Patient RBA kicks off central bank meetings

Overnight Headlines

*US stocks edged higher on strong corporate earnings

*USD eased as EUR moved back above 1.16

*RBA abandons yield control but remains dovish, AUD falls

*France pulls back in Brexit fish row, gives more time for talks

US equities edged higher making new record highs, with the Nasdaq leading gains (+0.63%). ISM manufacturing data fell and saw an upside surprise in prices paid caused by pandemic-related supply bottlenecks. Energy and small caps especially were outperformers with the Russell 2000 surging 2.7%. Sentiment is varied this morning, Asian markets are mixed, US and European futures mildly in the red.

USD moved lower after posting its biggest daily rise in more than four months on Friday. Last week’s high at 94.30 on DXY was reinforced as near-term resistance. EUR jumped above 1.16 erasing Fridays’ losses after hitting a two-week low at 1.1535. GBP continued lower making two-week lows at 1.3642. Sterling was pressured by the uncertainty over the BoE’s policy stance later this week. AUD has been hit after the RBA dropped the yield cap but promised to be patient on rate hikes.

Market Thoughts – Benign markets and risk sentiment

The earnings season appears to have calmed equity markets in the near term. A few weeks ago, volatility was elevated, and markets were in some turmoil. All the talk was of battling headwinds coming into the winter. But the current strong earnings season has seen above 80% of S&P500 companies so far report positive EPS surprises.

US indices continue to make record highs and notably small caps hit a 2021 top yesterday rising 2.7%. Evidently, for the time being, rising interest rates appear to be less of an issue. And markets remain fairly confident that central bankers will be able to strike a decent balance between addressing the inflation acceleration without killing growth. This week’s upcoming Fed and BoE, as well as smaller central bank meetings will point the way. That said, for equities the trend in profit growth is likely to slow significantly into the 4Q and the new year.

Chart of the Day – AUD/NZD collapses into support

The RBA tip-toed towards unwinding its pandemic stimulus by ditching its 0.1% target on the three-year yield. This was no surprise after it failed to defend the target already last week. The bank acknowledged the risk of higher inflation and tighter-than-expected labour markets. But it expects inflation to remain moderate as wages are only seen rising moderately in the coming years.

AUD has weakened this morning as markets pull back on rate hike expectations. But there are still around three hikes priced for 2022, even after Governor Lowe stated that “the latest data and forecasts do not warrant an increase in 2022”. After falling from recent highs above 1.06, AUD/NZD made a spike high last Friday at 1.0528. But the pair has fallen again this morning to the recent swing lows at 1.0416/18. This is also long-term support from the December bottom and the 50-day SMA. Bearish momentum may pick up through here, with eyes on 1.0345 and 1.0276.

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