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RBA Maintains Neutral Bias

Aligned to expectations, the Reserve Bank of Australia left interest rates on hold yesterday at a record low of 1.5 percent. With supporting commentary offering up very little new insight, policy makers re-confirmed the view that any shift towards tighter monetary settings would be gradual, allowing instead labour markets and inflation to return to target.

Whilst the overall impact on the Australian dollar was initially limited in the aftermath, the domestic unit plummeted during overnight trade, hitting fresh lows for the year versus the world’s reserve currency. Having earlier traded to a 24 hour high of 0.7546, resistance at the 75 US Cents level was comfortably broken down with the Aussie eventually settling at levels closer to the 0.7490 mark, a rate in line with this morning’s open.

In what’s been a period dominated by strong demand for the US dollar, investors have continued to line up during the early parts of this week amid comments in particular from the Trump administration which triggered renewed hope that the North American Free Trade Agreement could be renegotiated. Opening in a vulnerable position, the Australian dollar is weaker versus the Kiwi (1.0688), flat versus the Sterling (0.5496).

The theme of this week continues to be the strength of the US Dollar and shows no signs of easing as we reach critical support levels for the New Zealand Dollar. Opening Tuesday morning already under pressure at 0.7040, the Kiwi maintained a very tight range throughout the domestic session. The majority of downside movement on the NZD/USD currency cross occurred in the North American session seeing dips in the 69 US cent range for the first time this year.

Overnight the latest Global Dairy Trade Auction did no favours to the local currency as the market saw declines of 1.1% with whole milk powder prices leading losses. This caused initial moves lower for the Kiwi from 0.7015 to 0.6992.

Key macro indicators released this morning with unemployment data due for release this morning at (NZST) 10:45am whereby we expect figures to come in at 0.5% for Q1. The New Zealand Unemployment rate is also expected to come in a tick lower at 4.4% and will be an intriguing day for local investors as we expect the 70 US cent mark to be tested and opens this morning at 0.7007.

The Great British Pound saw a drop below 1.3600 overnight trading as low as 1.3589 against its US counterpart, as the manufacturing sector activity fell to its lowest in 17-months this April, with the PMI printing 53.9 against the previous 54.9, downwardly revised from 55.1.

Mortgage approvals also fell in the month of March to 62.914K, its lowest in three months. The GBP/USD pair is currently trading at 1.3612 retaining its bearish stance. We now expect support to hold on moves approaching 1.3580 while any upward push will likely meet resistance around 1.3645. Looking ahead today, the UK will see the release of Construction PMI, expected at 50.5 from the previous 47.0.

Another positive session for the USD last night, with the DXY Index, which indicates the general value of the USD versus world major currencies, breaking above its 200-day moving average of 92 and closing more than 0.60% up.

The USD is now up for the year, in line with the increase seen in US yields across the curve and ahead of tonight’s FOMC meeting where even though a hike is not expected, the market will be paying special attention to changes in the statement that could signal further acknowledgment by the FED about the progress toward their inflation objective.

In terms of economic data, ISM manufacturing came slightly lower than expected by the market, but prices paid rose to new cycle highs (highest since 2011). We will get mortgage and employment data tonight, before the FOMC rate decision.

The EURUSD closed below its 200-day moving average and important support level of 1.20, as USD strength continued against almost all other currencies. The currency is now flat on the year and the next few months could be challenging as it seems the European Central Bank, is in no hurry to discuss the end of their Quantitative Easing program, which doesn’t bode well for the Euro’s near-term view.

Additionally, latest CFTC data shows asset managers are widely long EUR, which raises the risk of bigger moves if weakness continues. In that sense, Volatility has also been picking up, in line with slip below 1.20 and the pair now sitting at a new multi-month low.

The CAD has been one of the few currencies that held relatively well versus the USD, probably due to a stronger than expected GDP report and comments from Bank of Canada Governor Poloz who said the current policy rate is “well below” the neutral rate. The CAD was losing more than 0.60%, with the USDCAD trading as high as 1.2914, its highest level in almost a month, but managed to recover afterwards at the end of the US session, to close almost flat. It’s also important to note that this recovery came despite some oil weakness.