AUD/USD: Bears in control despite risk-on U.S. session

• While U.S. risk-on markets recover, AUD/USD is picking up the markets trade war concerns instead.
• RBA likely to cut rates in due course.
• Risk is towards 78.6% Fibonacci retracement at 0.6857.

The focus for the U.S. session is on how well stocks have managed to perform, despite the various geopolitical tensions swirling around financial and commodity markets. The risk-on session has enabled the Dollar to climb higher, notably vs the Yen while the Aussie now trades back below the key 0.6920 historic support level, pausing for air just above the post-Aussie Jobs Data 0.6892 low. 

The U.S. session was already looking like a positive one from futures pointing to a jump start open pointing to higher prices. Indeed, the Dow opened 0.37% higher and the NASDAQ was 0.17% higher at the open, extending yesterday's positive closes. What might be surprising at first glance is the resilience of investor appetite despite Trump's ban on foreign adversaries as trade wars escalate? 

Recalling back to yesterday's Wall Street close, U.S. President Donald Trump signed an executive order banning telecommunications equipment from “foreign adversaries”. This is obviously an attack on China’s Huawei and a clear escalation of the trade war, despite being told today by Commerce Sec. Wilbur Ross  that this is not part of the trade wars, (it clearly is):

• Huawei order will be effective starting tomorrow.
• Action is not part of trade talks with China.
• Huawei wasn't discussed during US-China trade talks.

For investors to feel like we are moving closer to a deal, they might have another thing coming and such corrections we are seeing in today's markets could well be met with fierce opposition on the next retaliation from China. In fact, we should not ignore yesterday's comments from China’s Commerce Ministry saying that increased tariffs have “severely hampered” negotiations.

However, there was some relief yesterday when he announced that the US Administration would delay European auto tariffs for up to 6 months. Regardless of the trade war sentiment, the market today seems to care much more about positive earnings from Cisco Systems (CSCO) and Walmart (WMT) and upbeat U.S. economic data:

• US: Housing Starts rise in April, still below last year’s level - Wells Fargo
• US: Weekly initial jobless claims decreased to 212K from 228K
• The Philadelphia Fed Manufacturing index in May rose to a four-month high of 16.6 after registering 8.5 in April.

Currency action

As for the outcome in the FX space, risk-on is still not doing the Aussie any favours and the trade tensions are being felt here instead. The greenback has climbed to the highest levels since the 3rd May at 97.83, supported by a pop in U.S. yields as the stock market takes in investors cash. Additionally, there is a sense that tariff hikes are likely to filter through to create short term, but modest higher inflation, which potentially negates the need for the Fed to cut interest rates so soon, despite some still calling for lower inflationary risks following Fed's Powell palming off low inflation as just transitory. Subsequently, AUD/USD has been sold down again towards the overnight lows following the disappointments in the jobs data, for a low of 0.6895, so far, three pips shy of the low. The Aussie is under fire from speculation that the RBA will have no choice but to cut rates due to heightened risks to the economy associated with trade wars and trickle down outcomes due to the nation's dependency on, a) China as a trade partner and b) sales of commodities.

Aussie Jobs data

While headline April employment change of 28.4k was positive, the details throughout the Unemployment/Employment Report, (aka Jobs data) was not and was a nail in the coffin for the bulls and the Aussie is not going to be able to shake that off anytime soon, not with the RBA just a handful of weeks away in June. 

• The Full-Time Employment number dropped -6.3k in April.
• The Unemployment jumped to 5.2% (due to a pick up in the participation rate from 65.7% to 65.8%).
• The Unemployment rate for Mar was revised up from 5.0% to 5.1%.

"Digging a little deeper into alternative measures the RBA looks at - the under-employment rate jumped in April, from 8.2% to 8.5% and together with the unemployment rate jump, this drove the underutilisation rate higher, from 13.3% to 13.7% in April. Today's data poses a risk of the Bank pulling the trigger before August, but our preference would be to fade a June cut,"

analysts at TD Securities argued. 

AUD/USD levels

Analysts at Commerzbank noted that AUD/USD continues its descent and hit the 0.6900 level:

"Further down sits the 78.6% Fibonacci retracement at 0.6857. Immediate bearish pressure should remain in play while no advance above the 50% retracement and the May 10 high at .7016/18 is seen. Further up resistance can be spotted along the 55 day moving average at 0.7072 and at the 0.7207 February high."