Overnight Market Headlines
- The US 10yr treasury yield opened 5bp lower at 2.48%, then rising slightly to 2.50%. The 2yr yield opened 4bp lower at 2.28% and firmed to 2.31%.
- The chance of a Fed rate cut by December, implied by Fed fund futures, rose from 65% to 75%.
- Gold edged up as a slide in global share markets after Trump administration's threat of further tariffs on China prompted investors to favour safe-haven assets, but upside was capped by a firm USD. Spot gold gained 0.2% to $1,281.76 per ounce.
- China's steel futures dropped, the first trading day after a four-day national holiday, hit by worries over the outlook for trade after U.S. President Donald Trump said he would hike U.S. tariffs on $200 billion worth of Chinese goods.
- Shanghai copper and nickel hit their lowest in more than three months. All other metals fell. Aluminium decreased 1.8%, zinc was down 1.3%, lead was 1.9%
- Oil futures edged higher in volatile trade as rising tensions between the U.S. and Iran buoyed prices after they touched a one-month low following U.S. President Donald Trump's threat that he may raise tariffs on Chinese goods. Brent crude futures rose 39 cents to settle at $71.24 a barrel. Prices earlier sank to $68.79 a barrel, its lowest since April 2. U.S. West Texas Intermediate (WTI) crude futures rose 31 cents to settle at $62.25 a barrel. WTI's session low was $60.04 a barrel.
- EUR rose slightly from 1.1180 to 1.1210.
- The safe-haven yen outperformed, USD/JPY rising from 110.60 to 110.96.
- AUD rose from yesterday’s 0.6963 low (also a three-year low excluding Jan’s flash crash) to 0.7003 but fell back down towards 0.6975 this morning.
- Underperformer NZD slipped from 0.6630 to 0.6603.
- AUD/NZD rose from 1.0545 to 1.0594 and back down to 1.0570.
- AUDEUR ranged between 0.6230 / 0.6250 for the most part overnight.
AUD fell sharply on President Trump's tariff threats on Chinese imports but it might not be a one-way ride lower for the AUD. Trump's tweets have increased concerns of slower global growth, driving the U.S. interest complex lower. The threats have also been followed by drops in EUR and fed funds interest rates as well as the U.S. Treasury yield curve. The prospect of slower growth could put pressure on the Fed to cut rates earlier than short-term rates markets currently suggest, which in turn would likely push the USD lower.
All attention will be primed for 2.30pm today for the headline Reserve bank of Australia announcement with swap markets pricing a May rate cut at around a 50% chance.
Markets should react sharply to any rate decision, there may be only a (fragile) bounce on no change since the statement should include admission that growth and inflation forecasts have been cut since Feb and the RBA should adopt an easing bias. A rate cut however could be very damaging for the AUD as markets scramble to price in the next easing and ponder how soft the economy must be for the RBA to cut rates 11 days before the federal election.
In addition to the RBA meeting today we have March retail sales and international trade balance plus the important Statement on Monetary on Friday where we expect to see the RBA downgrading GDP forecasts and paving the way for our August cut call. In terms of the global focus, post the FOMC statement and Powell press conference, Fed speakers will be important with a total of 14 engagements over the next week. Chinese negotiators will be in Washington, DC for what feels like the final make or break stages of negotiations on a trade agreement.
Early AUD weakness in NY hours as USD trades firm but bids fade. Dip towards 0.6980 gets bought, AUD steadily lifts, near 0.7000 late. Techs are mixed, RSIs are falling but daily bull hammer candle forms.
RBA meeting & trade tensions are key risks for investors today / this week. RBA rate cuts are unlikely at today’s meeting but many in the market expecting this year. Investors appear to have factored in the expected cuts so the impact may be limited. Should the latest trade tensions simmer down AUD shorts could be in for a painful squeeze and a return to April's high would be likely.
Risk Event Data Today
- Australian Economic data today : the RBA policy meeting is ‘live’ with markets pricing in just short of a 50% chance of a cut and a slight majority of market economists (14/26) favouring a move.
- Australian March retail sales are expected to rise 0.2% (Westpac fcs +0.1%) with Q1 retail volumes up 0.3%. Mar trade balance is anticipated to post a $4.5bn surplus (Westpac $4.2bn), a touch lower than Feb’s record $4.8bn.
- Euro Area: the EU Commission forecasts are released.
- US: Mar JOLTS data is released. Fedspeak involves Kaplan in Beijing, and Quarles on financial regulation