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Commodity prices prop up AUD in face of advancing US Yields

By OFX

The Australian Dollar edged back above the 0.75 cent handle through overnight trade on Wednesday buoyed by resurgent oil and copper prices. Despite softer than anticipated quarterly wage growth data and an intraday drop to lows below 0.7450 the Aussie found support in late afternoon trade and continued to recoup losses suffered through Tuesday as London and New York traders entered the fray. Touching intraday highs at 0.7523 the AUD struggled to break resistance on approaches to 0.7530 as an uptick in US treasury yields capped gains.

US treasury yields-maintained Tuesday’s advance with 10 year and 2 year yield notes sitting comfortably above key markers and reaching their highest level in a decade at 3.1% and 2.59% respectively. Broader picture momentum remains behind the worlds base currency and although the Australian dollars depreciation has temporarily abated markets have already priced in two more FOMC rate hikes and look poised to extend expectations for a 4th. While commodity prices will continue to prop up our domestic unit the ever-widening interest rate return will weigh on the AUD and we expect it to test supports at 0.7430 and 0.74 through the medium term.

Attentions today turn to April labour market data print for direction through out the domestic session. We anticipate 20K jobs to have been added to the economy while unemployment should remain stable at 5.5%. With plenty of slack still in the Jobs market a surprise uptick in job creation and participation could help prompt a rally through 0.7530 while softness will drive the dollar back toward and possibly through psychological support at 0.75.

The New Zealand Dollar when valued against the worlds reserve opens higher this morning. Having hit new 2018 lows of 0.6850 the NZD/USD has bounced back and opens today around 0.69c. The Kiwi appears to be taking a breather and has found some support after hitting six-month lows on Tuesday thanks mainly to strong USD demand. Overnight 10-year yields are softer back down to just under 3.09% and second tier US data came in a little weaker than expected aiding the Kiwi. On the AUD/NZD cross it has preserved recent gains, ranging sideways between 1.0850 and 1.0900.

Looking ahead the New Zealand budget is scheduled for release today with interest rates expected to stay unchanged for quite some time and any negative surprise could send the Kiwi lower.

On the technical front, support is seen at 0.6850 followed by 0.6830 and resistance up at 0.6900.

The Great British Pound is again weaker this morning when valued against the US Dollar on the back of prevalent Greenback demand. Yesterday US Treasury yields extended their advances to fresh multi-year highs. Theresa May sparked confusion on Wednesday after suggesting that Britain would sign up to a “future customs union” with the EU after Brexit.

Looking ahead today and there are no macroeconomic data releases scheduled. Cable continues to trade above the 1.3500 handle currently at 1.3516. We continue to expect support to hold on moves approaching 1.3450 while now any upward push will likely meet resistance around 1.3560.

The USD was mixed against its G-10 counterparties and ended up falling slightly on yesterday’s session, loosing a marginal 0.10%, but remained supported thanks to continued upside momentum in the 10-year US treasury yield, which closed at a new high for the year 3.10% (up around 3 pips).

Industrial Production data came stronger than expected at 0.7% (versus 0.6% expected) with upward revisions for February, this brought further support to the strength in US yields. Higher yields and further steepening of the US treasury curve should bring more USD support in the short-term.

On the geopolitical front, there seems to be some doubts around US-North Korea Summit while trade talks with China will continue in Washington.

The Euro was under pressure on the back of concerns about the Italian election, it now seems an Italian government is close to a deal, but the market doesn’t seem so comfortable. Italy 10-year Government yield jumped more than 16 points as Five Star and League leaders met to talk about a coalition agreement, but there is still uncertainty on who will be names Prime Minister.

The Euro lost 0.3% against its USD counterparty, closing just above the 1.18. The EURUSD traded on a tight range between 1.1750support level and 1.1855.

The loonie was supported yesterday by higher metal and crude stocks, the CAD gained around 0.7% against the USD and its now opening stronger around 1.2780.

The USD couldn’t break the 1.288 level against the CAD despite higher US yields. In general, the USD was stronger versus most of its peers except for commodity and emerging markets crosses.

NAFTA talks seem to be progressing, at least according to recent comments by a spokesman for the Canadian Foreign Minister, who also indicated that the main challenge will be US congress deadline for ratifying the trade agreement.