FX News

US, Mexico and Canada shape new trade agreement- USMCA replacing NAFTA

US Dollar strength was the theme closing the week out on a high as markets retreated on risk sentiment. Equity markets were flat as the Italian Budget drama continues. Italy has defended its massive budget deficit with Italian equities trading down over 4% as the uneasiness over budget levels continues. The coalition government proposed a 2019 deficit of 2.4% of (GDP) Gross Domestic Product, Italy’s economic Minister Giovanni Tria defended it declaring that Rome was not a challenge to Europe after he said the debt levels will decrease over time. Economic growth over the next two years will be stemmed by investments Tria went on to say. China celebrate “National Day” all week which usually implies the markets could be a little less liquid producing increased volatility in currencies. Trump’s “good friend” Xi – (China President) may not be a good friend any more after Trump accused Xi of meddling in the US congressional elections in November. As the two countries impose fresh tariffs on each other the world’s largest economies will get together to avoid a drawn out trade war which dampen global growth. President Trump has threatened to slap tariffs on just about the total of all Chinese imports with China remaining staunch. US equity index the Nasdaq traded back into the negative after a Facebook security breach has apparently affected 50 Million accounts. The Nasdaq fall 3.4% on the news. Tesla shares have also taken a dive following on from the SEC suit against CEO Elon Musk with the price down nearly 12% Typhoon Trami is bearing down on Western parts of Japan as 100 mph winds have hit the mainland with 3.7 Million people on the evacuation plan. Tokyo is not in the path of the storm but very strong winds have been reported with trains and over 1000 flights being cancelled. US and Canadian officials have agreed on a new trade deal, Trump has called it USMCA (United States, Mexico, Canada) which replaces the old NAFTA trade deal. It sounds like Trump has won out on his hard ball negotiating tactics putting other world leaders, European Union, China and Japan on notice. The deal needs to be approved by congress before it comes into play on January 1 2020. The Canadian Dollar strengthened across the board against the G10 currencies reaching a 4 month (31 July 2018) high against the greenback. Price action in the NZD/AUD will be subdued this week with a lack of economic data on the docket and a Aussie bank holiday (labour day) Monday.

Australia

The Australian Dollar has made decent gains over the past three weeks which is a tad surprising given the level of risk averse sentiment in markets based on trade tensions. Only recent GDP and employment numbers have really held the currency from dropping further. Friday saw these gains level off – against the US Dollar it traded to a high of 0.7310 before falling away over the Fed rate announcement. Given that Australia has substantial interest in economic and political ties with both countries it only seems right that we should see a weaker AUD. With the Fed raising rates last week to 2.25% the gulf between the two countries in terms of interest rate and investment potential will only get larger with the Fed expecting to raise rates again an expected three times next year and once more in 2018. With a light economic calendar over the coming couple of weeks we may see the Aussie drift lower. Today’s RBA announcement is not expected to throw up any fresh AUD buying interest with the cash rate to remain at 1.50%   

New Zealand

Who forgot to wind their clocks forward and came into work an hour later on Monday? I’m switching off my Spa pool and cleaning up my BBQ in anticipation for much better weather. According to NIWA we have a 35% chance (for all NZ regions) that rainfall will be below normal levels now through to the end of November. I know this doesn’t actually tell us much but reports are that we have a 65% chance of seeing another El Nino over the coming months but not temperatures to the extent of last summer.  Last week the RBNZ governor left the cash rate unchanged at 1.75% as widely expected but made comment that the next change could be “up or down” with the rate to remain unchanged well into 2019. A quiet week on the cards for the kiwi with NZIER (Economic Research) today the main event. Pending trade tensions will have the biggest impact on the New Zealand Dollar this week with further downside expected to resume.

United States

Personal income and spending were generally in line with market expectations both rising 0.3% for August m/m. Recent data suggests growth and the economy is expanding at a solid rate. US Dollar momentum trucks on reaching the highest level since mid November 2017 of 113.90 against the Japanese Yen. Notes from lasts weeks FED rate rise to 2.25% suggested the overall economy is strong with solid labour market inflation just above 2.0%. The Fed sees 3% GDP this year with unemployment under 3.5% next year. Fed members could not agree on where a neutral monetary policy was in terms of rate rises, so they may just keep hiking rates until new reasons appear for them not to continue. This week all important Non-Farm Payroll figure offers a welcome break from recent trade headlines with actual “economic data” to perhaps shift markets from recent ranges. US Manufacturing data and Fed chair Powell speaks later in the week.  

United Kingdom

Confusion with brexit remains with both conservative and the opposition labour party consider the possibility of a snap decision as early as November 2018. The chances of a second referendum would be a disastrous outcome in the event of a “no deal” after the UK negotiations with the EU. A second vote still remains unlikely but it may be the only way to avoid a “hard” brexit. There still seems to many options to outline with a real divide still evident. Theresa May is preparing to make a critical speech at a party conference, amid speculation of a pending challenge to her leadership by Boris Johnson. The Party is split between – backing a hard brexit, remaining and those in the middle. Purchasers Managers Index (PMI) prints Wednesday and is expected to be in line with positive August numbers.

Europe

The Euro has been left scrambling in the wash of uncertainty over the Italian budget. The events which have unfolded have bought about a broad based Euro decline. Italian officials have been forced to defend its plans to run a huge government deficit as fears the economy would be plunged into despair. The five star movement and the right wing league proposed a 2019 deficit of 2.4% of GDP which is three times the previous administrations target. In attempts to calm fears the economic minister Tria said economic growth in Italy would be boosted by offshore investment of the next two years. Given the recent casualness of the ECB’s on Italy previously we will see further market nervousness continue until the final Italian budget is submitted on the 15th of October.  The Euro is trading at 1.1570 against the US Dollar by far the weakest currency this week. It’s a quiet week of data in the Eurozone with a German holiday Wednesday.  

Japan

The Bank of Japan’s Tanken Manufacturing Index survey report for the third quarter 2018 (July to September) was released Monday and showed a lower than expected figure of 19 based on the Bank of Japan’s predicted 22. The report is aimed at assessing business confidence in manufacturing. The bank of Japan made comment global trade tensions are not having a big impact on sentiment but could affect at a later date with raw material costs to blame along with bad weather and natural disasters impacting. Large manufacturers see the USD/JPY trading down to 107.50 this financial year currently its trading around 113.70. Japanese consumer confidence index releases tonight and is expected to be in line with market predictions of 43.0. US Dollar sentiment will be the main driver of the pair this week along with US Non-Farm Payroll Friday.

Canada

We have a new trade deal, Trump is calling it USMCA. President Trump administration’s new trade deal between Canada and Mexico has been agreed and leaves much of the old North American Free Trade Agreement (NAFTA) as it was. Essentially the key differences are in the Auto and dairy industries. The new agreement which has been negotiated intensely over the past year between the three countries includes many compromises by both the US and Canadian officials. The US has gained access to Canadian dairy a huge win for US dairy producers. Canada has won the right to keep in place a disputes resolution process. The Canadian Foreign minister Freeland is calling the deal a victory for Canadians. The US accounts for over 75% of all Canada exports and will pave the way for tariff free access to the American market. The Canadian Dollar gaped lower Monday on market confidence, trading down to 1.2840 versus the US Dollar the strongest performer early week and continued its run over the G10 currencies after news broke. Employment data later in the week and trade balance will be key to the Canadian Dollar staying under the pivotal 1.30 level. Crude Oil was sharply higher up over 75.00 again breaking resistance above 73.00 suggesting we may see higher prices develop in the near term.

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