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Global Market Update
The View from Australia

Craig Killaby July 29, 2020



> AU Q2 CPI & Trimmed Mean CPI : -1.9% & -0.1% v. -2.0% & 0.1% exp.

> EU June German Import Prices : 0.6% v. 0.5% exp.

> US June Goods Trade Balance : -70.6B v. -75.5Bio exp.

> US June Pending Home Sales : 16.6% v. 15.6% exp.

> US EIA Crude Oil Inventories : -10.6M v. 1.0M exp.

> US FOMC Statement, Decision & Press Conference : <0.25% v. <0.25% exp. (no change)


Overnight Headlines (BBG)


> Fed officials left their benchmark interest rate unchanged near zero and again vowed to use all their tools to support the U.S. economy amid a shaky recovery from the coronavirus pandemic


What you need to know


It was a busy day across financial markets, with AU inflation numbers and the conclusion of the Federal Reserves’ July meeting the highlights for investors. Local inflation numbers for Q2 showed what many expected, and that was a near 2% drop in consumer prices, with the economy having the first q/q negative inflation read in 20 years. Delving into the details, the government subsidised child care accounted for a large amount of the deflationary pressure down 95% in the quarter, while petrol prices falling also added to the fall. Markets can expect these figures to bounce back in Q3, and market reaction was largely muted on the release as the RBA will take these with a grain of salt with rates locked in where they are for the time being. There was a slight selloff in the AUDUSD around the release, however it was more likely due to the surprise closure of the QLD/NSW border for residents of greater Sydney from Saturday. How long the border will stay closed for will likely depend on how well NSW does at containing the clusters of COVID-19 cases, with a rise in cases in metro Sydney the cause of the drastic measures. Consumer confidence will be the most impacted from the actions, with the lingering virus problem keeping people’s pocketbooks closed in the midst of uncertainty.


In Europe, the session was fairly quiet with most investors sitting on the sidelines ahead of the FOMC decision early this morning AEST. The Fed’s decision was fairly straightforward as expected, keeping policy unchanged while reiterating their pledge to use all their available tools to support the economy. Markets were expecting a dovish stance from the Fed, and that is exactly what they got with Chairman Powell citing significant unknowns and risks due to the recent and continued spike of COVID-19 cases across the country. Fiscal support will be very important as the recent measures are coming to an end, however the tone was that the ball is in lawmaker’s court as they need to pass more support as the economy struggles. As expected when the head of the Central Bank warns of significant risks and unknowns, US equity markets rally, seeing the S&P500 up 1.25% as they realised that support is here for the long haul.


The moves away from the Dollar continued in the aftermath of the meeting, with the DXY down near 0.5% as the reasons to hold the Buck continue to dwindle. The AUDUSD touched a high of 0.7197 in the aftermath of the meeting, and settling a touch below as I write although still unable to breach the 0.7200 handle. The AUD crosses are mostly up with the exception of the European pairs, which outperformed against the AUD. Local equity markets finished the session in he red on the deflation print, however expected to see these losses erased today as Rio Tinto reported bumper earnings after the close. In commodity markets, it is greener pastures as the Dollar struggles with Iron Ore up 1.8% and Gold continues to grind higher up 0.5%. Copper is the laggard, finishing the session largely unchanged, while WTI crude investors ignore demand fears as it finishes up 0.6%.


The Day Ahead




> NZ July ANZ Business Confidence : -29.8 prev.

> AU June Building Approvals : -2.0% exp.

> AU Q2 Import Prices : -2.5% exp.

> EU Q2 German GDP : -9.0% exp.

> US Q2 Advance GDP : -34.5% exp.

> US Unemployment Claims : 1.44mio exp.


As investors sit at their desks this morning, there will be little reason not to continue selling the USD in the aftermath of the Fed’s decision this morning. The DXY is looking very sick and with the comments from the US President and members of US Congress on the fiscal stimulus gridlock, the reasons to hold the Buck are few and far between. With the AUD knocking on the door of 0.7200 as I write, the strong ASX open may be the catalyst to see the pair push through.


Today’s data is mostly tier two, as sentiment continues to be the driver and flows away from the Dollar remain the key. US GDP is the highlight tonight, however it is more likely to be a lowlight with the 2nd quarter of 2020 likely to be the worst ever recorded with the economy grinding to a halt. Also due to add fuel to the negative USD fire are unemployment claims, with the virus raging across the US it would not be surprising to see a worse than expected print and raising even more questions as to how long investors can whether this storm.


Range for the day : 0.7150 – 0.7225


AUD/USD Technicals


The 0.7200 level has held, for now, as the fresh high of 0.7197 keeps rallies in check for the time being. A breach of this level would bring the pair back towards Feb 2019 levels of 0.7207 and 0.7246. On a touch of 0.7200, expect a swift move higher on a stop run as the pair continues its unprecedented (there’s the word again) post pandemic rally. Support seen at the recent lows of 0.7149 and 0.7113, however it is looking like USD bears have taken over.