July 25, 2017

Markets Today: Levels

The AUD reached an intraday high yesterday of 0.7968 but has traded with a softer tone during the overnight session.

It has been a quiet start to the week in the northern hemisphere with no major market moves overnight. US equities ended the day mixed with the Dow and S&P marginally lower while the NASDAQ closed marginally higher. A better than expected PMI print has helped the USD stabilise while on the other side of the Atlantic the Euro has lost a bit of ground amid softer than expected activity indicators. Oil prices are a little bit stronger after Saudi Arabia and Russia threatened to escalate the dispute with countries that have not complied with production cuts and early this morning President Trump called on all Republican senators to end “the Obamacare nightmare” ahead of a procedural vote to start debate on the health care bill.

Well like Nick Jonas 2015 hit “Levels”, for currency markets it is all about levels at the moment. After falling to a 15 month low, the USD is approaching some critical levels (specifically 92.0 on the narrow DXY index and 1150 for the broader BBDXY). We do have the FOMC meeting early on Thursday morning, but US politics could be a big test ahead of that. Opening the debate on repealing and replacing the Obamacare bill could be a positive for the USD as it would improve the prospect for the Trump administration to get its infrastructure spending and tax reform agenda back on track. On the other hand, failure to open the debate is likely to be a significant test for those key levels to hold. We doubt either will break convincingly with ease (at least not at first time of asking) but if we do break through, the potential for accelerated US dollar losses is fairly obvious.

Meanwhile after three up days, the EUR traded with a softer tone overnight. Yesterday morning the pair traded to an intraday high of 1.1680, but since then it has drifted lower and is currently trading at 1.1642.  Mixed German and French PMIs in July  saw the EU manufacturing PMI  slipped to 56.8 vs 57.2 exp. and while the services PMI printed in line with expectations at 55.4. For now we think a Euro pull backs should find support at 1.1475 while strong resistance is seen at 1.1750.

Similar to the Euro, yesterday the AUD reached an intraday high of 0.7968, but it has traded with a softer tone during the overnight session and the pair opens this morning at 0.7924. We don’t have a lot in the domestic calendar today, thus if the 80c level is to be tested over the next 24hrs, the catalyst is likely to come from the USD side and as noted above US politics could be the likely culprit. AU CPI data and Governor Lowe speech tomorrow are the two domestic events likely to trouble the AUD this week and our guess is that both are unlikely to be an upward force for the currency.

Oil prices are just over 1% stronger following comments from Saudi Arabia in St. Petersburg.  At a joint OPEC/Non-OPEC conference Saudi Arabia’s energy minister Khalid al Falih said that “We are going to forcefully demand participation “ from all producers. He then also added that Saudi Arabia would lead by example and cap its exports in August at 6.6m b/d, down from 6.9m b/d in May and 1m b/d lower than last year’s monthly.

In other news Former Federal Reserve Governor Daniel Tarullo said weak inflation could weigh on the Fed’s discussions about whether to raise interest rates again, with only little risk that prices will surge out of control. Tarullo said the risks of runaway inflation “seem pretty modest at this juncture.”

Coming Up

Today is probably the quietest day of the week with very little on the calendar to trouble the scorers. This morning Australia gets its weekly consumer confidence reading and in Japan the BoJ releases the Minutes from its 14-16 June meeting. The latter unlikely to be market moving given last week’s BoJ Meeting.

Later in the day the IFO survey is out in Germany and after the lower than expected ZEW survey earlier in July (although still at elevated levels), the market will be looking to see if the more representative IFO survey also shows any signs of cooling in economic activity. While historically the IFO index has been a good GDP growth predictor, the current elevated index level appears to be exaggerating the potential growth over the coming quarters.

Moving onto the US, FHFA House price Index and Case-Shiller Home prices are the first two cabs off the rank, followed by Conf. Board Consumer Confidence and Richmond Fed Manufacturing Index. The confidence index has been slipping in recent months and although the June reading did show a small rebound, the market is looking for the index to drop again in July (116 exp. vs. 118.9 prev.). Fed speakers are in a hiatus ahead of the FOMC meeting Thursday morning and as we learned this morning the US Senate may vote on the healthcare bill tonight/tomorrow morning.


On global stock markets, the S&P 500 was -0.11%. Bond markets saw US 10-years +1.77bp to 2.26%. In commodities, Brent crude oil +1.33% to $48.7, gold+0.0% to $1,255, iron ore +1.1% to $67.86, steam coal -0.1% to $86.35, met. coal +0.0% to $164.00. AUD is at 0.7924 and the range since yesterday 5pm Sydney time is 0.7901 to 0.7968.

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