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Australian dollar continues its trend lower on trade war tensions

By OFX

The Australian dollar continued to edge lower through trade on Tuesday as investors sold back into the US 74 cent handle as the local currency continues to underperform against a stronger US dollar. Having opened the morning at 0.7405 and struggling to gain any upside momentum in morning trade, intraday highs were limited to 0.7422 before a steady decline ensued.

Overnight we saw lows into 0.7380 as President Trumps administration looks to be on the verge of heightened measures to restrict Chinese investment into the American economy and potentially blocking United States manufactured high tech products into China.

A brief relief to the sell-off was seen following the release of CB consumer confidence index numbers, slumping to a number of 126.4 versus the previous reading of 128.8 causing the Australian dollar to recover to 0.7402.

While we see no end to trade war talks, the Aussie could remain under pressure for the foreseeable future as markets continue to trade off every word from the Trump administration. With a lack of domestic data on the horizon we see Core Durable Goods orders as the next major macroeconomic release as the Australian dollar opens this morning at 0.7390.

The New Zealand dollar was slightly weaker this morning when valued against the US Dollar as the Kiwi struggles to hold its ground ahead of the Reserve Bank of New Zealand (RBNZ) meeting on Thursday. Overnight low between the NZD/USD pair was 0.6846.

Looking ahead today and all eyes will be on NZ Trade Balance Report which is anticipated to show the Trade Balance surplus narrow to NZ$ 100M from 263M in April. ANZ Business Confidence Survey for the month of May will be released shortly after.

From a technical perspective, the NZD/USD pair is currently trading at 0.6852. We continue to expect support to hold on moves approaching 0.6830 while now any upward push will likely meet resistance around 0.6900.

The Pound was the second worst performer amongst the majors, finishing the day down 0.4% against the worlds base currency. The catalyst for the underperformance was a combination of broad based US dollar strength and cautious commentary delivered to the British parliament’s treasury select committee by incoming BOE policymaker John Haskel. Haskel aired his concerns regarding the uncertain impact Brexit will have on the domestic economy and expressed caution about whether the economy’s readiness for a higher interest rate setting. Markets took the comments as an indication that Haskel, whose views are relatively unknown, will be more likely to vote in favour of keeping interest rates on hold rather than raising them.

As a result, the pound fell to 1.3208 against the USD and also fell to 88.120 against the Euro, representing a nine day low. GDP data is due to be released on Friday which will give us a better indication of how the economy is faring however traders are seemingly cautious on the pound ahead of the European Union leaders summit later in the week which will be closely watched for any indication on what the trading relationship between the UK and the single market will look like post-divorce.

The US Dollar rebounded through trade on Tuesday, advancing across the board as traders moved away from emerging market and high yielding currencies. Ongoing trade hostilities continued to dampen investors appetite for the Chinese Yuan which in turn fostered weakness in the Australian dollar as the commodity driven unit slipped back below support at 0.74 to touch intraday day lows at 0.7381 while the US dollar index jumped half a percent snapping a four day sell off. Equities steadied, and risk aversion abated which helped drive the Dollars recovery and leaves the door open for further upside.

The hawkish Federal Reserve outlook is driving investors into the worlds base currency as the divergence between US and global monetary policy widens and adds further short-term support to the Greenback.

Attentions today turn to US core durable goods orders ahead of Thursdays GDP print and Friday’s all important measure of inflation the PCE index. Strong reads and weakness across European, British and Japanese macroeconomic indicators will only strengthen demand for the USD while the European summit and ongoing trade tensions pose direct immediate threats to risk appetite and will continue to drive short term direction.

The Euro couldn’t hold into gains above 1.17 versus the US dollar and felt 0.50% to 1.1648. The Euro weakness was triggered by broad greenback strength which according to some market participants might be related to end of quarter flows and general trade tensions.

Additionally, ECB Governing Council member Philip Lane comments weighted on the dovish side as he said inflation was recovering but still below the ECB goal. Trump continued talking about potential tariffs on EU cars but also addressed some investors concerns about US-China trade drama saying he’ll favour a less confrontational approach toward restricting Chinese investment in the American tech industry.

Next levels to watch for the EURUSD are 1.1620 short term and 1.15 as major support level and on the upside, 1.17 should act as short-term resistance. Also, keep an eye on Headlines coming from the European Summit, which could potentially bring further volatility into FX markets.

USDCAD increased 0.1% to close around 1.3308. The loonie was not able to take advantage of the increase in WTI prices, which traded above 70 for the first time in the month, probably affected by the risk-off sentiment that was dominating the markets Yesterday and manifested itself in broad USD strength.

The trade drama also seems to be showing spill over effects as Canada said they were preparing steel tariffs on China and other countries to protect against potential market disruption in prices triggered by US steel tariffs.

Next levels to watch for the loonie are Yesterday USDCAD high at 1.3325, which should act as short term resistance while 1.32 should be seen as next support.