Monday, December 2, 2019

China’s Manufacturing PMI for November beats expectations; does the Aussie have more room to fall?

  • China
  • Dollar
  • Gold
  • Yen
  • Stocks
  • AUD

Market recap: Markets get ready for an economic week

US stock markets suffered losses on Friday as investors grew cautious of a possible escalation in US-China tensions. The DJIA and S&P500 both fell 0.40% on Friday as a result. But major indices still managed to make a weekly gain as signals from the US and China over the week indicated that a phase one trade deal is close. The DJIA, S&P500 and the Nasdaq made a weekly gain of 0.63%, 0.99% and 1.71% respectively.

Gold jumped 0.53% on Friday as the dollar fell against major currencies on Friday. But safe haven assets look set for losses on Monday as China’s manufacturing Purchasing Managers’ Index (PMI) by Caixin for November came in better-than-expected at 51.8. Gold fell 0.38% while the yen weakened 0.012% against the dollar on Monday morning as of 3.22pm (GMT +8).

Stocks in Asia started the week higher as a result of the better-than-expected data from China. The Nikkei, Hang Seng Index and Straits Times Index started Monday’s trading session 0.41%, 0.49% and 0.14% higher.

The week ahead looks to be a busy one, with important economic data from the US set to be released. Institute for Supply Management (ISM) PMI data and US labour market data will be released throughout the week. Monetary policy decisions from Australia’s and Canada’s central banks will be made on Tuesday and Wednesday respectively. Finally, The Organisation of Petroleum Exporting Countries (OPEC) will be meeting on December 5th and 6th this week.

Today’s Analysis: RBA looks set to leave monetary policy unchanged

During Reserve Bank of Australia (RBA) Governor Philip Lowe's speech on unconventional monetary policy last week, he dismissed the need for quantitative easing in the near-term but set the parameters for adopting unconventional monetary policy. Lowe said that unconventional monetary policy would only be considered when interest rates reach 0.25% (RBA's current official cash rate stands at 0.75%). His statement opened up the possibility for a second rate cut next year. But the Australian central bank still looks unlikely to cut rates during this month's monetary policy decision on December 3rd at 11.30am (GMT +8).

Futures tracking the RBA's interest rate decision implies that only a 7.7% probability for a rate cut is priced into the market, down from 18.8% probability of a rate cut. the low probability for a rate cut is thanks to a number of factors including a recovering housing market, a weakening Australian dollar and signals from Lowe. Corelogic's index of median city home values jumped 2% month-on-month from October to November. The fifth straight rise in housing prices is likely to help consumer spending as household wealth experiences a boost and is likely to continue in the short-to-medium-term as interest rates remain at a record low. In addition, the weak Australian dollar is likely to help with demand for Australian exports as AUD/USD has fallen 4.11% since the start of the year, although the Australian economy will likely continue to face pressure from the US-China Trade War and a slowdown in the Chinese economy.

The Australian dollar looks set to continue to fall against the greenback this year (Chart: YTD)


As the market is expecting rates to remain unchanged, traders are likely to focus on any dovish signals for 2020’s monetary policy as Australia’s labour market continues to soften (unemployment rate rose to 5.3% and employment change contracted by 19,000 instead of the expected 15,000 growth in October). If monetary policy remains unchanged and there is little indication on future rate cuts, then expect AUD/USD to remain little changed and continue to range between 0.6756 and 0.6787. But if the RBA shows any dovish signs on future monetary policy, then expect the Australian dollar to fall against the dollar, possibly to 0.6724’s level as probabilities for a future rate cut increases.



But the AUD/USD currency pair will also be affected by this week’s economic data from the US. If economic data from the US beats expectations, then the Aussie is likely to continue to fall as the greenback is likely to strengthen against major currencies.


Technical Analysis:         


The bears continue to control the Aussie as it trades below the 20-day, 100-day and 200-day moving averages. The downtrend is likely to continue as the Australian dollar is unlikely to strengthen from the RBA’s decision on Tuesday. The pressure from a stronger dollar will likely also help the bears to pull the currency pair further down, as they retest the 0.6756 support level. If this week’s RBA decision on monetary policy is dovish and if economic data from the US beats expectations, then the bears may get the chance to push the Aussie below the 0.6724 support level and retest the 0.6703 level to attempt to bring the Aussie to a new 10-year low.

Support: 0.6756 / 0.6724 / 0.6703

Resistance: 0.6787 / 0.6827 / 0.6869

AUD/USD Chart (D)