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FX Update – Trump Pulls From Iran Nuclear Agreement


Market Overview:

With the US pulling from the Iran deal this has put pressure on European countries which still want the deal to stay in place. China, France, Russia, Britain and Germany all have expressed commitment to stay in the deal. Germany in particular has said they would try to persuade the US government to continue with it. On Sunday the US government threatened to bring about new sanctions on these countries who currently do business with Iran. The US are still hopeful that they and their allies could strike up a new deal with Iran. The US national security adviser John Bolton said a possible deal could be made but this depends on the “conduct of the other governments”. The withdraw by the US has raised the risk of further conflict in the Middle East with a lack of current stability there. Currency markets had an uneventful close the week, the US Dollar is still the currency of choice, then it’s a distant second to the Canadian Dollar. Crude Oil prices soured based on uneasiness with the Iran situation raising to a high of 71.71 before settling around 70.70 at the weekly close. The US Dollar Index spiked to 92.55 showing the wide ranging support for the greenback. Equities remain strong as well with the DOW index coming off a weekly low of 24200 to close around 24830. The RBA kept the benchmark rate unchanged at 1.5% extending its record breaking run and the Bank of England (BoE) left their benchmark cash rate unchanged at 0.50% in a 2-7 vote as markets expected, although the market saw the BoE comments as generally dovish after the pricing out a rate hike for 2018. This Thursday we have the NZ Budget, this will set the tone for the NZ Dollar for a while to come. With business sentiment at a low since the Labour government took office Ardern is mindful of this while the budget will aim to change people’s perception that the country’s economic tender situation is a little more rosy. We can expect to see a homeless package of $100M come in along with a health boost of over 8B over the next 4 years.

A quiet week for the Australian economy saw little news of note- The Australian budget the only significant highlight saw no surprises supporting fresh tax cuts. In summary: The Australian economy is in its 27th year of consecutive growth, business conditions are at the highest levels since the global financial crisis of 2008 and global growth is at its fastest pace in six years. Monetary policy minutes releases tomorrow and should support recent positive economic data followed by unemployment figures Thursday.

New Zealand
The New Zealand Dollar weakened following last week’s RBNZ announcement and continued to underperform. The benchmark rate of 1.75% was left in place as was widely expected with Adrian Orr downgrading the forecasted cash rate for June 2019 down from 1.9% to 1.8%. This week’s first labour Annual Budget will be in focus and offer plenty of opinions and discussions based on the results to what has been omitted or under funded by the NZ government. David Clark, the current health minister, has said he estimates it would cost over 14B over the following 10 years to get health assets to the standard they should be. The NZD has opened at 0.6960 against the US Dollar (USD) with expectations it should remain relatively steady this week across the board. A retest of 0.7000 is on the cards if the market risk returns.

United States
Now that the US government has pulled out of the Iran deal President Trump wants to impose sanctions on European Countries which run business with Iran bringing about a fair amount of head scratching. With France, Germany, China, Russia and Britain staying in the current agreement the US are looking for a deal which addresses all accounts of Iran destabilising its activity in the Middle East. Theses sanctions block all American businesses from doing business in Iran and all foreign businesses doing business in Iran using the US Banking and financial system. The US Dollar has remained the strongest currency from the G10 group with geopolitical tensions in place. This week on the calendar we have US monthly retail sales, building permits and Crude oil inventories. We suspect the US Dollar may remain in favour through the week with a lack of ongoing risk appetite.

The Euro (EUR) recovered from its early week decline pushing back over 1.1900 Friday against the US Dollar making it one of the best performing currencies closing the week.
ECB policy maker Francois Villeroy de Galhau said the ECB could give new guidance on the timing of its first rate hike as the end of its massive bond buying program approaches. Investors are focused this week on speeches by a number of ECB officials and German data which is expected to show a slowing of economic conditions. Yearly CPI is released Wednesday around an expected 1.2% growth which is down on previous months.

United Kingdom
The British Pound struggled towards the end of the week after the Bank of England (BoE) left rates unchanged in its cash rate release. With two of the 7 votes were in favour of hiking, markets interpreting the overall tone as more dovish than anticipated with markets now pricing out a 2018 hike. Against the US Dollar the pair has bounced off a fresh low of 1.3455 the December 28th low to trade back at the top of the current range at 1.3560. This week’s inflation hearing could put pressure on the GBP limiting the upside. Also, UK average earnings is scheduled for Tuesday and needs to be around the expected 2.8% for the GBP to push higher.

The Japanese Yen consolidated around the 108.50 area after Bank of Japan (BoJ) Kuroda made further comment that he sees sustained momentum in achieving the Bank of Japan’s 2.0% goal. Too much emphasis on medium term economic forecasts should not be given too much weight as companies raise wages and prices of goods and services. The Japanese Current Account rose to JPY1190B above the JPY1023B expected and well above the February result of 188B. Japan’s overall government surplus stands at a hefty JPY3122B which is well above predictions. Quarterly prelim GDP is released Wednesday for March and is expected to be better than the previous few months figures. We expect the JPY to make a push for 108.50 this week if risk prevails in the market.

The Canadian Dollar was the second best performing currency last week with Crude oil prices showing new highs. In the wake of the US pulling from the Iranian deal we have seen oil jump to 71.71 boosting the Canadian Dollar (CAD). Economists are expecting higher prices with the demand outpacing supply for the rest of the year. Global stocks are down to a five year average and falling but most fundamental information we are seeing suggests a bullish market ahead. The Canadian Dollar gave back gains towards the end of the week after disappointing employment figures missed the mark publishing at -1.1K shedding jobs against expectations of 17.8K jobs added to the workforce. The unemployment rate stayed the same at 5.8% the pair bouncing back to 1.2780 late NY session.

Major Announcements last week:
• RBNZ keeps cash rate on hold at 1.75%
• Bank of England keeps cash rate on hold at 0.50%
• President Trump exits from the Iran deal.
• Canadian employment prints at -1.1K way down on 211K expected
• Crude Oil hits 71.71 a multiyear high
• Australian Budget promises tax cuts

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