- The Australian dollar tumbled on Wednesday, moving back towards multi-year lows struck earlier in the month.
- US and European stocks were hammered, while volatility surged, explaining the Aussie’s performance.
US CPI data will be released later in the session. It carries the potential to amplify or reverse the market moves seen on Wednesday.
The modest rebound in the Australian dollar came to a shuddering halt on Wednesday, falling heavily as global investor risk sentiment took a turn for the worst.
Here’s the scoreboard at 8am in Sydney.
AUD/USD 0.7045 , -0.0057 , -0.80%
AUD/JPY 79.12 , -1.09 , -1.36%
AUD/CNH 4.8788 , -0.0329 , -0.67%
AUD/EUR 0.6117 , -0.0063 , -1.02%
AUD/GBP 0.5340 , -0.0062 , -1.15%
AUD/NZD 1.0928 , -0.0039 , -0.36%
AUD/CAD 0.9203 , 0.0007 , 0.08%
After drifting to as high as .7130 in Asian trade on the back a modest improvement in investor sentiment, the AUD/USD began to fall in European trade with losses accelerating as North American markets opened.
European stocks fell heavily, losing between 1.5% to 2.5% across the region. A similar bloodbath was seen in US stocks with the Dow, S&P 500 and Nasdaq tumbling 3.15%, 3.3% and 4.1% respectively, logging the largest one-day percentage move since February.
The US VIX Index — regarded by some as Wall Street’s “fear gauge” also spiked to as high as 22, the loftiest level since April.
As for the reason behind the abrupt and aggressive selloff, take your pick.
Reports that trade tensions between the US and China was negatively impacting some US companies was one catalyst used to explain the slide. However, trade concerns are not exactly “new” news.
More firm US economic data, and hawkish commentary from US Fed officials, kept US bond yields at or near multi-year highs, adding to concern that the current pace of Fed tightening was likely to continue in the period ahead.
US wholesale inventories surged by 1% in August, up from an initial estimate of 0.8%. Sales also increased by 0.8%, more than four times larger than the 0.2% gain expected.
The data saw the Atlanta Fed’s GDPNow model lift expected Q3 US GDP growth to a rapid annualised pace of 4.2%.
A surge in underlying producer price inflation in September also bolstered the view that consumer price inflation is likely to increase in the months ahead.
While headline PPI rose 0.2% during the month, excluding the impact of volatile items such as food, energy and trade services, prices jumped by 0.4%, the largest increase since January.
Chicago Fed President Charles Evans, regarded by most as policy dove, also sounded hawkish, suggesting that the US labour market is “extremely vibrant,” with a “little bit more to go on rate hikes before they reach a neutral level.
Combined, they acted to lift two-year US government bond yields to a fresh decade-high, and saw benchmark 10-year note yields push back towards seven-year highs struck earlier in the week.
With US bond yields pushing higher, stocks cascading lower and commodity prices also under pressure, the Aussie dollar succumbed to a wave of selling pressure, tumbling to session lows in the latter parts of trade.
The Aussie’s losses against the euro and British pound were even steeper with both currencies benefiting from renewed optimism over Brexit negotiations.
As for whether the selloff will continue today, that will largely come down to whether the carnage in Europe and North American markets extends into Asian trade, especially with no major releases scheduled across the region.
It’s likely it will.
While the local and regional calendar is devoid of any market moving events, that will change in the second half of the session with a number of key releases scheduled that carry the potential to amplify or reverse the market moves seen on Wednesday.
At the top of the list will be the release of US consumer price inflation (CPI) data for September.
Headline inflation is seen increasing 0.2% for the month, seeing the annual rate of change slow to 2.4% from 2.7% in August. Underlying inflation is also tipped to lift 0.2%, pushing the year-ended rate up to 2.3% from 2.2% a month earlier.
Any upside beat in this data series, especially the core, could lead to a negative reaction from financial markets.
It will arrive at 11.30pm AEDT.
Elsewhere, CPI data will be released in France and Spain, jobless claims in the states and new home price in Canada.
On the central bank front, Carney and Vlieghe from the BoE will speak while the ECB will release the minutes of its last monetary policy meeting.
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