AUD, YEN, POWELL, US DOLLAR, STOCKS – TALKING POINTS:
- Markets cheer Australian election outcome, Japanese 1Q GDP data
- Yen may rebound as AUD rally fizzles on Fed Chair Powell speech
- S&P 500 chart setup warns recent recovery might be just corrective
The Australian Dollar outperformed at the start of the trading week after incumbent Prime Minister Scott Morrison unexpectedly prevailed a federal election over the weekend. The outcome appeared to echo as broadly supportive for market-wide risk appetite, perhaps because it spared investors yet another big uncertainty – a new G10 government with an ambitious fiscal agenda – to contend with.
The upbeat mood was reinforced by first-quarter Japanese GDP figures, where the headline reading registered meaningfully better than expected. This helped buoy sentiment despite signs of weakness in the details. In fact, similarly to US GDP for the same period, inventory build-up and a drop in imports drove the topline number upward while consumption and investment weakened.
The cycle-sensitive Canadian and New Zealand Dollars traded higher against this backdrop. The former may have enjoyed added support from a rise in crude oil prices, a somewhat frequent influence since the currency’s home country is a major energy exporter. The anti-risk Japanese Yen underperformed, with the similarly-minded Swiss Franc and US Dollar also on the defensive.
YEN, USD MAY RISE AS FED CHAIR POWELL TALKS DOWN RATE CUT BETS
Looking ahead, the markets’ disposition may sour anew as Federal Reserve Chair Jerome Powell steps up to the microphone. His speech at the Atlanta Fed’s annual conference marks the most notable bit of scheduled event risk on an otherwise quiet economic calendar. Rhetoric echoing this month’s FOMC statement is likely to reiterate that the US central bank is in no hurry to boost stimulus.
That is unlikely to sit well with investors hoping for a lifeline. They’re struggling to digest a toxic cocktail of slowing global growth, US-China trade war escalation and swelling European political risks. These include Brexit and the fast-approaching European Parliament elections, which may hand a big win to eurosceptics at a most fragile time for the regional bloc.
As it stands, the markets price in the probability of at least one Fed interest rate cut before year-end at just over 73 percent. If Mr Powell’s remarks bring that reading lower, a risk-off pivot in prevailing sentiment may encourage the unwinding of JPY-funded carry trades and put a premium on USD liquidity, sending both currencies higher. Pro-risk commodity bloc FX may bear the brunt of selling pressure.
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CHART OF THE DAY – US STOCKS REBOUND MAY PROVE TO BE FLEETING
The bellwether S&P 500 stock index found support and turned upward after hitting a two-month having confirmed a double top below the 3000 figure. The rebound tellingly stopped short of breaching back above former resistance in the 2865-2880 area however, recoiling from that barrier to suggest the upswing was merely corrective.
That may set the stage for renewed progress to the downside, a possibility that is seemingly made greater if the cues from upcoming fundamental news-flow register as expected. Immediate support is in the 2807-2824 zone, with a daily close below that exposing minor infection points at 2747 and 2677. Pushing through these sets the stage to challenge a more potent barrier in the 2603-2626 region.
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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com
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