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AUD edges lower as investors sell into rally and risk sentiment sours

By OFX

The Australian dollar edged lower through trade on Thursday as investors sold into Wednesday’s rally and the currency underperformed, falling against most major counterparts. Having touched intraday and 6 weeks highs at 0.7675 investors dumped the commodity driven unit after April’s trade balance report missed the mark and exports fell further than anticipated. While the soft read was softened somewhat by an upward revision to March numbers the slowdown suggests the export led growth enjoyed in Q1 may not be carried through Q2 and will be unlikely to drive improvements in wage growth and inflation expectations anytime soon.

Having touched intraday lows at 0.7614 the AUD steadied with supports forming at 0.7605 and we open this morning buying 0.7624 U.S Cents. With little of note on the domestic docket today attentions turn to Chinese Trade Data. A strong read could offer renewed upside support, fostering demand for key commodity exports. We expect the AUD to hold through a largely tight trading band into the weekly close with short term outperformance potentially holding into next weeks FOMC meeting and rate statement.

The New Zealand dollar opened yesterday morning at 0.7036 and remained in a sideways trading pattern like it has done so for the majority of this week, since gains were seen on Monday through the 70 US cent handle. The Kiwi briefly tested key resistance levels at 0.7056 during the domestic session before the NZD/USD cross moved lower seeing overnight lows of 0.7023.

Movements into the weekend will be determined today by the release of Chinese Trade balance figures and the start of G7 meetings being held this year in Quebec. We see current short term support levels at 0.7020, psychological support levels at the 70 US cent handle as the New Zealand dollar opens this morning at 0.7027.

The Great British Pound enjoyed mixed fortunes through trade on Thursday offering little to excite investors when compared against its US counterpart while pulling lower against the Euro. Falling to a one month low against it mainland counterpart Sterling touched intraday lows at 88.37 as investors feared the government will fail to provide a viable solution to key Brexit sticking points, namely Irish boarder plans.

Having suffered a marked sell off throughout the last 6 weeks on amended monetary policy expectations and deteriorating optimism surrounding the Brexit process investors have been forced to adjust long term expectations for broader GBP values. While polls suggest markets still see the pound recouping much of the losses suffered post Brexit there is a shifting expectation the year to date highs at 1.43 won’t be seen again in the short term with significant resistance hampering moves toward 1.36 and 1.40.

Attentions now turn to next weeks crowded domestic docket headlined by monthly Manufacturing Production numbers, Wage Growth data, CPI and Retail Sales for broader direction. Strong reads could help support calls for an August adjustment in monetary policy and fuel medium term GBP upside.

The US dollar edged lower against both the JPY and Euro on Thursday as Treasury yields plummeted and investors continued to buy back into the Euro ahead of next weeks ECB policy meeting. Ten and two year treasury notes plunged throughout London trade loosing 0.12% and 0.07% respectively while Fed Funds futures also retreated as markets amended expectations for monetary policy action into the end of the year.

The pace of the USD advance has moderated somewhat through the last 2 weeks as investors re-adjust expectations surrounding the pace of monetary policy tightening. While an increase to the bench mark rate next week is largely priced in those expecting a 3rd and 4th rate hike are wavering with the large majority of analyst pricing in just one additional upward adjustment before years end. The burgeoning yield advantage over the majority of G10 counterparts should provide a back stop behind the USD but further gains will likely be hard fought moving into the 3rd quarter and second half of 2018.

Attentions now turn to the weekends G7 summit as protectionist trade policy continues to dominate broader sentiment and risk flows.

The Euro managed to close the session up near 0.4% versus the dollar and is trading now close to 1.18 despite weak economic data coming out of Germany (factory orders: -2.5% versus +0.8% expected). EURUSD reached a new monthly high at 1.1840 during early US session on the back of the recent ECB announcement around next week’s meeting.

US yields fell as safe-haven demand increased on trade tensions between the US and its major partners ahead of a G-7 Summit. The Euro has been performing very well, gaining almost 3% since hitting a 10-month low last week. Next levels to watch for the cross are 1.1837 on the upside while 1.1750 should act as first support.

The loonie got hit on yesterday’s session against safe-haven assets and the US dollar. USDCAD was up 0.25% to around 1.2975 after being more than 0.5% up, around the psychological 1.30 level on the back of a continuation of tensions between the US and Canada around tariffs and Nafta negotiations.

Options expiring Friday close to 1.30 may put more potential pressure on the CAD, the market will be putting special attention to the next resistance level around 1.3050, which is broken could open the way for further CAD weakness. First short-term support should be found around 1.2930 and then 1.2860, June 6 session’s low.