Australia
The move into gold as the North Korean problem heats up has helped stem Australian dollar losses as investors move away from risk assets. However the Australian dollar has shifted lower slipping below the 0.7900 mark to a low of 0.7854 against the USD. There have also been a number of other factors weighing on the Aussie, China’s July inflation was below expectations, as CPI rose 0.1%, above the previous -0.2% but below the 0.2% expected. Australian domestic data for home loans and consumer confidence were also below forecasts. 1.4% from 1.5%. With no immediate change expected on the North Korean problem we look for the safe-haven trend to remain intact at least for the next few days and the AUD will look to struggle to hold over the 0.7880 level. Immediate support is at 0.7855 then down at 0.7785.
New Zealand
As widely expected the RBNZ left rates on hold at 1.75% making few changes to its previous forecasts or its guidance on future monetary policy. The New Zealand dollar initially rose on release of the statement to a high of 0.7366 against the USD as the markets had expected a slightly softer tone from the RBNZ given the weaker balance of economic data over the last few months. While the RBNZ acknowledged the recent softer data, the projected OCR path was identical to the May Monetary Policy Statement, with a flat track for the next two years before a gentle upturn. With global inflation pressures weaker, the burden is on more domestically generated inflation to keep inflation on target .The RBNZ are of the view that the current low rates will achieve this but need more time to work. Shortly after the rally on release of the statement the New Zealand dollar slid lower for most of the rest of the day, dipping sharply to a low of 0.7254 after comments later in the day from RBNZ Assistant Governor McDermott around NZD intervention”. The currency has opened this morning around 0.7275. The circumstances for any intervention by the RBNZ look distant to us, nonetheless, the damage has been done. The tone remains soft, as all risk currencies have been hit by the move towards safe-haven as the war of words over North Korea increases. Look for the NZD to consolidate around the 0.7250/85 level ahead of US CPI later tonight.
United States
Increasing geopolitical tension rattled financial markets worldwide overnight, sending US stock markets to their biggest drops since May and pushing up demand for safe-haven assets. Although the heightened geopolitical situation around the Korean peninsula may well have been the trigger for this latest bout of risk aversion, with global equity markets trading near record highs and premiums on high-yield creeping higher, several high profile commentators have already warned that valuations are stretched and profit taking would be prudent. Unsurprisingly Gold rose for the third day in a row and has posted its highest close since June 6, as it hovers around $1,285/oz (up 0.60%) amid risk aversion, soft US inflation data, and a weaker US dollar. Overnight, economic data from the US showed an unexpected drop for July in the Producer Price Index, which fell 0.1%, against expectations of a 0.1% rise. It was the first negative reading for the index in almost a year and goes in the opposite direction of another rate hike from the Federal Reserve during 2017. Tonight’s inflation US CPI report is the most important risk event for the USD all week. There were also comments by Fed officials expressing unease about low inflation and suggestions that sluggish productivity could dampen wage growth despite job gains. As one of the main drivers of Fed policy, these cautious views confirm that the central bank is in no rush to raise interest rates especially after last night’s producer price report. The drop in PPI signals potential weakness in CPI but even if consumer prices tick higher, it may not be enough given the concern the Fed has around inflation and more importantly, as geopolitical tensions between the U.S. and North Korea continue to grow. So for the USD against its main trading currencies, until the threat of war reduces, USD/JPY now down at 109.12 could have a difficult time responding to positive data. With that in mind, stronger CPI could send pairs like EUR/USD to 1.1700 as it exacerbates the pressure on those currencies hit by the latest round of risk aversion.
United Kingdom
Latest releases of UK data were mixed but pointed to a slowing economy as UK exports were lower despite hopes of a boost from UK pound weakness. The UK goods trade balance report showed -GBP12.72 bio for June, against GBP11 bio expected and -GBP11.3 bio last, with the total trade balance at -GBP4.56 bio for June versus expectations of -GBP2.5 bio and -GBP 2.5 previous. Data showed growth slowing to 0.2% in the 3 months to July, down from the 0.3% seen in the June quarter. There also appeared to be a drop in service sector growth which was the main driver in the previous quarter. Although the weaker UK Pound should start to produce results in the second half of the year as world growth continues to increase there remains concern that UK domestic consumer spending will be held back by weak wage growth and delayed investment spending due to Brexit-related uncertainty. On a more positive note, UK industrial production returned to expansion in June, growing by a solid 0.3% in June, beating expectations of a -0.1% reading and against the previous -0.2% result. The UK pound has extended losses slipping below 1.30 against the USD over the last few days to trade currently around 1.2975. 1.3015 is resistance but unlikely to be tested, we favour a drift towards support at 1.2950 a break of which would likely lead to a steady slide towards the 1.2870 region, the next relevant static support.
Europe
After making a higher earlier in the week at 1.1822 against the USD the EUR/USD has been choppy seeing a low of 1.1688 and is now back at 1.1765 after the weaker US PPI data overnight. With little in the way of economic releases, event risk tonight centres around the US inflation figure and to a lesser extent, CPI data for France and Germany is also due tonight. Although the Euro has been affected by the Korean tensions it appears to have been quite resilient and barring no major surprises on the US CPI data later tonight. We maintain our view that next week should bring a return to the 1.1800 level with an initial target of 1.1850. The outlier for all markets at the moment being any escalation of the Korean tension to outright conflict.
Japan
The Japanese unit has continued to strengthen against the USD with the USD/JPY dropping to a new two-month low at 109.06 on risk aversion as geopolitical concerns heighten over the North Korean tensions. We look for the JPY/USD to remain under pressure as the JPY, as a safe-haven, continues to benefit from the North Korean situation pushing aside any Japanese economic or political issues. We are now targeting 108.95 over the day which if broken would target 108.10. Immediate resistance is up at 110.00 but little chance of this being seen over the next few days.
Canada
The Canadian dollar has had a better week as weaker US data has seen the CAD rise to 1.2743 against the USD. There has been little in the way of significant economic data released from Canada this week and as such offshore events have driven the currency. As for other currencies, tonight’s US CPI data will be crucial for CAD direction, but if weak, look for the USD/CAD to extend gains above 1.2770 and target 1.2800 early next week. Immediate support is down at 1.2670 then 1.2610.