Yesterday’s Australian July employment data was mildly positive, with unemployment steady at 5.6% although full time employment decreased by 20,000 on a seasonally adjusted basis. The Australian dollar has had a choppy couple of days ranging from 0.7806-0.7961against the USD. The employment figures pushed the AUD back over 0.7900 against the USD reaching highs in the 0.7950/60 level however it has had problems holding above the 0.7900 handle being hit overnight by the more the risk-off mood and falling equity market to drop back to 0.7880. The higher gold price has had little supportive effect. It has traded around the 0.7875/85 level for most of this morning but 0.7870 is immediate support and any break below that level will target 0.7830. Given the current risk tone we look for a test of lower levels next week.
It’s been a choppy trading week for the New Zealand dollar which has seen a range of 0.7222 to 0.7334 over the last two days. The weaker than expected Global Dairy auction prices did the New Zealand dollar no favours and we saw a dip to 0.7228 before softer US data and the US political conditions saw a rise back into the 0.7310-20 area. Overall data releases continue to show an economy that is showing solid progress, yesterday’s Producer output prices data was up 1.3% for the June quarter and meat and dairy product manufacturing rose 6.9% and 3.4% respectively for the same period. Overnight has seen markets move to a more risk adverse stance, as the Trump administration becomes increasingly bogged down in controversy over a racist rally in Virginia and news of a terrorist attack in Barcelona. Equity markets are lower, the S&P500 is down 1.5% and the DOW off 1.24% with gold up nearly US$5 an ounce. A new poll out last night also showed that a change of Government may also be likely with the Labour party and their new leader‘s popularity surging. We expect later polls to show further narrowing of the National government’s lead. The New Zealand has been marked down along with other commodity currencies and has failed to hold over the 0.7300 level seen yesterday opening lower at 0.7286 against the USD and if the risk averse tone remains look for a test of 0.7250 then 0.7220.
Financial markets were knocked by an increasing sense of unease as comments from President Trump continued to exacerbate the controversy over a racist rally over the weekend and Barcelona was hit by a terrorist attack. US equity markets were heavily lower, with the S&P 500 posting its second largest decline of the year as Trump’s polarising comments increase the uncertainty around any of his agenda getting actioned anytime soon. The terror attack was another reminder that geopolitical risks abound and remain a threat to global growth with markets still jumpy after last week’s escalation of tensions over North Korea. The Trump Administration continues to look more beleaguered by the day and with the resignation of many members of Presidential business advisory councils and then the subsequent disbandment of these councils, there are now real concerns that the President’s policy agenda on tax reform and infrastructure may have very little chance of being enacted in the coming year. However US data out last night was solid with the Philly Fed manufacturing survey showing coming in above expectations for August and weekly jobless claims figures were down 12K from the previous week. The USD was stronger against the EUR with the EUR/USD failing to climb over the 1.1800 level, it is now back at 1.1724 with immediate support is around 1.1685 a break of which would target 1.1650, however we expect consolidation around current levels to end the week.
United Kingdom trade data out yesterday showed that the UK benefited from a surge in sales to the EU in the first half of the year as export growth outstripped import growth. However, overall the UK remains a net importer of goods with a goods deficit of EUR 53 bio for the 6 months to June in its trade with the EU. However, this is down from EUR 57.8 bio for the same period in the 2016 year. The weaker UK pound is starting to have some effect in making UK products more competitive abroad. In other data this week, July retails sales were better than expected, although June’s figures were downwardly revised. According to official data, the volume of sales grew by 0.3% in the month against expectations of 0.2% and by 1.3% when compared to a year earlier, this last, below the 1.4% expected, whilst core readings beat expectations amid stronger spending on food. This more positive data has done little to halt the slide in the GBP which has moved lower over the course of the week from 1.3020 – 1.2840. It is now around 1.2870 and given ongoing Brexit woes and shaky majority of the May government, we look for support at 1.2840 to be tested heading into next week.
The Euro slid lower last night to 1.1661against the USD, after release of the ECB minutes for the July meeting showing some dovish remarks and concerns about the market overshooting in FX. The ECB minutes highlighted stronger growth but also noted that policy will need to remain expansionary for underlying inflation pressures to converge on 2%. The ECB further commented that “patience, persistence and prudence” were needed. This means getting inflation up is still contingent on a “very substantial degree of monetary accommodation”. The Governing Council also acknowledged the strength of the euro, “Regarding exchange rates, while it was remarked that the appreciation of the euro to date could be seen in part as reflecting changes in relative fundamentals in the euro area vis-à-vis the rest of the world, concerns were expressed about the risk of the exchange rate overshooting in the future”. This resulted in the EUR being sold lower to the 1.1660 level against the USD but it has opened higher this morning back over 1.1700 to the 1.1725 mark. The EUR although having recovered some of yesterday’s losses does carry a more negative tone, but countering this is the fact that the USD is far from strong. However failure for the EUR to regain the 1.1800 handle is not encouraging and if support at 1.1685 is broken 1.1607 will be targeted.
The Japanese yen has fared well against most of its trading partners on the renewed terrorism fears as the market seeks shelter in safe haven assets. From a high in the USD/JPY of 110.94 earlier in the week, the JPY has strengthened to 109.48 this morning. The USD/JPY is better offered in a risk-off environment as investors grow ever more concerned that yet another atrocity has taken place in the European market where terrorists have targeted innocent and holiday- making families along one of the Europe’s most iconic tourist attractions. With the risk-averse tone now firmly in place look for the JPY to continue to strengthen with 108.80 being the next level for the USD/JPY which if broken would open the way towards the 108.00 area.
A mixed week for the Canadian dollar which has given up gains on the USD as the risk-off tone takes its toll. Following an expansion of 1.1% in June, manufacturing sales in Canada contracted by 1.8% in July amid decreasing sales in the petroleum and coal products.
Also not helping were crude oil prices remaining under pressure on Thursday, with the barrel of West Texas Intermediate trading at its lowest level since July 25 at $46.50, losing 0.6% on the day, making it difficult for the commodity-sensitive CAD to retrace its losses against its peers. The USD/CAD has broken through resistance at 1.2650 to currently sit around 1.2670; next stop is 1.2700, then 1.2770. Downside support is seen at 1.2858 but it’s unlikely to be tested over the next few days.