- The Australian dollar remains pressured, undermined by renewed concern surrounding the global economic outlook.
- Weak economic data from the US and Europe on Friday was the catalyst behind the lift in global growth concerns.
- Longer-dated US bond yields are now below shorter-dated yields, a scenario that has often occurred before US recessions in the past.
The Australian dollar came under renewed selling pressure on Friday, slipping below the .7100 level against the greenback as fears for the global economy grew.
Here’s the scoreboard at 8am AEDT.
AUD/USD 0.7078 , -0.0004 , -0.06%
AUD/JPY 77.81 , 0.00 , 0.00%
AUD/CNH 4.7573 , -0.0007 , -0.01%
AUD/EUR 0.6265 , 0.0012 , 0.19%
AUD/GBP 0.5355 , -0.0004 , -0.07%
AUD/NZD 1.0297 , -0.0018 , -0.17%
AUD/CAD 0.9501 , -0.0004 , -0.04%
And here’s a hourly chart of the AUD/USD, showing the reversal in the Aussie having hit a fresh one-month high on Thursday.
After sliding on Thursday on broad-based US dollar strength, the AUD/USD continued to weaken on Friday, undermined by the release of weak economic data from Europe and the United States that helped to fan fears over the outlook for the global economy.
“Very soft European activity indicators on Friday, particularly from Germany, sparked concerns that the current global growth slowdown could be more than just a passing phase,” said Rodrio Catril, Senior FX Strategist at the National Australia Bank.
“It all began in Europe with the Flash PMI releases for March. The German Manufacturing PMI fell to 44.7, its lowest level in six years, while the Euro-wide index fell by more than expected to 47.6.”
Th US flash composite PMI output index also dipped to the lowest level since September last year, adding concerns about a broader slowdown across the global economy.
The weak economic data saw long-dated government bond yields fall sharply, and left the spread between three-month US treasuries and 10-year note yields in negative territory for the first time in 12 years.
As Catril explains, that increased concern about the potential for a looming US economic recession.
“The three-month-10-year US treasury curve has been a reliable predictor of US recessions, correctly predicting every US recession since 1975,” he said.
“An inversion typically needs to persist for at least a quarter for a recession to eventuate.
“Also, historical comparisons are somewhat difficult given current unconventional policies such as QE and forward guidance from central banks suppressing term premiums as well as the fact that the current slowdown is driven by external forces from Europe and China.”
Despite uncertainty over the signal generated from the inversion of the US yield curve, the news saw risk aversion lift sharply, resulting in large and widespread declines in European and North American stocks.
That also ensured that currencies linked to the performance of the global economy, like the Aussie dollar, came under selling pressure. Most major commodity markets also weakened, further undermining the Aussie’s appeal.
The Aussie also fell heavily against the British pound as the EU agreed to an unconditional extension of Brexit until April 12, beyond the original deadline of March 29.
“With a large majority of British MPs against a no-deal outcome, and parliament likely to take steps to take control of the process this week, there is scope for the GBP to build on its gains from Friday,” Catril said.
“But with Theresa May coming under heavy political pressure to resign and the tail risk of new elections, it’s still likely to be a bumpy ride.”
Turning to the day ahead, sentiment and headlines look set to remain in the driving seat given a lack of first-tier economic data releases on Monday.
German business confidence and and the Chicago Fed National Activity Index are the headline acts in terms of data during the session, providing the latest barometer of how the German and US economies are currently faring.
Outside of the data, Chicago Fed President will also speak twice during the Asian session.
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