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Global Market Update
The View from Australia

Craig Killaby January 30, 2019



> AU Q4 CPI & Trimmed Mean CPI : 0.5% & 0.4% v. 0.4% & 0.4% exp.

> EU December German Import Prices : -1.3% v. -0.8% exp.

> US January ADP Non-Farm Employment Change : 213K v. 180K exp.

> US EIA Crude Oil Inventories : 0.9M v. 3.0M prev.

> US FOMC Statement & Federal Funds Rate Decision : <2.50% v. <2.50% exp. (no change)


Overnight Headlines (BBG)


>  The Federal Open Market Committee said it would maintain its target rate at 2.25-2.50%

>  European Commission President Jean-Claude Juncker said that a disorderly Brexit is now more likely; he also defended the need for an Irish border backstop


What you need to know


It was the best day of the year for the AUD, the best performing major in a session that showed some tone reversal from the Fed and some slightly better than expected inflation figures. The Aussie gained some footing in the early portion of the Asian session, with Q4 CPI beating expectations up 0.5% and bringing the y/y rate up to 1.8%. Although this is unlikely to change the RBA’s policy, it was able to support the AUD and set it up to take another run at the 0.7300 level. In the UK, the Brexit situation continues to unravel with the President of the EU Juncker was pessimistic on the prospects of renegotiating their deal to exit the EU and immediately sent the GBP down against the Dollar. As mentioned yesterday, we continue to expect significant volatility in all GBP pairs seeing the AUD/GBP jump up 1% overnight. The Dollar underperformed against the majority of the majors following the Fed’s decision to keep their target interest rate band unchanged early this morning. Powell & Co seemed to surrender to the recent market volatility and changed the tone from being the ‘gradual interest rate path is most effective’ to ‘the best path forward is to be patient with rate increases’. The signal was the most explicit from the Fed since their began their tightening and showed that the likelihood of another increase in 2019 is getting even smaller. The change in stance was a complete backflip from what the Fed had been pushing at the back half of last year, commenting that the recent muted inflationary pressures and global financial developments as the reason for the change.


Market reaction was swift, seeing UST yields falling sharply across the curve with the 2y leading the fall down 5.6bp from yesterday and the 10y down 2.5bp. AU/US 2s spread is up over 7bp from yesterday, generally AUD supportive. The Dollar hit the lowest level in four months, with the DYX down as much as 0.6% following the report and finished the day down 0.4%. Commodity currencies performed the best against the sliding Greenback, with the AUD, CAD and NZD all up around 1%+ on the day. Powell’s comments and statement was music to equity traders ear’s as the S&P500 finished the day up 1.55%. Commodity markets surging yesterday, as Iron Ore continues to push much higher up another 4.5% and Copper not too far behind up 2.1%. WTI crude supported by the weak Dollar and falling US stockpiles, up over 2%. Gold up 0.6%.


The Day Ahead




> AU Q4 Import Prices: 0.3% exp

> AU December Private Sector Credit : 0.3% exp.

> CN January Manufacturing & Non-Manufacturing PMI : 49.3 & 53.9 exp.

> EU Q4 Prelim Flash GDP : 0.2% exp.

> CA November GDP : -0.1% exp.

> US Unemployment Claims : 215K exp.


With the Aussie coming off its overnight high of 0.7273 this morning, surprisingly AU bond yields opened up lower and might be a sign of some AUD weakness to kick off the day. Nonetheless, the rally for the AUD was a good sign for bulls as the 0.7300 level comes back into the picture with Chinese PMIs on the docket today. If we happen to get any sort of positive news from the US/China on trade, this could be an opportunity for the AUD/USD to push higher. No real data on the docket outside of the China PMIs, keeping a close eye on AU bonds.


Range for the day : 0.7215 – 0.7270


AUD/USD Technicals


After the break of the Dec 18 high of 0.7247 the AUD has its sights set on the 200DMA currently sitting at the 0.7295 level. A break of this level leaves a bullish run open up to 0.7394. Support now sits at the 0.7171, while the 0.7247 seems to see some slight consolidation in early trade. The momentum looks to be turning bullish after yesterday’s run, leaving upside potential truly on the table.


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