Commodity Currencies Strengthen as Risk Sentiments Continue to Stabilize

Market sentiments continue to stabilize today with European indices trading mixed. DAX is trading up 0.55% at the time of writing, CAC flat and FTSE down -0.1%. US futures point to a mildly lower open as markets come back from holiday. In the currency markets, Yen is firm against most currency except Aussie and Kiwi. But Swiss Franc is trading broadly lower as risk aversion recedes. Euro and Dollar are trading as the second and third weakest for the day so far. In other markets, gold pares back some gain but maintains near term bullishness for a take on 1350 handle later in the week. WTI crude oil staging a strong rebound and is back above 48. Strength in oil might start to life Canadian Dollar later in the session.

US to push more sanction but Russia disagrees

Concerns over Korea tensions recede temporarily even though there are reports that North Korea is quietly moving another intercontinental ballistic missile towards its west coast, readying for another launch by the end of the week. The United Nations Security Council emergency meeting ended with no consensus yesterday. US is pushing for toughing sanctions for a vote on September 11. But Russian President Vladimir Putin said that "sanctions of any kind would now be useless and ineffective" as "they’d rather eat grass than give up their nuclear programme". Putin urged to "promote dialogue among all interested parties."

Meanwhile, North Korea ambassador to UN, Han Tae Song, said in the forum in Geneva that "the recent self-defense measures by my country, DPRK, are a ‘gift package’ addressed to none other than the U.S." And, he warned that "the U.S. will receive more ‘gift packages’ from my country as long as its relies on reckless provocations and futile attempts to put pressure on the DPRK." He also emphasized that "pressure or sanctions will never work on my country." He added that "The DPRK will never under any circumstances put its nuclear deterrence on the negotiating table." And, the military measures were "restraint and justified self-defense" to counter  "the ever-growing and decade-long U.S. nuclear threat and hostile policy aimed at isolating my country".

Fed Brainard: Fed should be cautious about more tightening

Fed Governor Lael Brainard said today that Fed should be " cautious about tightening policy further until we are confident inflation is on track to achieve our target." She also noted that "there is a high premium on guiding inflation back up to target so as to retain space to buffer adverse shocks with conventional policy." And she emphasized that " it is important to be clear that we would be comfortable with inflation moving modestly above our target for a time." Minneapolis Fed President Neel Kashkari and Dallas Fed President Robert Kaplan will speak later today.

UK PMI services sends warning signals

UK PMI services dropped to 53.2 in August, down from 53.8 and missed expectation of 53.5. That’s also the lowest level in 11 months. Markit noted that the latest round of PMIs suggest 0.3% growth in the UK economy in the current quarter, same as Q2. However, Markit chief economist Chris Williamson warned that "momentum is being gradually lost." And, "robust manufacturing growth means the economy may be rebalancing towards goods production, aided by the weaker pound, but the slowdowns in services and construction send warning signals about the health of the economy." Also, "the overall level of optimism also remained subdued, mainly linked to Brexit uncertainty, close to levels that have previously been indicative of the economy stalling or even contracting."

Also from Europe, Swiss GDP grew 0.3% qoq, 0.3% yoy in Q2, much lower than expectation of 0.5% qoq, 1.0% yoy. CPI rose to 0.3% yoy in August, but missed expectation of 0.5% yoy. Eurozone retail sales dropped -0.3% mom in July, in line with consensus. Eurozone services PMI was revised down to 54.7 in August, Germany PMI services revised up to 53.5, France PMI services revised down to 54.9. Italy PMI services dropped to 55.1 in August.

RBA Lowe: Stimulatory policy continues to be appropriate

As widely anticipated, the RBA left the cash rate unchanged at 1.5%, historic low since August 2016. Policymakers remained confident over the economic outlook, but stayed cautious over the strength in property prices. Again, they warned that recent appreciation in Australian dollar would weigh on the outlook for growth and employment, and prolong soft inflation. It appeared that the central bank would keep its policy rate unchanged at the current level for some time. More in RBA Left Cash Rate At 1.5%.

Speaking at a dinner in Brisbane after the rate announcement, RBA governor Philip Lowe said that low interest rates are supporting job growth and inflation. And "these are positive developments." Though, he sounded cautious and said that ", it will be some time before we are at what could be considered full employment in Australia and before underlying inflation is at the mid-point of the medium term target range." Therefore, "stimulatory monetary policy continues to be appropriate."

Released earlier today, Australia current account deficit widened to AUD -9.6b in Q2. New Zealand ANZ commodity price dropped -0.8% in August. China Caixin PMI services rose to 52.7 in August.

AUD/USD Mid-Day Outlook

Daily Pivots: (S1) 0.7932; (P) 0.7952; (R1) 0.7963; More…

AUD/USD jumps notably in early US session but it’s staying well below 0.8065 resistance. Intraday bias remains neutral for the moment as consolidation from 0.8065 might extend. But in case of another fall, downside should be contained by 0.7785 cluster support (38.2% retracement of 0.7328 to 0.8065 at 0.7783) to bring rebound. On the upside, break of 0.8065 will resume the medium term rise and target 100% projection of 0.6826 to 0.7833 from 0.7328 at 0.8335.

In the bigger picture, rise from 0.6826 medium term bottom is still in progress. At this point, there is no confirmation of trend reversal yet and we’ll continue to treat such rebound as a corrective pattern. But in any case, break of 55 month EMA (now at 0.8087) will target 38.2% retracement of 1.1079 to 0.6826 at 0.8451. Break of 0.7328 support is needed to confirm completion of the rebound. Otherwise, further rise is now in favor.

Economic Indicators Update