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FX Update: Commodity recovery helps drive NZD and AUD higher

A quiet open to the week with little economic news and with President Trump “on-tour” the bad news eroding USD confidence has temporarily taken a back seat. US stocks rose for the third day boosted by President Trump’s trip to Saudi Arabia that saw trade deals announced across the defence, energy and infrastructure sectors, lifting industrial shares such as Boeing, Raytheon and 3M. Crude pushed to a one-month high before OPEC meets later this week. A more “risk-on” tone is now evident in financial markets, returning after political turmoil on a daily basis in Washington rattled investors and saw stocks have some the biggest declines since last September. 

This week is light on major releases, there are several speeches by US Fed officials and ECB officials and of course the release on Thursday of the NZ Budget. Not much expected in this document to move markets as given that it is an election year, focus will be on “steady-as-she-does” with some social spending thrown in to give a feel-good election feeling.

The Australian dollar begins the week on a more positive note holding well over the pivotal 0.7400 level against the USD. Firmer oil prices, a rise in the gold price and taking a more positive view on risk have seen the AUD up at a 2 week high at 0.7486. A continued positive momentum in equities and commodities should be AUD supportive, with potential to push the AUD to target 0.7500 then beyond. There is little in the way of local data this week, so moves will be largely offshore driven. Any pullback should attract buying interest around the 0.7430/35 mark.

New Zealand
The New Zealand Dollar closed the week in a positive mood coming off its recent low of 0.6820 to close around 0.6920 levels. Risk appetite continues to drive the NZ Dollar higher, investors happy to take on further risk with chances increasing the Fed may not raise rates on June 15th With continued Trump administration diversions going on and weaker recent inflation figures this has rocked the boat somewhat, having said that the Fed will probably still press ahead with hiking. Weekly data locally is light except the Annual Budget release on Thursday. The kiwi traded through 0.7000 earlier in the day the monthly high and is firmly out of its recent trading range. Breaking upside on the 50 day moving average it looks to 0.7050 resistance for further gains.

United States
US markets have calmed with the President away “on tour”, as political turmoil has been dialled back, awaiting his return!  Investors have adopted a more risk -on tone as focus moves back to the economy and the chances of a Fed rate hike early next month. The weaker USD over the week or so has been a direct result of the “Trump trade” unwinding as the continual political scandals around his administration reduce the chances of his infrastructure and spending policies passing through Congress, rather than any deterioration of the US economy. Data figures continue to remain supportive. The EUR/USD continues to trade higher and after breaking resistance at 1.1170 rallied to a new high for the year at 1.1262 after German Chancellor Anglea Merkel commented that the ECB was responsible for EUR weakness after referring to the German trade surplus, it has since dropped back around the 1.1242 mark. Potential now exists for the EUR/USD to extend its advance to the 1.1300 level, last seen early November.  Further gains will likely see the pair reaching the 1.1340 region over the next day or so. Conversely a correction would take place on a break below 1.1160, with scope then to revisit the 1.1080 region.

United Kingdom
The UK election campaign grinds on, dominating the news as the June 8th polling day approaches. Polling surveys still show the Conservatives holding a solid lead, however this lead has halved from 18% over the last week after the publication of the party’s manifesto last Thursday was seen to damage the Tories’ electoral prospects causing a drop in the GBP. This was later reversed as PM May, did a U-turn and back pedalled over potential social spending cuts in her party’s election manifesto. The horrific news today of a terrorist bombing at a music concert in  Manchester that saw 19 fatalities is just 15 days away from the general election polling day  and the risk for the pound from here is whether this will delay the campaigning as the UK remains at the second highest level of security. The GBP/USD started the week with a negative tone, but persistent USD weakness helped the GBP/USD pair to regain the 1.3000 level, in spite of Brexit turmoil. The pair gapped lower overnight, knocked by Brexit’s minister Davis, who said that the UK can leave the negotiation table should the EU insist on the payment of a Brexit bill of around €100 billion. The pair fell to 1.2965 before stabilizing, it is now back around 1.3000 . We anticipate sideways trading heading into election day holding within a 1.2960-1.3100 range.

Eurozone data continues to show improvement and this allied with continued USD weakness, mostly around political ructions, has seen the EUR continue to firm over the last week. That old chestnut Greece is back on the front burner for the Eurozone bloc with news that while Eurozone finance ministers may agree to release new loans to Greece, they are likely to struggle to convince the International Monetary Fund to join the bailout by keeping the prospect of debt relief for Athens highly conditional. Debt relief was one of the IMF conditions. Greece needs new cash from the euro zone to avoid a default in July when it has to repay some €7.3bn worth of maturing loans. To get the money, the Greek parliament approved pension cuts and tax hikes last Thursday. For the IMF to join the bailout it wants the euro zone to commit now, more firmly and in greater detail to debt relief for Athens, even if it were to happen only in 2018. This would be difficult to swallow for Germany, which faces elections in September, and several other countries, which all want to retain some leverage over the Greek government to make sure it delivers on all the promised reforms until 2018. Also in overnight trading, Germany’s Chancellor Angela Merkel argued that the “too weak” EUR was to blame for the contracting trade surplus in Germany, boosting the demand for the shared currency. Some market analysts suggest that the narrowing Germany-U.S. yield spreads are helping to support the euro.

The Japanese yen has shown little movement in this week’s trading after gaining over 200 points on the US Dollar last week. The yen opened around the 111.00 area before giving up early gains and trading back at 111.50 after poorer than expected Trade Balance data.  The ministry of finance reported a surplus of 481.7 Billion from a surplus of 614.7 Billion as imported growth outstripped exports. The safe haven trade has been attractive recently with investors as the continuing troubles in the US remain.  With little Japanese data to be released this week direction will be driven by US, in particularly the Fed reserve speeches. With the USD still looking venerable price direction could be limited to resistance at 114.00 with prospects of support at 108.00 being tested.

The Canadian Dollar closed at 1.3510 for the week a big mover against the greenback picking up over 210 points. Canadian data was mixed with CPI and Core Retail Sales both missing expectations Friday, markets choosing to ignore the data the pair rallying to 1.3500 during late NY trading. The continued rally in Crude Oil played a large part, this morning’s price reaching $51.40 a barrel a long way from $47.00 the recent low. With continued Issues in the Trump administration weighing on markets we suspect the Canadian dollar may make a push for 1.3440 support, following this it may have a look at the prior low of 1.3280 of mid- April 2017. Bank of Canada will announce their cash rate announcement along with the statement Thursday with no move on the current 0.50% expected.

Major Announcements
•    US Building Permits 1.23m vs 1.27m expected
•    NZ PPI 0.8% vs 0.7% expected
•    UK Average Earnings Index 2.4% vs 2.4% expected
•    Canadian Manufacturing Sales 1.0% vs 1.1% expected
•    Australian Employment Change 37.4k vs 4.5k expected
•    UK Retail Sales 2.3% vs 1.2% expected
•    Canadian CPI 0.4% vs 0.5% expected
•    Canadian Core Retails Sales -0.2% vs 0.2% expected

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