Australian Dollar, Caixin PMI, RBA, Bond Yields, Yield Curve Control – Talking Points:
- The Australian Dollar briefly drifted lower on the back of disappointing PMI figures out of China.
- The RBA’s attempt to stifle the sell-off in local government bonds may have little impact on AUD.
- AUD/USD poised to extend rebound as price surges away from key support.
Australian Dollar Unfazed by Disappointing Chinese PMI
The Australian Dollar drifted marginally lower after Chinese Caixin PMI figures undershot market expectations of a 51.4 print in February, coming in slightly lower at 50.9. Manufacturing and non-manufacturing PMI figures released over the weekend also highlighted a notable slowdown in China’s economic recovery.
NBS manufacturing PMI for last month came in at 50.6 (exp. 51.1), while non-manufacturing PMI slide to 51.4 (exp 52). This seemed to have little effect on the trade-sensitive currency, as it surged over 0.6% higher against the US Dollar, on the back of expectations that the Federal Reserve may look to do more in the wake of the recent sell-off in US Treasury markets.
Attention now turns to Federal Reserve Chairman Jerome Powell’s speech later in the week, as well as the Reserve Bank of Australia’s upcoming monetary policy decision.
AUD/USD 3-minute chat created using Tradingview
RBA Interest Rate Decision in Focus
The upcoming Reserve Bank of Australia’s interest rate decision will be keenly eyed by local investors, as the central bank fiercely attempts to defend its 3-year yield target against the global reflation trade that has routed bond markets.
After a two-month hiatus from the local debt market, the RBA was forced to purchase over $7 billion in bonds last week, to prevent 3-year yields from accelerating further away from the central bank’s 0.1% target. Yields on 3-year government bonds climbed as high as 0.149% on February 25, and still remain just over 3-basis points higher than the RBA’s target.
Australian 10-Year Government Bond Yields
AU10Y daily chart created using Tradingview
But it isn’t just short-term maturities that are causing the central bank headaches, with an almighty sell-off in 10-year government bonds sending rates of return soaring just shy of 80-basis points. Indeed, the RBA announced $4 billion of purchases in longer-date securities – double its normal size – to cap the marked rise in yields on Monday.
One would expect that this would signal further downside for the local currency however, with the strong possibility that the Federal Reserve will follow suit in the coming weeks, it seems relatively unlikely that AUD’s long-term bullish trajectory is at risk.
Moreover, with commodity prices continuing to surge higher, and recent fundamental data points pointing to a rapid recovery in economic output, the path of least resistance for the risk-sensitive Australian Dollar remains skewed to the topside.
AUD/USD Daily Chart – 55-EMA Nurturing Rebound
AUD/USD daily chart created using Tradingview
From a technical perspective, the outlook for AUD/USD remains constructive, as prices continue to track within the confines of an ascending Andrews’ Pitchfork and accelerate away from trend-defining support at the 55-EMA (0.7674).
With the RSI maintaining the uptrend extending from the September lows, and the MACD tracking firmly above its neutral midpoint, further gains appear in the offing.
Ultimately, a daily close above confluent resistance at 0.7800 and the Pitchfork median line is needed to carve a path for price to retest the yearly high (0.8007). Clearing that probably signals the resumption of the primary uptrend and brings the 2018 high (0.8136) into the crosshairs.
Alternatively, falling back below psychological support at 0.7700 could trigger a more extended pullback to the February low (0.7564)
The IG Client Sentiment Report shows 54.63% of traders are net-long with the ratio of traders long to short at 1.20 to 1. The number of traders net-long is 31.64% higher than yesterday and 55.34% higher from last week, while the number of traders net-short is 36.85% lower than yesterday and 45.98% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests AUD/USD prices may continue to fall.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger AUD/USD-bearish contrarian trading bias.
— Written by Daniel Moss, Analyst for DailyFX
Follow me on Twitter @DanielGMoss
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