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AUD hangs onto gains despite poor domestic indicators

By OFX

The Australian Dollar closed yesterday marginally lower following a largely risk adverse trading session and a softening in domestic construction conditions. Having opened near one-month highs at 0.7580 the AUD tumbled mid-morning following a dour report on construction work completed throughout the first quarter. Seen as a precursor to GDP data the soft print does little to expel fears the Australian economy is still running below capacity and only reinforces expectations monetary policy will remain accommodative through the short -medium term.

Having touched intraday lows at 0.7523 the AUD found support as investors were reluctant to extend losses ahead of the FOMC meeting minutes. While the minutes were largely on point and a June rate hike is firmly on the table the Aussie found short term support in key commentary that suggests 2 rate hikes in H2 are unlikely and that a gradual rate of adjustment is appropriate. The FOMC made clear there was no urgency to hike more aggressively and that inflation moves moderately beyond the 2% target would be tolerated. Edging back through 0.7550 the AUD opens this morning buying 0.7565 U.S cents.

With little macroeconomic data on hand domestically attentions now turn to FOMC speakers and Friday’s core durable goods order report Friday for direction into the weekly close.

The New Zealand Dollar opened yesterday morning at 0.6935 against the US Dollar with the expectation of a quiet day on the markets. This was not the case as the RBNZ published a research paper on hypotheticals around unconventional monetary policy should they need to be used in the future.

Despite RBNZ Assistant Governor John McDermott calming markets in an interview with Bloomberg by saying that there is “no imminent prospect” there still a higher chance than previous that they could use negative cash rates if need be.

The Kiwi was sold off in droves following the news and shed nearly half a cent back below 69 US Cents following the interview and once again tested two-year lows as the NSD/USD cross remains vulnerable. Eventual intraday lows hit 0.6886 before recovering and looks to pair losses this morning with an open at 0.6925.

NZ trade balance figures are released this morning and is looking to recover from a shock trade deficit last month of negative $86 million after a big rise in imported fuel costs for the month.

The Great British Pound continued its downward trajectory in overnight trading, hitting a fresh new 2018 low. Opening this morning at 1.3353, the Sterling is struggling to find its feet in a bearish market, bouncing off the new low of 1.3312.

The UK CPI Data released overnight appears to be the catalyst, coming in slightly below expectations at 2.4% for the year. The reading extends the Bank of England’s economic woes with the Inflation number at its lowest level in more than a year.

The Pound is finding little support from the headlines as well with reports that Theresa May’s government has yet to decide on the post-EU customs options it wants. Both Boris Johnston and Jacob Rees-Mogg have been vocal in their wish to leave the customs union quickly and for May to show more “backbone”. Again, Brexit continues to weigh on the Sterling and the incumbent government.

Traders will look to close out the week with an important statement from Bank of England’s Governor Carney and the April Retail Sales report.

Following the release of the FOMC minutes US stock indices closed the Wednesday session higher, the tech heavy Nasdaq was up by 0.64%, the S&P 500 Index gained 0.32% and the Dow Jones Industrial Average rose 0.21%. The minutes revealed the Fed seems optimistic about the economy with the labour market continuing to strengthen and economic activity has been rising at a moderate rate. FOMC officials said that the economic outlook warranted another interest-rate hike “soon” with markets already pricing in a 90% rate hike in June.

A reverse impact on US treasury yields which were pulled down further after the Fed suggested it was willing to allow inflation to temporarily push above the target inflation rate of 2% without incurring an additional intervention from the Fed. Investors flocked to buy safe havens such as bonds which moved in the opposite direction.

Central banks have been in focus this week, BOE governor Carney will be speaking in London today while the ECB due to release a detailed record of the ECB’s recent meeting. Also a raft of U.S. data adds to the busy agenda.

The Euro made fresh 6 month lows through trade on Wednesday as the beleaguered 19 nation combined unit continues to suffer softness across broader macroeconomic indicators and ongoing political uncertainty. Manufacturing and Service sector business conditions have softened through the month to date compounding slowdowns across broader and key economic markers and exacerbating fears and expectations monetary policy will remain accommodative well into 2019.

The Euro broke below the 1.17 handle to touch 1.1679 as the ongoing uncertainties that surround the Italian election and collation formation continue to weigh on the currency. Concerns the new government will push for ECB debt forgiveness and fiscal policies proposed will exacerbate an already stretched fiscal deficit have only heightened fears the broader European economy will fail to recover the same growth levels enjoyed through 2017 forcing the ECB to maintain and extends its QE program.

With the currency poised to break toward 1.15 attentions now turn to ECB minutes for further guidance and direction into the weekly close.

Loonie gains stalled overnight and saw its largest losses for the week on Wednesday evening following its recent rally against the US Dollar. The USD/CAD cross opened the day at 1.28 before climbing to intraday highs of 1.2915. The greenback eventually fell back against the Canadian dollar during the North American session following the release of FOMC minutes. It was remarked there is no urgency to raise interest rates than at current levels which are currently priced into the market.

Further movements on the Loonie will be contingent on further NAFTA trade talks which continue to stall on US Auto demands as informal deadlines were not met last week.

Absent of any domestic news for the Canadian dollar we sit this morning 1.2840, taking it cues from several US economic data releases this evening.