AUD/USD rises despite risk-off tone, USD, yields slammed post ISM

Evidence of an economic slowdown in the US continued to build on Monday, sending odds of a Fed rate cut in September back above 50%. Yet the initial reaction on Wall Street suggested that too much bad news is actually bad for forward earnings, even if odds of a cut rose. The S&P 500, Nasdaq 100 and Dow Jones futures all fell over 1% after the release before paring losses and are on track to close slightly lower for the day.

Manufacturing contracted at a faster pace than expected according to the latest ISM report from the Institute for Supply Management. Q2 GDP is estimated to be as low as 1.8%, down from 2.7% according to the Fed Atalanta’s GDPnow report. And that sets the tone for a softer ISM services report on Wednesday, which could further excite expectations of a Fed cut in September ahead of Friday’s key NFP report.

• Manufacturing ISM fell to 48.7, below 49.8 expected and 49.2 prior
• New orders fell at its fastest pace in 12 months at 45.4
• Prices paid slowed by -3.9 points to 57 from 60.9
• Employment expanded for the first month in eight, with a 2.5 points increase rising to 51.1
• Comments of interest from respondents included mention of a “minor slowdown”, “volume continues to be challenging” and “we anticipate more headwinds in the coming months”

Crude oil sides on demand concerns

The US dollar was slammed on Monday, sending the USD index futures contract to an eight-week low on a daily close basis. USD/JPY formed a bearish outside day, USD/CAD reached a 10-week low, EUR/USD closed above 1.09 for the first time in 2.5 months and GBP/USD reached 1.28 for the first time since mid March.

Gold prices regained their footing after sneaking in a minor 3-week low earlier in the day, before reclaiming $2350 and forming a bullish engulfing candle. Crude oil suffered its second worst day of the year and fell over 3.5% to $74 as demand concerns rose as prices fell.

USD index technical analysis:

The US dollar index finally saw a clear break of the December trendline, with bearish momentum also clearing the 200-day EMA and 200-day average. Prices are clinging on to the 104 for support, but with the USD index closing at the low of the day it seems a break beneath it seems more likely than not at this stage. But with traders fully focused on weak US data over bad, it may not take much more to further topple yields and therefore the US dollar. The 103.50 to 103.65 zone is the net line of defence for bulls should 104 break.

AUD/USD technical analysis:

I warned in the AUD/USD outlook report that we could be in for some choppy trade on the Aussie, and I see no immediate reason to change that stance. Yes, the weaker US dollar sent AUD/USD to a 2-week high on Monday – but it was not exactly a risk-on session. And with key resistance level hovering nearby for AUD/USD, I suspect its upside potential remains limited. And we may even see a pullback in today’s Asian session if quarterly net-export contribution, retail sales and company profits come in soft and lower expectations for tomorrow’s GDP report.

Economic events (times in AEST)

Data released from the Australian Bureau of Statistics (ABS) at 11:30 AEST can help shape expectations of Wednesday’s GDP report. But for it to have any meaningful impact on AUD/USD likely requires the data to be distinct enough to force banks to revise their growth forecasts on the eve of GDP.

With traders clearly obsessed with any signs of weak data from the US, we could see a further selloff for the US dollar and yields should job openings or goods orders deliver soft numbers.

• 11:30 – Australian Q1 company profits, quarterly retail sales, net exports contribution, business inventories (ABS)
• 00:00 – US JOLTS job openings, durable goods orders

ASX 200 at a glance:

• The ASX 200 cash index closed higher for a second day on Monday with 9 of its 11 sectors rising
• Financials and utilities led, information technology and telecoms declined
• However, volatility on Wall Street and SPI 200 futures overnight should see the ASX cash market open slightly lower today
• 7800 resistance proved a tough nut to crack for ASX futures (lower chart) which also met resistance around a high-volume node
• The 1-hour chart shows a bullish trend is developing, alongside a potential bull flag
• However, with resistance overhead I am equally on guard for momentum to peter out and prices turn lower, than I am to seeing them break higher
• Therefore, my bias today is neutral until the market tips its hand

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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