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Aussie edges marginally lower as U.S inflation ticks upward and investor turn an eye to wage growth


The Australian dollar maintained a tight trading range through Thursday largely holding onto Wednesday’s advance as risk appetite remand healthy on news Italy had moved closer to forming a viable coalition. Having touched intraday highs at 0.7592 the AUD met selling pressures and touched session lows at 0.7554 after the Fed’s preferred measure of inflation the PCE index crept higher. Year on Year indicators touched the Fed’s target at 2% and firmed expectations for 3 rate hikes through H2 2018.

With the Fed maintaining its process of monetary policy tightening and the RBA firmly entrenched in a neutral policy setting the yield advantage enjoyed by the USD could sit as much as 1% above our own domestic unit. An unprecedented level and primary reason we maintain a largely bearish outlook for the AUD moving into the 2nd half of the year.

While broader ranges remain unchanged short term direction and attentions turn now to US NFP data. A strong jobs report will only confirm the worlds largest economy is operating at full capacity with market emphasis drawn to wage growth performance as an indicator of future inflationary pressures. A strong read will put pressure on the AUD leading into the weekly close while a soft print could see topside resistance tested again.

The New Zealand Dollar enjoyed a relatively calm day, holding its gains over the past 48 hours. Opening this morning at a healthy 0.7003, the Kiwi continued its good run of form, nudging over 0.7 for the first time in almost a month. It has been one of the strong performers in FX markets over the last few days as it tracked the on-going political debate in Italy.

The New Zealand Dollar mostly drifted throughout the trading day, with little movement either way. The ANZ Business Survey was released with a weaker than expected reading that ultimately didn’t have a lasting impact on the Kiwi’s fortunes. Across the Tasman, the NZD remains relatively unchanged, although also slightly higher against its Aussie counterpart.

The Kiwi will now enjoy a quiet domestic calendar to close out the week. All eyes turn to the headlines for developing stories in Europe and US trade tensions with China.

The Great British Pound is stronger this morning when valued against its US counterpart. The Sterling reached to an overnight high of 1.3347. However was unable to hold on to gains beyond the 1.3300 level, ending the day slightly below the 1.3300 figure and little changed for the day.

On the local data the Nationwide Housing Prices index for the month of May was down 0.2% and up 2.4% YoY, both readings below market's expectations. Looking ahead today the UK macroeconomic calendar all eyes will be on the release of the Markit Manufacturing PMI for May with market forecasts expected at 53.5 from the previous 53.9. From a technical perspective, the GBP/USD pair is currently trading at 1.3298. We continue to expect support to hold on moves approaching 1.3260 while now any upward push will likely meet resistance around 1.3320.

The USD Index closed the session almost flat overnight, strengthening versus commodity currencies like AUD, CAD but weakening against safe havens like the JPY and CHF.

The US announced it would put an end to the temporary metal tariff exemptions for the EU, Mexico and Canada, prompting a correction in US Equity Indexes, with the S&P down 0.7%.

From the data front, PCE Core came as expected, personal spending came slightly higher than expected while Jobless claims came slightly lower, all supportive of a relatively strong current economic situation for the US. Additionally, the Chicago Purchasing Manager also supported this view, coming at 62.7 versus 58.3 expected. The US 10-year treasury yield traded within a narrow range between 2.88 and 2.84.

The EURUSD closed almost 0.25% higher, around 1.1695 amid positive developments in the Italian political drama where the two populist parties agreed to form a government.

Economist Giovanni Tria will be the finance minister, replacing Eurosceptic Paolo Savona who had been designated as minister for European affairs.

The EURUSD traded as high as 1.1724 at the beginning of the European session, with support found around 1.1645 and speculative offers seen around the 1.1740/1.1750 level.

Volatility in markets will likely continue in the short term and the markets will be expecting the retaliation steps the European commission will taker after the US cancelled the tariff exemptions it had with the EU, Canada and Mexico.

The US announcing an end to tariff exemptions, which impacts Canada directly, its not a positive sign for NAFTA negotiations. If we also consider the correction in oil on the overnight session plus the fact that Canada GDP data for the first quarter missed estimates, then the correction in the loonie seems logical.

USDCAD spiked 0.6% to close around 1.2953, the economy expanded at a 1.3% annualized rate, versus 1.8% expected. This is the slowest reading in almost 2 years.

Next levels to watch for the USDCAD are 1.3050, which acted as strong resistance earlier this week, and 1.2850 on the downside.