steady. US 10yr treasury yields implied by futures firmed by 1bp to 1.43%. Fed funds futures continued to price a 50% chance of a hike by October 2022. US 10yr treasury yields implied by futures firmed by 1bp to 1.43%. Fed funds futures continued to price a 50% chance of a hike by October 2022.

Commodities, Brent crude oil futures rose 1.3% to $77 – a three-year high - after an OPEC meeting to resolve supply increases was abandoned, copper rose 1.7%, and gold rose 0.3%. Iron ore fell 1.8% to $221.

Overnight Currency Ranges

AUD/USD 0.7509 0.7536

EUR/USD 1.1851 1.1880

GBP/USD 1.3815 1.3862

USD/JPY 110.79 111.19

NZD/USD 0.7009 0.7034

USD/CAD 1.2324 1.2368

USD/CNH 6.4585 6.4754

AUD/JPY 83.43 83.61

AUD/NZD 1.069 1.0732

AUD Thoughts

AUD/USD seesaws around the week-start levels, teasing resistance of a 30-pips range, as traders brace for an important day carrying the Reserve Bank of Australia (RBA) monetary policy meeting. That said, the AUD trades near 0.7530 amid early Tuesday morning, unchanged on a day mainly due to the off in US markets.

Aussie Retail Sales and Commonwealth Bank PMIs came in upbeat for May and June respectively but AiG Performance of Construction Index for June eased below 58.3 to 55.5, following the broad trend of the Aussie data that challenge RBA hawks.

It’s worth noting that indecision over the Federal Reserve’s (Fed) next moves magnified, also weighing on the risk appetite and AUD/USD prices, even as Friday’s mixed employment figures probed the bulls.

Moving on, the RBA’s move to how they can overcome the easy money policies, mainly the bond purchase program and yield target for 3-year Treasury bond, will be the key even as the Australian central bank is expected to stand pat during today’s meeting. Also important will be RBA Governor Philip Lowe’s justification of the policy review. Given the covid-led pessimism, RBA announcements may weigh on the AUD/USD prices. However, the return of the US traders and PMIs will also be important to watch.

AUD/USD remained in a tight 0.7509/36 range overnight with all key technical levels remaining intact. Offering interest remains thick to 0.7600 while demand remains should materialise if we dip back to 0.7440/50.

Event Risk Data Today

Australia: The Reserve Bank Board will announce its July policy decision. Following the Board meeting, the Governor will make his usual Statement at 2:30pm, and then speak at 4pm - 'Remarks by Phillip Lowe – Today’s Monetary Policy Decision' - which will be followed by media Q&A. The Board has already informed us that decisions will be made around the Yield Curve Targeting (YCT) Program and the Bond Purchase Program (QE). With the economy having recovered much faster than the Bank’s expectations in the November Statement on Monetary Policy, it seems reasonable that the Board will decide not to extend the 'yield target bond' to the November 2024 bond. We expect that the Board will decide to take a more flexible approach to its bond buying program than we have seen in the past. We think the Board will be committed to maintaining the current pace of purchases ($5 billion per week) until late in the year (around the December Board meeting). Weekly payroll jobs and wages, for the fortnight ending June 19, will serve as a guide for the June Labour Force Survey.

New Zealand: We expect to see a further improvement in confidence and own-activity expectations in the June NZIER Quarterly Survey of Business Opinion , reflecting recent strong data and the reopening of trans- Tasman travel. Measures of capacity and price pressures will be of particular interest. The March survey found that businesses had had limited success in raising their prices up to that point. Concerns about rising costs and labour shortages have escalated further in the last three months. Futures markets are predicting a 2% fall in prices at the early July GDT auction, continuing the recent trend.

Euro Area: May retail sales are expected rise 4.3%, with further strength ahead as the reopening progresses. The June ZEW survey of expectations should remain upbeat, with the recovery beginning to materialise.

US: The reopening and robust consumer spending should drive another strong print in the June ISM services index (market f/c: 63.5)

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