OVERNIGHT DATA AND HEADLINES
• China is pushing U.S. President Donald Trump to remove more tariffs imposed in September as part of a "phase one" U.S.-China trade deal, people familiar with the negotiations said. The deal, which may be signed this month by Trump and Chinese President Xi Jinping at a yet-to-be determined location, is widely expected to include a U.S. pledge to scrap tariffs scheduled for Dec. 15 on about $156 billion worth of Chinese imports, including cell phones, laptop computers and toys. A U.S. official said the fate of the Dec. 15 tariffs is being considered as part of negotiations and a potential signing trip this month.
• US: ISM non-manufacturing index improves in October, still consistent with slower growth ahead. After sliding to its lowest level in three years, the ISM non-manufacturing index improved 2.1 points to 54.7 in October. The index, which is at a level consistent with expansion, signals that broad economic activity is holding up despite manufacturing activity remaining in contraction in October. The largest gain came from the hiring index, which improved 3.3 points to 53.7. This was a welcome improvement from the plunge in September, though it still suggests the pace of hiring is set to slow.
• With both ISM surveys still pointing to slower economic growth, consensus is that the FOMC is not done cutting rates. Continue to expect it will leave rates unchanged at its December 11 policy meeting, but barring a significant improvement in the data, expect it to cut rates another 25 bps at the start of next year.
• USD and crude prices rose, spurred by ongoing optimism a U.S.-China trade deal may be near, but a rally in global equity markets stalled as China pressed U.S. President Trump to remove recently imposed tariffs.
• The three main U.S. indexes took a breather after expectations of a U.S.-China trade deal propelled them to record highs in the previous session. Dow Jones rose 77 points (0.28%) to 27,539, S&P 500 lost 0.29 points (0.01%) to 3,077 and the Nasdaq added 12 points (0.14%) to 8,445.
• The JPY and CHF slid, as growing signs the U.S. and China are inching closer to a trade deal boosted risk appetite and spurred investors to seek higher-yielding currencies.
• China's yuan firmed to fresh 2-1/2 month highs amid optimism over the trade war dispute. CNY edged up 0.1% towards 6.9876 lows but rebounded back up towards 7.0085.
• AUD edged higher overnight towards a 0.6927 high but fell back towards 0.6890 late into NY close.
• EUR fell from 1.1134 highs down towards 1.1062 lows.
• AUDEUR, as a result of the massive EUR selloff, rose from 0.6180 highs up towards 0.6230 highs.
• AUDNZD reversed direction higher, trading up towards 1.0810 highs from 1.0740.
• U.S. Treasuries rose to six week highs over optimism surrounding the trade war dispute, and before the Treasury Department will make the first sale of $84 billion in new coupon-bearing supply this week.
• Treasuries extended price losses after the Institute of Supply Management’s (ISM) services sector report beat expectations in October, adding to optimism over U.S. economic growth.
• Two-year notes were down in price 02/32 yielding 1.63%. 10-year notes were down 20/32 in price to yield 1.858%, after earlier rising as high as 1.873%, the highest since September 16.
• The yield curve between two-year and 10-year notes also steepened to 23 basis points, the steepest since July 25.
• Interest rate futures markets are pricing in only a 5% chance of the Fed cutting rates in December, down from 44% at the beginning of October.
• Gold fell more than 1%, en route to its biggest one-day dip in more than a month, on expectations the U.S. may drop tariffs on Chinese imports. Spot gold slid 1.3% to $1,490.09 per ounce.
• Coking coal futures in China gained the most in four weeks amid market talks about fresh import curbs, following brisk purchases in recent months.
• Benchmark spot 62% iron ore slumped to $84 a tonne, closing in on levels seen before the Jan. 25 mine tailings dam burst in Brazil, which sparked a five-month rally in prices.
• Copper climbed to a seven-week high - Three-month LME copper climbed 1.1% to $5,940 a tonne trading to register its third straight daily gain. LME aluminium shed 0.2% to close at $1,811 a tonne.
• Oil prices rose more than 1% on hopes for a U.S.-China trade agreement. Brent crude futures rose 88 cents (1.4%) to $63.01 a barrel. U.S. WTI crude futures rose 76 cents (1.3%) to $57.30 a barrel.
• No Australian Economic data today.
• New Zealand : Global dairy trade auction, Q3 employment / unemployment (indications of employment growth have softened).
• Japan : Oct Japan PMI services final
• Europe : Oct services PMI & September retail sales.
• U.S. : Fed speak from Kashkari Q&A.
AUD staged another rally towards the recent 0.6928 highs yesterday after the RBA delivered an “as expected” outcome at the November Board meeting, leaving the cash rate unchanged at 0.75%. Risk currencies, however, sold off into the NY close which saw AUD fall back under 0.6900 towards 0.6880 lows.
Forward guidance from the RBA meeting indicated that the RBA stands ready to cut again “if needed”. Views on prospects for a near term change in monetary policy settings have shifted significantly.
Not so long ago the November meeting was seen as “live” and markets were willing to price the odds of a cut at more than 50%. But signs of progress on the trade war front, a tick down in the Australian unemployment rate, some positive RBA economic commentary, a chunky rise in house prices and an on consensus CPI outcome have moved the policy dial. Globally, it is difficult to say the RBA is done. The RBA places a lot of weight on a lower AUD as a transmitter of monetary stimulus. The global race to the interest rate bottom is not over. Failure to participate could see the AUD move higher.
The other theme gaining prominence in RBA commentary is the structural and cyclical influences on global savings and investment. “Excess” savings is a significant contributor to current low interest rates and why the RBA believes that low rates will persist for an extended period. As Governor Lowe noted recently, “the focus needs to be on an improvement in the investment environment”. Governments need to help create that environment – and the push for more infrastructure spending is part of that. But business needs to adapt as well. Hurdle rates need to be lowered and animal spirits rekindled.
The RBA may have to take a backseat to Fed expectations as optimism over U.S.-China trade progress and upbeat non-manufacturing ISM boost yields.
The upbeat non-manufacturing ISM buoyed those yields further and sank euro dollar and fed funds futures prices. As a result probabilities for a December Fed cut are now 5% and rates markets now price in only 27bps of cuts by January 2021. Rising U.S. rates leave AUD threatening to break lower from its recent consolidation phase, which could lead AUD to fall sharply and track a downward path. The break lower could also drive recent longs to exit positions, resulting in tests of 0.6805/10 and 0.6755/65. If that support gives way it would indicate the rally from October's low is over, making a return to 2019's 0.6670 low likely.
AUD longs are on the verge of giving up - RBA induced rally off Dec high erodes in NY. AUD dips below 0.6885, small bounce has it near 0.6895 late in the day
Long upper wick on daily candle, t-l resistance are concerns for longs. AUD/USD longs face risk that a sharp fall might take hold.
The 200 day moving average is coming in at 0.6952 (a likely drawcard for any further gains). The top of the downtrend channel forms a top at 0.6933. 61.8% Fibonacci level @ 0.6924.