Overnight Headlines

*USD was mixed with DXY trading around 92

*US equities closed lower in late trading despite strong US earnings

*AUD jumps as RBA sticks to tapering plan

USD ended very modestly lower, printing a “doji” candle so signalling some indecision. EUR traded sideways in a narrow range before closing lower while the JPY edged stronger against the dollar as USD/JPY closes in on the cycle low at 109.06. A break here could see 108 fairly quickly. AUD and NZD diverged yesterday but strength is being seen in both today with resistance above at 0.7411 and 0.7019/21 respectively.

US equities closed lower as investors were concerned about peaking growth and the spread of the Delta variant. US ISM manufacturing activity came in lower than expected with US 10-year Treasury yields tumbling below 1.20%. The mood changed through the day with investors shifting from value and cyclicals to growth and defensives. The Vix, Wall Street’s fear gauge, moved above 19 pointing to more caution among professional investors. Futures are pointing to a mixed start with European bourses opening in the red.

Market Thoughts – US ISM slowed for a second month

While 59.5 still constitutes strong manufacturing growth, the key ISM index fell for a second straight month and below analyst expectations. This tells us that the global industrial cycle is slowing with US fiscal easing now fading and affecting data. The initial slowdown was led by China but now the report highlights bottlenecks in production and labour shortages.

Peak reflation historically means risk assets get hurt though we do not see bear markets. Instead, investors flip and there is an end to the outperformance of cyclical stocks over defensives. Flaws in the global recovery story should also not see an extension of the dollar downtrend in the near term.

Chart of the Day – AUD/USD trying to move higher

The RBA stuck to its tapering plan this morning which was a surprise to some. They had speculated that the bank might postpone these plans due to the rise in Covid-19 cases and new lockdown measures. Policymakers said that if the virus outbreak gets contained, then the economy would be able to bounce back quickly. Crucially, there is no change to the central scenario that rates will not be raised until 2024.

The relief rally in AUD/USD is pushing prices into last week’s highs around 0.7410/13. If bulls can get above here, which tallies with the September 2020 high, they will aim for the 23.6% Fib level of the move lower since May at 0.7431. Otherwise, dollar strength (plus falling iron ore prices) could challenge initial support at 0.7316.