Originally published by IG Markets
After somewhat of a fightback from the US dollar on Tuesday and Wednesday, we are back to what we have seen for most of the year, selling US dollars, credit spread narrowing and US equities grinding higher, driven by tech.
The 2% gain (in the last two days) in the US Dollar Index to 93.12 was driven predominantly by EUR/USD falling to $1.1823, but there has been a strong reversal in US trade. USD/CAD was perhaps one of the US dollar first movers and printing a bearish outside day reversal (i.e. trading above Wednesdays high and looking to close below the low). However, all eyes have been on EUR/USD in G10 FX, which has been given a boost by a stronger European headline inflation print, although the upside has been curbed by a Reuters report detailing that the ascent of the eueo is a genuine worry for some within the ECB and could be a consideration when they judge their slowdown in asset purchases.
A break of $1.1946 (50% of the pullback seen this week) and we should see the 29 August high of $1.2070 being taken out.
USD/JPY is also interesting here, currently trading just below ¥110.00 and this pair will get strong focus with US non-farm payrolls in play tonight at 22:30 aest. The market goes into this release expecting 180,000 jobs to be created, but the fed funds future (a tradeable interest rate instrument) will likely pay far closer attention to the average hourly earnings, which are expected to gain 2.6%yoy. The Federal Reserve has been paying close attention to the U6 unemployment rate (a broader unemployment rate that also includes "marginally attached workers and those working part-time for economic reasons”). Currently, at 8.6%, a collective within the Fed still point to genuine slack in the labour market and this measure of unemployment is at the heart of their concerns, so number towards 8% could put some upside into the current 30% probability of a December rate hike.
We have been treated to a plethora of US economic data releases, including July core PCE (personal consumption expenditures), which came in line with expectations at 1.4% (and 10bp lower from June print of 1.5%). Personal income (+0.4%) and spending (0.2%), with Chicago manufacturing index showing good expansion at 58.5. We also heard from US Treasury Secretary Steven Mnuchin, who was interviewed on CNBC and spoke optimistic of the Trump tax plan and again called for the corporate tax rate to be lowered to 15%. On the whole, there was not a whole lot of new information for the market to disgust, but comments that having a "weaker US dollar is somewhat better for trade” have perhaps weighed on the US dollar, although Mnuchin is of the belief that "a strong US dollar over the long term reflects confidence."
US treasury yields are also looking heavy here across the curve and weighing on the US dollar, with the 10-year treasury down two basis points to 2.12%.
It’s been a good night for commodities, with US crude bouncing back 2.4% to reclaim $47.00, although the big moves have been seen in gasoline futures which are moving sharply higher on reports the Motiva Port Arthur refinery (Texas) could be shut for two weeks. Bear in mind, this is the biggest refinery in the US, so the impact on gasoline supply would be significant. Good gains have been seen in spot iron ore (+3.7% to $78.91), while copper has gained 0.5%, helped to an extent by yesterday’s stronger Chinese manufacturing PMI and steel PMI report. Gold (+1%) is a pillar of strength, reacting to the moves lower in US fixed income and USD/JPY and is closing above Monday and Tuesday supply levels.
US equities have closed August on a stronger footing and capping a fifth consecutive month of gains. As mentioned tech has worked nicely, with Apple (NASDAQ:AAPL) at the heart of that move. Gold miners have performed admirably, while energy has moved a touch higher and there is no strong conviction to push prices higher despite US crude having a decent rebound. The S&P 500 (closed at 2471 +0.6%), itself, needs a close through the 16 August highs of 2474 and we should see new all-time highs here, while the Nasdaq 100 is testing the all-time high (set on 27 July) and a close through this near-term barrier puts the Nasdaq 100 as the no.1 vehicle of choice for the index bulls.
Closer to home, we can see SPI futures trading at 5690 at 16:10 aest and the official close of the S&P/ASX 200. So with the index currently at 5694 (at the time of writing), it is clearly indicative that the ASX 200 is set to open the new month on a flat note. There is little in the way of event risk to concern, and the US payrolls report is not being considered as one that could dramatically impact on US monetary policy, so the ASX 200 should trade in a fairly tight range today, with the wash-up being we close for a 15th week in the 5800 to 5675 range.
AUD/USD has seen a strong bid of the lows of $0.7871 and currently sitting at $0.7949. Traders have been good buyers of AUD/NZD though, so this cross rate needs to be on the FX radar, as the moves higher have been punchy, to say the least and the pair sits at the highest levels since April 2016.