FX News

Markets Dance to Trade Moves

Market Overview:

A relatively uneventful start to the week, with little in the way of major economic releases apart from Q2 US GDP data to be released on Wednesday.
On Friday, US Fed Chairman Jerome Powell, in his first speech as Fed chief at an annual conference in Jackson Hole, Wyoming, said there was “good reason” to expect the U.S. economy to sustain its recent strength and that the “gradual process of normalization remains appropriate,” however Mr Powell also noted that inflation which is currently sitting around the Fed’s 2% goal is not showing any signs of accelerating. US equity markets pushed higher following the speech, while simultaneously the USD slipped lower.
Over the coming week, look for more rumblings on the tariff war between the US and China as the world’s two largest economies yielded little visible progress last week toward a cease-fire. Looming instead are new tariffs that President Trump has threatened to impose on some $200 billion in annual imports from China, and Beijing’s already-promised retaliation……As the standoff continues with no satisfactory resolution in sight, we expect equity market advances to slow as markets find it harder to hold onto existing gains and trading currencies like the Australian and New Zealand dollar to remain under pressure.
Just how sensitive equity markets are to trade developments was illustrated overnight, with US equity markets surging higher as the Trump administration unveiled details of an agreement that they say will replace Nafta. Shares of carmakers and parts producers in the equity benchmark surged more than 3.5%. The Dow Jones Industrial Average rose above 26,000 for the first since February. The Mexican peso rallied, and Canada’s dollar strengthened on hopes that there will be an opening for that country to join the new agreement….This trade breakthrough while capturing investor attention came amid news of yet failure of U.S. and China trade talks.

Australia

The weekend bought some respite to the AUD which has consolidated at the lower level over the 0.7300 figure against the USD.
However last week’s political woes have taken a toll , with a poll out yesterday showing the opposition Labour party 12 points ahead of the government, further illustration if needed, that the voting public have no tolerance for internal party wrangling.
The new Treasurer is Josh Frydenburg who will inherit from the outgoing Treasurer and now new PM Scott Morrison, an economy on auto-pilot as high immigration and commodity exports underpin growth, but hoppled with weak wage growth that’s cribbing the spending power of heavily-indebted households.
After hitting a low of 0.7236 against the USD last week, the Australian dollar is back up trading around the 0.7350 level buoyed by the overnight positive moves on equity markets its tone remains mildly positive with support at 0.7300 and resistance up at 0.7390.

New Zealand

The New Zealand dollar opens the week on a firmer note trading a shade under the 0.6700 mark against the USD on an increase in risk sentiment bought on by better international equity market performance and some relief on the trade front.
Today sees PM Adern on a major charm offensive with NZ business, to try and correct the sliding business confidence figures that have been instrumental in the slide in the New Zealand dollar over the past few weeks….There is little in the way of major local data releases this week and we expect that NZD direction will take its cue from offshore moves…look for current levels against the USD to hold over the next few days but expect the NZD to test support at the 0.9090 level against the AUD over the next few days.

United States

News to start the week has be centered on the potential new trade agreement between Mexico and the US. This breakthrough on trade with Mexico captured investor attention in the midst of yet another failure for U.S. and China trade talks. American stocks added to records amid strong earnings and domestic expansion, while Federal Reserve Chairman Jerome Powell’s indication the U.S. will continue to follow a path of gradual tightening was interpreted as having a more dovish tone.
There is little economic data of note out for the US this week other than the Q2 GDP release on Wednesday, but this will be the calm before the storm with a big data week next week culminating in the Non-farm payroll figures next Friday.
The more dovish tone emanating from the Fed has seen the USD weaken against both the EUR and JPY…..with the EUR/USD trading back above the old resistance level of 1.1620 and is now around 1.1680 looking to probe resistance at the 1.1752 level..

Europe

European equity markets started the week on a firmer note, although with the UK on a bank holiday volumes were lighter….also helping was a rise in German IFO business confidence, the first rise in 9 months. With the US Fed indicating a steady but slower pace of rate hikes the EUR should head higher over the week with 1.1752 providing the first resistance level on the way to the 1.1790, a break of which would signal a return to a bullish EUR market…we expect current EUR/USD levels to hold over much of this week below the 1.1750 level, as the market gets ready for a raft of US economic data next week which may provide the breakout of previous ranges.

United Kingdom

The shambles that is the Brexit negotiations continues, with little clarity from either main party on which is arguably the most important issue facing the UK in the last 50 years.
However given that significant risks also attach to the EU given a “no-deal” outcome, there now appears to be emerging a hint of inherent willingness on both sides to find a Withdrawal Deal solution. This may serve as a backstop to the degree of no-deal Brexit risks priced into the currency. But with regard the GBP and political risks, it is far too early to signal the all clear; the biggest test for the pound will be the return of a divided UK parliament from their summer recess and the upcoming Party Conference Season. A murky UK political backdrop with PM May’s position remaining weak amongst her party, should continue to put a dampener on GBP in the near-term…risk-reward may no longer favour chasing the pound much lower from current levels (1.2785 -1.2890) and GBP/USD underpinned around 1.2700 would reflect a healthy chunk of Brexit negativity…..This week sees UK money supply data on Thursday and consumer confidence Friday.

Japan

The softer USD overnight after  Fed Chairman Jerome’s comments has seen the JPY track back above the 110.00 level against the USD as the trade war rhetoric continues to grind on…Japanese economic stability may get a boost along with the retention of the monetary easing policy, as  Prime Minister Shinzo Abe launched his bid for a historic third-straight term as ruling party president, attempting to put months of scandal behind him and become Japan’s longest-serving premier…..With little in the way of domestic economic data, Yen action will mainly stem from market sentiment and USD direction over this week.

Canada

The main news for Canada this week will be developments around the trade talks and what influence the new Mexico/US trade agreement will have on the US/Canada trade relationship….Reportedly the Trump administration want Canada to be in the new trade deal, but  the U.S. seems to expect Canada to agree to everything Mexico just negotiated — and to end its politically sensitive tariff exemptions as well….it is highly unlikely that this will happen…..given a continued trade stand-off, pressure is likely to remain on the Canadian dollar to the downside.

Major Announcements last week:

  • NZ Retail Sales prints 1.1% from 0.4% expected
  • Canadian Retail Sales down at -0.2% from -0.1%
  • Crude Oil Inventories at -5.8M sending CAD higher
  • Jackson Hole Symposium finished without a hitch
  • UK Bank Holiday Monday
  • NAFTA agreement with Mexico replaced by new trade agreement
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