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Global Market Update
The View from Australia

Craig Killaby February 22, 2021

Data/Speakers

 

> EU February German IFO Business Climate : 92.4 v. 90.5 exp.

> US January CB Leading Index : 0.5% v. 0.4% revised prev.

 

Overnight Headlines (BBG)

> US congress begins its path to the next US$1.9trillion relief package, due to be voted in the House of Representatives as early as Friday

> Commodities surged as inflation risks started to mount, with LME Copper and Nickel hitting their highest levels in nearly a decade

> Local bond markets were hit on higher inflation expectations as yields across the curve rose, while the RBA is now facing another issue as the 3yr yield creeps slowly above their 0.10% target

What you need to know

The inflation narrative is slowly starting to build momentum, as rising bond yields and surging commodity prices send shivers through equity investors as longer term inflation expectations soar. The day in Australia was relatively quiet, although the AUDUSD was able to briefly break above the 0.7900 handle on a less than expected RBA bond purchase, it was short lived. The positive UK news continues to buoy markets, with the first dose of the vaccine seeing significant drops in transmission across the country as the PM expected to announce that schools are being planned to reopen. The data is positive for the rest of the world as countries begin their vaccination programs in a race to reopen struggling economies. There was a brief bout of risk aversion as data out of Germany showed that transmissions spiked, although that seemed to be short lived with risk appetite pointing to the upside with commodities and commodity-backed currencies getting the most benefit.

 

In the US, the talks of the next stimulus package have picked up with the package passing through the US House panel this morning and on track to hit the House floor on Friday. The US$1.9trillion plan marks yet another fiscal support package for those Americans struggling with the pandemic, the third major package since the outbreak began. The Dollar struggled on the session, with commentary around a multi-billion Dollar infrastructure spending plan to come post-stimulus also weighing on the Buck as it is down 0.4% from yesterday’s open in DXY terms.

 

US bond yields are rising across the curve, however the more pronounced moves are coming at the longer end as inflation expectations are weighing on bond prices. The AUDUSD posted yet another multi year high of 0.7929 as the move towards 0.8000 seems inevitable. The crosses are all looking much stronger, with the AUD outperforming against all the majors. Assisting in that move higher is commodity prices, with Copper and Nickel hitting decade highs on the LME while Iron Ore also was supported up 1.5%. It is clear that investors are pricing in the notion that demand is going to come back much quicker than production, leaving supply shortages and seeing prices surge. WTI crude is up a whopping 4.2%, while Gold have rebounded sharply off its recent lows up 1.4%.

 

The Day Ahead

 

Data

 

> NZ Q4 H/line Retail Sales & Core Retail Sales : -0.5% & -0.6% exp.

> AU January Goods Trade Balance : 8.96Bio prev.

> UK January Claimant Count Change & Unemployment Rate : 13.8K & 5.1% exp.

> EU January Final H/line CPI & Core CPI : 0.9% & 1.4% exp.

> US Fed Chair Powell to testify

> CA Bank of Canada Gov. Macklem to speak

> US February CB Consumer Confidence : 90.2 exp.

> US February Richmond Manufacturing Index : 16 exp.

> JP Bank Holiday

 

With the Aussie opening up well above the 0.7900 handle, there have been a few headlines that the US stimulus bill will not be passed until early March and seems to be denting risk appetite ever so slightly. The infrastructure commentary is bullish for commodities and should further support the AUD move higher, with 0.8000 well in its sights. NZ retail numbers will be the data highlight this morning, with AU trade figures unlikely to move the needle in a material way. US investors will be listening closely to the testimony from the Chair of the Fed this evening, with the rising borrowing costs for the US government on the longer end a concern as yields move higher. Likely to see some profit taking on this strong move, with a trickle back towards 0.7900 possible before we see another break higher.

 

Range for the day : 0.7880 – 0.7950

 

AUD/USD Technicals

 

It has been a strong move higher for the pair, breaking through resistance like a hot knife through butter and taking aim at the major 0.7986 level before cracking 0.8000. Expecting a move back towards the 200ExpMA, which now sits at 0.7877 on the 10m chart and support intraday. The 50DMA at 0.7693 likely stops major corrections lower, however signals are that a run at the January 2018 high of 0.8136 are building.

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