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Global Market Update
The View from Australia

Craig Killaby January 24, 2019

Data/Speakers

 

> AU January Flash Manufacturing PMI & Services PMI : 54.3 & 51.0 v. 54.0 & 52.7 exp.

> AU December Employment Change & Unemployment Rate : 21.6K & 5.0% v. 17.3K & 5.1% exp.

> EU January Flash Manufacturing PMI & Services PMI : 50.5 & 50.8 v. 51.5 & 51.5 exp.

> EU ECB Main Refinancing Rate & ECB Press Conference : 0.00% v. 0.00% exp.

> US Unemployment Rate : 199K v. 219K exp.

 

Overnight Headlines (BBG)

 

>  Ross said the U.S. and China are eager to end their trade war, but the outcome will hinge on whether Beijing will deepen economic reforms and further open its markets

>  Draghi intensified his warning on the challenges facing the euro-area economy, signalling the ECB could be even more cautious about any withdrawal of crisis-era stimulus this year

>  NAB raises mortgage rates, the last of the big four to do so, spiking fears of an RBA rate cut in the future

 

What you need to know

 

The market was set up to see the AUD break higher in the early stages of the APAC session yesterday, only to be stopped abruptly following the news coming from one of Australia’s big four banks. Let’s start with the December employment report, which printed better than expectations on both the Unemployment Rate and overall change. With the UR sitting a fraction below the 5.0% level and showing that the economy is at or near full employment, the RBA would have liked the sign and proven that their growth estimates are on the right track. However, this all changed when NAB decided to join the rest of the big four and raise their variable home loan rates by 12-16bp, due to come into effect at the end of this month. The move sparked a sharp drop in AUD bond yields, with the 2y and 10y yields falling 5.8 and 6.3bp respectively as the market starts to price in the possibility of a rate cut by the RBA this year (approx. 40% by November currently). The AUD performed poorly for the remainder of the session, slowly drifting lower to finish down 0.7% and touching an daily low of 0.7081 against the Dollar. In Europe, Draghi continued his dovish reign of the ECB, pointing to the downside risks facing the EU economies and pared back expectations that stimulus would be removed. The EUR finished the day down 0.6% against the Dollar, which performed well following the negative comments on trade. US commerce Secretary Wilbur Ross stated that it is unlikely that a trade deal will come from the meetings between the US/China next week. Ross also send the markets in a flight to havens with comments that the two are currently ‘miles away’ on any sort of agreement. It was a Dollar positive session, seeing the DXY finish up 0.4%. US equities were able to edge out slight gains, with the S&P500 up 0.15% to close. Another sharp drop on the UST yields front, with the 2s and 10s down yet again. Mixed bag on the commodities front, with Base Metals falling ever so slightly and WTI crude able to push up near 1.5%.

 

The Day Ahead

 

Data

 

> NZ December Visitor Arrivals : 4.0% prev.

> EU January German IFO Business Climate : 100.7 exp.

 

With the AUD breaking through the 0.7100 level, I would not be expected to see the currency pair back some of the losses experienced yesterday as it may be a bit overdone. The trade news comes back into the forefront, with a deal looking like it is not on the horizon with the US/China and likely limiting AUD/USD upside for the time being. Looking at today’s data, it will be surprise headlines driving the market with same macro risks remaining. Keeping a range around the 0.7080/0.7150 level as Australia heads into the Australia day long weekend.

 

Range for the day : 0.7080 – 0.7150

 

AUD/USD Technicals

 

Slight change to the technical picture after the drop yesterday, clinging to the 0.7080 level with risks mounting on some further downside. After the employment report, the AUD looked poised to break through resistance however, lower highs are likely considering the bearish bias that has struck the market.

 

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