- The Australian dollar continues to fall as markets scale back the likelihood of a rate cut from the US Federal Reserve this year.
- Market probability of a 25 basis points rate cut from the Fed by the end of the year now sits at 65%. It was over 100% last week.
- Reduced odds of Fed easing in the near-term, along with a sharp fall in crude oil futures and a modest increase risk aversion, saw the AUD/USD fall back below the .7000 level on Thursday.
- US non-farm payrolls for April will be released midway through Friday’s session. It will dictate whether the Aussie’s slide continues or reverses.
The Australian dollar continues to fall as markets scale back the likelihood of a rate cut from the US Federal Reserve this year.
As seen in the scoreboard below at 7am in Sydney on Friday, the AUD/USD is back below the 70 cent level, albeit marginally.
AUD/USD 0.6998 , -0.0015 , -0.21%
AUD/JPY 78.02 , -0.08 , -0.10%
AUD/CNH 4.7212 , 0.0003 , 0.01%
AUD/EUR 0.6263 , 0 , 0.00%
AUD/GBP 0.5369 , -0.0005 , -0.09%
AUD/NZD 1.0574 , -0.0012 , -0.11%
AUD/CAD 0.9428 , 0.0004 , 0.04%
The same factor that drove the Aussie lower late on Wednesday remained the dominant feature during Thursdays’s trading session: higher US bond yields and a firmer US dollar, reflecting commentary from US Federal Reserve Chair Jerome Powell that pushed back against growing market expectations for a reduction in the Fed funds rate this year.
The probability of a 25 basis point decrease in the Fed funds rate by the end of the year continued to fall on Thursday, dropping from 70% to 65%. Just last week a rate cut before the start of 2020 was deemed to be a lock by markets.
Reflecting reduced odds of Fed easing in the near to medium-term, the benchmark 10-year US bond yield rose 6 basis points to 2.56%. Two-year yields — highly influenced by central bank policy expectations — also lifted four basis points to 2.35%.
Firmer US yields, along with modest risk aversion in stocks and another plunge in crude oil futures, contributed to slide in the AUD/USD, seeing it fall back below the .7000 level late in the session.
According to Westpac Bank, the AUD/USD remains vulnerable to further downside risk today with US non-farm payrolls for April set to dictate broader market direction in the latter parts of the session.
“The recent low at 0.6990 remains vulnerable,” it said. “[The] US payrolls report poses major event risk.”
Richard Grace, Chief Currency Strategist at the Commonwealth Bank, agrees that further risks to the downside are building.
“The technical close below 0.7000 is a bearish signal, and opens up the door for further mild depreciation,” he said.
Payrolls are expected to increase by 185,000 in April, leaving the unemployment rate steady at 3.8%. Average hourly earnings are tipped to increase by 3.3% from a year earlier, up from 3.2% in March.
The latter figure carries the potential to be as influential on markets as the payrolls or unemployment number.
The report will arrive at 10.30pm AEST.
Before that event hits, there’s a number of other major releases scheduled earlier in the session.
In Australia, the Ai Group will release its services PMI at 8.30am AEST. That will be followed three hours later by building approvals data for March. For the latter, a big decline is expected following a unit-led spike in February.
The rest of the Asian region is relatively quiet, largely reflecting that Chinese and Japanese markets remain closed for public holidays.
The big event in Europe will be Eurozone inflation for April. Markets will be looking for a substantial acceleration following the release of national inflation measures in recent days.
“Headline inflation is expected to tick up to 1.6% from 1.4%, thanks to the higher oil prices, but there’ll be even more focus on core CPI which is expected to lift from 0.8% to 1.0%,” said David de Garis, Economist at the National Australia Bank.
“This is expected from the normal holiday price boost effect from this year’s late Easter rather than any acceleration in underlying inflationary pressures.”
While it will play second-fiddle to the payrolls report, the US ISM non-manufacturing PMI for April will also be released. It’s expected to lift to 57.0, up from 56.1 in March. The advanced report on US goods trade for March will also arrive during the session.
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