6th May 2019 - The Australian dollar tumbles as Trump tweets threat to China

Good Morning,


Overnight Market Headlines


- The eagerly awaited US jobs report was a mixed bag – strong employment growth but slightly disappointing wage growth.

- US bond yields and the USD fell in response, while US equities rose (S&P500 +1.0%). Markets open this morning reacting to risk-negative news of weekend North Korean missile tests and US-China tariff increase threats.

- The US 10yr treasury yield fell from 2.56% to 2.51%, and the 2yr yield fell from 2.35% to 2.31%.

- The chance of a Fed rate cut by December, implied by Fed fund futures, remained at 65%.

- U.S. stocks rose in a broad-based rally as stronger-than-expected job growth in April coupled with muted wage gains left markets upbeat about the outlook for the economy and interest rates. Dow Jones rose 197.16 points (0.75%) to 26,504.95, the S&P 500 gained 28.12 points (0.96%) to 2,945.64, and the Nasdaq added 127.22 points (1.58%) to 8,164.00.

- Gold was headed for its biggest daily rise in two months, clawing away from a four-month low hit in the previous session, helped by a pullback in the USD. Spot gold rose 0.7% to $1,279.47 per ounce

AUD leads risk off selling after a Trump/China U-turn. AUD off 0.7% early with risk, as Trump undermines US/China trade deal optimism. Risk off across the board - AUD leads - AUD/JPY -1% - EUR/AUD +0.5%.er at $6,236 per tonne

- Oil prices inched up as strong U.S. economic data boosted demand sentiment and as production losses in sanctions-hit Iran and Venezuela tightened the market. Brent crude oil futures settled at $70.85 a barrel, rising 10 cents. The global benchmark shed 2.6% for the week, breaking a five-week winning streak. U.S. WTI crude futures closed at $61.94 a barrel, up 13 cents, while losing about 3% during the week, its second straight weekly decline.


Currencies

- The US dollar index closed down 0.3% on the day @ 97.46.

- EUR bounced off 1.1140 after US payrolls to 1.1205, but opens lower at 1.1160 this morning, rattled by weekend news of US threats to raise tariffs on China, as well as a North Korean missile test.

- USD/JPY fell from 111.50 to 111.08, and is at 110.70 at the open this morning.

- AUD rose from 0.6990 to 0.7025, but is lower at 0.6965 this morning on similar weekend news (Trump & North Korea).

- NZD rose from 0.6610 to 0.6653, but is lower at 0.6600 this morning.

- AUDNZD ranged between 1.0550 and 1.0580, but is lower at 1.0520 this morning.

- AUDEUR ranged for the most part on Friday between 0.6250 / 0.6280 – fell lower this morning towards 0.6220


AUD Thoughts

AUD was on track for a third straight weekly loss, down 0.5% for the week on top of its hefty 1.7% loss the previous one.


Bears initially cheered the upside surprise to payroll gains and the drop in the unemployment, pushing AUD to a four-month low. But downside surprises in year-on-year average earnings, average workweek hours and ISM non-manufacturing erased gains for the U.S. interest rate complex and USD, sending both broadly lower, while Australian-U.S. yield spreads have tightened. AUD rallied sharply off its 0.6985 low and turned positive on the day.


After closing the overnight session above 0.7000, AUD came under fire this morning over the weekend North Korean missile testing & Trump tweets on tariffs.


President Donald Trump on Sunday dramatically increased pressure on China to reach a trade deal by announcing he will hike U.S. tariffs on $200 billion worth of Chinese goods this week and target hundreds of billions more soon.


The announcement via Twitter marks a major shift in tone from Trump, who has cited good progress in the talks and praised his relationship with Chinese President Xi Jinping. Trump's announcement comes ahead of another round of talks

between U.S. and Chinese officials in Washington scheduled for this week. White House officials were unaware on Sunday afternoon whether the tweet would affect those talks. The Chinese delegation could decide not to come because of what is

likely to be seen as an escalation by the president. Trump's move is a reversal of his decision in February not to increase tariffs from 10% to 25% on $200 billion of goods, thanks to progress in the trade talks. That increase will now go into effect on Friday, Trump said in a tweet. The president also said he would target another $325 billion of Chinese goods with 25 percent tariffs "shortly" and he suggested that the measures were not leading to price increases for American consumers.


Australian investors "will be on edge" when the Reserve Bank of Australia meets this Tuesday as the debate on whether it should cut rates "continues to heighten". Interest rate futures are pricing in a 33% chance of an easing at the May 7 meeting.

About 40% of 42 economists polled by Reuters predict a 25 basis point cut to an all-time low 1.25%. The RBA's May 7 meeting is a risk for bulls, though, Australian short-term rates markets suggest a rate cut is not likely until July 2019. The fact that investors have already priced in cuts could limit AUD's downside, leaving it in the 0.7000/0.7200 range.


Technical Outlook

AUD leads risk off selling after a Trump/China u-turn. AUD off 0.7% early with risk, as Trump undermines US/China trade deal optimism. Risk off across the board - AUD leads - AUD/JPY -1% - EUR/AUD +0.5%.

Despite a strong close Friday the 5, 10 & 21 daily, weekly and monthly moving averages fall. Strong bearish setup targets a test of 0.6936, 61.8% of the 2019 rise. 0.7025 NY close/0.6990 Asian high.


Risk Event Data Today

- No Australian Economic data today.

- China: Apr Caixin services PMI is released.

- Euro Area: Mar retail sales follows a +0.4% read in Feb. May Sentix investor confidence is released.

- US: Fedspeak involves Harker on the economic outlook.

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