- Equity markets made it consecutive positive sessions overnight with the S&P 500 and the Dow climbing 0.8% each while the Nasdaq advanced 0.6%. Oil had another sharp drop falling 3.3% which takes the 6 week move to -23%. USD buying was the overnight theme in the FX space with the DXY bouncing out of this week’s low. After briefly trading above 0.70c, the USD buying took its toll on the AUD which retreated to a low of 0.6
- US 10yr treasury yields round-tripped from 2.13% to 2.08% and back, 2yr yields from 1.85% to 1.77% (lowest since 2017) and back. Markets repriced Fed fund rate expectations, with a cut expected by August, and another by October.
- Australian 3yr yields round-tripped from 1.10% to 1.05% (record low) and back, 10yr yields fell from 1.51% to 1.47% and back. Market pricing for the August meeting is around 50%.
- The US dollar index is up 0.3% on the day.
- EUR initially rose to 1.1306 after a weak US jobs (ADP) report, but then fell to 1.1221.
- USD/JPY rose from 107.80 to 108.49.
- AUD fell from 0.7008 to 0.6963.
- NZD initially rose to a one-month high of 0.6667 following the ADP data, but then fell to 0.6612.
- AUD/NZD fell from 1.0550 to 1.0500, helped by yesterday’s RBNZ comments which cooled rate cut expectations.
- Brent crude oil fell 3% to $59 – the lowest since 8 March – on data showing that US petroleum stockpiles posted the largest monthly rise since 1990.
AUD Thoughts/Technical Outlook
The Australian dollar went back and forth during the trading session on Wednesday, as the 0.70 level is crucial on longer-term charts. Ultimately, it’s likely that we will see a bit of pullback pressure in this area, because we have had a move towards the 50 day EMA, which is massive resistance. Above the 0.70 level I see about 50 pips worth of resistance, so I think it’s likely that we will turn over rather soon. However, if we were to break above the 0.7060 level, then we could probably continue to go higher.
To the downside, I believe the 0.69 level will be supported, and that would be my target. This doesn’t mean that it’s going to be easy, and quite frankly I think that the choppiness will continue. Remember, the Australian dollar is highly susceptible to the US/China trade policy, but the other part of this equation is that the Federal Reserve has suggested that perhaps they would ease monetary policy if necessary. That could lead more money into the gold market, which of course helps the Aussie dollar in general.
I believe that this market is in the process of trying to bottom a bit, but that doesn’t mean that it’s going to be easy. It’s going to take quite some time to form a longer-term bottom, and I suspect a lot of help from the US/China trade relations. If we can get good news out of there, that probably sends the Aussie dollar to the 0.72 level next.
Offshore – markets will remain focussed on any further developments between Mexico and the US with the ongoing US/China trade spat.
The ECB monetary policy meeting is upon us this evening we believe the continued slowdown in Eurozone growth as well as reduced expectations for global trade and growth justifies tiered deposit rates and a TLTRO that qualifies as policy easing, not funding insurance. Despite the ECB’s comments that they have not run out of policy options, their pre-existing options are few and the central bank will want to use what remains to maximum effect.
Event Risk Data Today
- Australia: Apr trade balance is expected to be a surplus of $5.0bn (Mkt fcs $5.4bn), continuing on from the record highs set in early 2019.
- Germany: Apr factory orders is released
- Euro Area: the ECB policy meeting key focus will be any guidance or decision on TLTRO-III pricing. The meeting will also contain an update to their macroeconomic projections but revisions are likely to small. Q1 GDP 3rd estimate is expected to be confirmed at 0.4%
- US: Fedspeak involves Kaplan on a panel in Boston and Williams gives keynote remarks at an international economics event.