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Aussie range bound in face of year to date highs for USD

By OFX

The Australian Dollar offered little throughout trade on Monday failing to make any significant gains yet held on above psychological supports at 0.75 in the face of broader USD advances. The greenback touched fresh year to date highs when measured against a basket of major counterparts driven largely by another marked correction in the Euro as investors continue to extend bets U.S interest rates will increase at a faster pace. A stronger than anticipated NAB business confidence report helped bolster support for the beleaguered AUD and despite touching intraday lows at 0.7494 rebounded to open this morning buying 0.7511 US cents.

The rapid AUD sell off has steadied somewhat through the back end of last week as investors correct fair value ranges and expectations, reducing near term risks for our commodity driven unit. Short term bounds between 0.7430 and 0.7630 appear reasonable and while we expect investors to sell into significant upturn support at 0.75 and 0.7430 should hold while 10 year U.S treasury yields remain below 3%.

Attentions now turn to domestic retail sales data for direction through Tuesday. A strong read above 0.5% could prompt some hope that an uptick in consumer spending will help bolster price pressure and force an uptick in inflation that has otherwise remained flat and outside the RBA’s target band.

With little on the domestic agenda yesterday, the New Zealand Dollar traded sideways over the past twenty-four hours. Opening the week at 0.7015, We saw a familiar pattern of intraday highs at 0.7040 before dips just below psychological support levels at US 70 cents in overnight markets.

Inflation expectations for the quarter are released this morning and will be one of the main important factors for when we see the RBNZ move on its first interest rate hike since July 2014. The RBNZ has long warned of needing a pickup in inflation levels and wage growth before there is any change to its current neutral bias. In the last quarterly report released by the RBNZ in a survey of expectations we saw one-year inflation to remain flat while two years ahead had a 0.09 percentage point increase to 2.11%.

All eyes will be across the Tasman this evening where the Annual Budget release takes place as we have seen the AUD/NZD cross rally over the past week by 1.5% to 1.0710. The New Zealand Dollar opens this morning once again at 0.7015 against its American counterpart.

The Great British Pound bottomed out at 1.3515 earlier today against the US Dollar. We saw a fairly quiet day amid a holiday in the UK and the absence of macroeconomic headlines coming from major economies. All eyes this week will be on Thursday’s Bank of England monetary policy decision.

The Bank of England is expected to hold on the cash rate in May leaving its outlook for the policy rate unchanged with three rate hikes warranted until 2020. Also on Thursday we will see the release of Quarterly Inflation Report. The GBP/USD pair is now currently trading at 1.3559.

We continue to expect support to hold on moves approaching 1.3500 while now any upward push will likely meet resistance around 1.3590.

The US Dollar, measured by the Bloomberg Dollar Index, printed new YTD highs on a relatively quiet session impacted by a holiday in the UK and continued pressure on Emerging Markets currencies and the Euro.

The USD outperformed most of its G-10 peers, closing 0.2% stronger at its highest level for 2018.The trading session was briefly interrupted by President Donald Trump’s tweet that he’ll announce whether the US stays in the Iran nuclear deal on Tuesday (Wednesday early morning for APAC).

Some mixed commentary came from Fed representatives, with Robert Kaplan (Fed Dallas President) indicating he still sees only 3 rate hikes this year and that they should continue removing accommodation in a gradual way. In relation to inflation he mentioned: “We don’t want to run persistently above or below 2% “

US yields were little changed but we will see significant supply of Treasuries this week as quarterly refunding auctions begin Tuesday with a $30 billion sale of 3-year notes.

Euro softness continued Monday, with EURUSD closing 0.3% weaker at around 1.1920 after touching a fresh 2018 low of 1.1898 earlier in the session.

The main catalyst for the move lower was the disappointing German factory orders number (-0.9% vs +0.5% expected) but the currency managed to find a bottom after comments from ECB Peter Praet somehow blaming last week’s drop-in core inflation to Easter timing.

Also, ECB Smets mentioned they will probably announce steps to phase out Quantitative Easing this summer (after the July 26th policy meeting) but also signaling the market was right about pushing back ECB rate hikes.

The loonie has been following WTI crude prices recently, and it was off to a good start this week with crude oil prices breaking above $70 per barrel. Unfortunately, President Trump headlines on Iran’s nuclear deal triggered a sell off in crude and put upward pressure on the USDCAD, which tried to break above the 1.29 level for the sixth time since April 25th.

The CAD recovered a bit afterwards but still closed the session around 0.3% weaker versus the USD although managing to stay within the short-term range of 1.28 and 1.29.