Trade talks and China's return this week puts AUD longs on hold



Good morning


OVERNIGHT DATA AND HEADLINES


• Oil prices jumped overnight as supply issues took centre stage following a week of sharp losses, while stocks and the USD drifted higher with eyes on the upcoming Sino-U.S. trade talks.

• U.S. stocks erased early losses to trade flat, as comments from White House economic adviser Larry Kudlow calmed nerves over the outcome of this week's high-level trade talks with China. Dow Jones was down 1.46 points (0.01%) at 26,572.26, S&P 500 was up 0.65 points (0.02%) at 2,952.66 & Nasdaq was up 10.23 points (0.13%) at 7,992.70.

• Data on Monday revealed that sales of manufactured goods in Germany, as measured by factory orders, declined by 0.6% on a monthly basis in August and dragged the annual decrease down to -6.7% from -5% to revive concerns over an economic slowdown in the eurozone's biggest economy.

• The U.S. Federal Reserve should continue to cut interest rates in order to offset growing risks to the economy, Minneapolis Federal Reserve Bank President Neel Kashkari said on Monday. "My message is clear: we should be supporting the economy, not tapping the brakes on the economy so I want to look at the data over the next few months but so far I am happy that we're cutting interest rates," Kashkari said during an event in Prior Lake, Minnesota. "How much more do we have to cut? I don’t know yet," he said, citing slowing global growth, weakening business investment and inflation that is below the central bank's 2% target as economic risk factors.

• President Donald Trump said on Monday he wanted to see the U.S. Federal Reserve enact a "substantial" cut in interest rates because of the lack of inflation in the United States. "We'd like to a see an interest rate cut, a very substantial one," Trump said. "We have no inflation. If anything it's going below the number, so therefore we're entitled to an interest rate cut. I hope the Fed does that."


CURRENCIES


• USD was little changed as markets awaited U.S.-China trade talks later in the week – DXY index was down 0.02% at 98.792.

• GBP fell as investors grow increasingly concerned that Britain and the EU were no closer to agreeing a Brexit withdrawal deal. GBP traded 0.3% lower at 1.2295.

• EUR turned flat overnight falling back below 1.1000 towards 1.0965 on weaker German factory orders and USD rebound.

• AUD failed to build on recent gains falling lower after yesterday’s AIG index dropped to 42.6 in September from 44.6 in August. AUD hit 0.6727 lows in NY close.

• AUDNZD traded just above 1.7000 after falling back lower from 1.0720 highs.

• AUDEUR fell overnight down towards 0.6130 from last weeks 0.6170 highs.


INTEREST RATES


• U.S. Treasury yields ambled higher ahead of remarks from Fed Chair Jerome Powell, U.S.-China trade talks and the auction of $78 billion notes and bonds this week.

• The week's $38 billion three-year bond auction, $24 billion 10-year reopening and $16 billion 30-year reopening could significantly lower prices, as floods of supply often do.

• The two-year yield, which last week fell 22.6 basis points, rose 6.4 basis points to 1.462%. The 10-year yield was up 3.9 basis points, having fallen 15.9 basis points last week.


COMMODITIES


• Gold prices inched lower but held a tight range around the $1,500 level as investors took a cautious approach ahead of the U.S. Federal Reserve minutes and trade talks between Washington and Beijing this week. Spot gold slipped 0.4% to $1,498.27 per ounce.

• Copper edged higher ahead of fresh U.S-China trade talks this week, but reports that Beijing was reluctant to agree to a wide-ranging deal tempered hopes for a speedy resolution. Benchmark LME copper ended 1.4% higher at $5,720 a tonne.

• Oil prices rose, buoyed by hopes of progress in U.S.-China trade talks and supported by challenges to supply facing major exporters. Brent crude rose 78 cents or 1.3% to $59.15 a barrel. U.S. West Texas Intermediate (WTI) crude was at $53.74, up 93 cents or 1.8%.


EVENT RISK TODAY


• Australian Economic data today : Sep ANZ job ads (softening trend), Sep NAB business survey (conditions and confidence remain below average).

• China : Sep Caixin China PMI services (services sector being hindered by manufacturing’s woes).

• Japan : August household spending

• Germany : August industrial production

• U.S. : September small business optimism, PPI, monthly budget. Fed Chair Powell speaks at the NABE conference in Denver & Evans at the Chicago rotary club.


AUD thoughts :


AUD, flattened by strong resistance over the Friday night session, continued its fall overnight towards 0.6727 lows on a firmer USD and signals that Chinese officials are increasingly becoming more reluctant to agree to a broad trade deal pursued by President Trump.

With China coming back after week long holidays and the absence of any tier 1 Australian data this week, AUD finds itself back in similar trading ranges and awaits any significant offshore news/data to change scope of direction. The sensitivity to risk following the fall from yesterday’s Sep AiG construction index drop 42.6 (prior 44.6) has also seen Australian yields drop which has placed a further impetus towards selling interest.


Today watching the Australian September job ads & business survey results for domestic economic health checks however the Chinese Sep PMI services will be of more interest.


Technical outlook :

AUD falls to a low of 0.6727 on the NY close, convingly piercing the 10 day moving average at 0.6746 on the fall.

Moves lower from here setup the 0.6700 first line of support followed by last weeks 0.6670 (10-year low hit last Wednesday the day after RBA's dovish rate cut).

Bids expected to defend near 0.6700 if AUD extends south but nothing to support until 0.6670.

Significant topside resistance levels to watch just under 0.6800 (0.6794 / 0.6798).






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