FX remains range bound despite strong risk sentiment

Equities were mostly higher yesterday, on cautious optimism over company earnings reports, with a clear divergence between the Dow Jones Index and the Nasdaq Comp as investors and money managers rotate away from growth and technology stocks and buy value driven and Dow components, as prospects for rising rates increase.

FX staying range bound and choppy. Risk sentiment remains strong in the face of any short-term negative headline shocks. The economic data globally is strong despite some tighter restrictions in parts of the world, but traders are beginning to look toward Friday's jobs report for April. Economists expect the data to show employers hired 988k workers.

GBP/USD continues to consolidate around the 1.39 area, as traders await the Bank of England Monetary Policy Report due at midday. We are looking for a move above 1.3920 to confirm our bullish view.

AUD/USD been chopping around in a range. We are now watching 0.7820 on the topside and 0.7700 on the downside. There are certainly downside risks for AUD from any broad risk aversion, Covid outbreaks, or China retaliation but as industrial metals continue to charge higher it may continue to grind higher unless something more meaningfully changes.

The retaliation from China that we had been waiting for after Australia cancelled a Belt and Road initiative deal a couple of weeks ago came today. China NDRC, an economic planning agency, announced the indefinite suspension of all activities under China-Australia Strategic Economic Dialogue. There is no clear immediate implications for Australia from this but the market is concerned of any further action. Australia’s exports have held strong this year despite tensions although this is purely driven by iron ore. Other exports to China have fallen 29%. If China enacts more tariffs as punishments or targets iron ore imports then this could have a large impact on the Australian economy (luckily for Australia, supply disruptions in Brazil means China has no alternative). Iron Ore is continuing its march higher so overall it seems that Australia-China trade will continue to increase despite these tensions.