It’s not been a good session for risk assets on Tuesday.
Stocks have been pummelled and commodities are under pressure, succumbing to a continued lift in global bond yields. As a result, investor sentiment has soured.
As seen the in the scoreboard below as at 8am AEDT, it’s not been kind to the risk-orientated, commodity-linked Australian dollar which has fallen across the board.
AUD/USD 0.8078 , -0.0014 , -0.17%
AUD/JPY 87.92 , -0.24 , -0.27%
AUD/CNH 5.1136 , -0.0145 , -0.28%
AUD/EUR 0.6517 , -0.0017 , -0.26%
AUD/GBP 0.5712 , -0.0036 , -0.63%
AUD/NZD 1.1023 , -0.0026 , -0.24%
AUD/CAD 0.9963 , -0.0024 , -0.24%
Along with weakness in risk assets, Ray Attrill, Head of FX Strategy at the National Australia Bank, said the Aussie was also undermined by a lift in financial market volatility.
“The AUD is the ‘weakest’ currency of the past 24 hours — a term to use advisedly given it’s still trading comfortably above 80 cents,” he said in his morning note.
“Here we’d point to that jump in the VIX this week, as well as softer oil and where the Aussie has proved just as sensitive to oil price volatility as the likes of Canadian dollar, bearing in mind LNG prices are directly linked to oil.”
Attrill says the “latest price action does serve as a reminder that if we do get a much broader and deeper deterioration in risk sentiment in coming weeks or month, the AUD will be close to the front of the currency causality list”.
Just as the Aussie benefited more than most from improved sentiment towards the global economy over the past month, any subsequent reversal in sentiment in the period ahead could see the Aussie get hit hard, in other words.
As Attrill rightly points out, while the Aussie fell across the board on Tuesday, the losses were very modest in scale.
Whether the move seen overnight continues on Wednesday will likely come down to a mix of major economic, political and central bank events that will arrive during the session.
In Australia, the main focus will be on the release of Australia’s December quarter consumer price inflation (CPI) report at 11.30am AEDT.
Headline CPI is tipped to increase by 0.7%, leaving the increase on a year earlier at 2.0%. The underlying measure is expected to lift by 0.5%, seeing the year-on-year rate edge up to 1.9%, above the RBA’s 1.75% forecast.
This 10-second guide has more on what to expect, along with the implications for interest rates depending on how the report prints.
Coming got on the heels of the inflation report, China will also release manufacturing, non-manufacturing and steel industry PMI reports for January at midday AEDT.
While these reports used to move markets, they have lost much of their clout in recent years given a noticeable improvement in the Chinese economy, along with ongoing scepticism over the veracity of the data.
Markets have almost been programmed to expect a modest improvement in activity levels in the manufacturing sector, outpaced by a faster improvement in non-manufacturing parts of the economy.
That means the PMIs will either have to be horrible or amazingly strong to cause any significant reaction in markets.
Coming one hour after the PMI data, US President Donald Trump will deliver his first State of the Union Address in Washington.
“The focus of markets will likely be which president will be presented — the pragmatic businessman of the Davos meetings or the firebrand who caters to the domestic base,” say Dana Peterson and Veronica Clarke, Economists at Citibank.
“Political pundits suggest he likely will offer a more conciliatory tone towards Democrats on domestic issues, as well as soundbites that appeal to a bi-partisan audience. Either way, we anticipate the themes of the President’s SOTU will be familiar with few, if any real policy surprises.”
One struggles to remember any recent State of the Union address that has has any meaningful impact on financial markets, but this is Trump, of course.
Later in the session, the other major event markets will be focused on will be the US federal Reserve’s January FOMC policy decision, Janet Yellen’s last as Fed Chair before Jay Powell takes the reins.
There’ll only be a statement released following the meeting, rather than economic projections and press conference, with most expecting the Fed to lay the foundation for another increase in the Fed funds rate in March.
“The FOMC meeting is likely to send a modestly hawkish signal, as officials become more convinced of the shift from the disinflation of 2017 and emphasise the momentum in the real economy,” said economists at Bank of America Merrill Lynch.
Attrill at the NAB agrees with that assessment.
“[The statement] should do nothing to put the market off the firm scent of a next rate rise in March.”
Outside of those events, markets will also receive unemployment and inflation figures from the Eurozone, Canadian GDP along with the ADP National Employment report, employment costs and EIA crude oil inventories from the United States.
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