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Aussie hits fresh yearly lows as China concerns escalate

By OFX

The Australian Dollar had a day to forget with a precipitous decline to close out last week. The currency was undermined by a number of factors, but the telling result was a fresh yearly low to 0.7175. Opening this morning at 0.7185, the Aussie looks to navigate a politically charged week while the bears stay firmly in the drivers’ seat.

The Aussie spent much of the week oscillating within familiar ranges around the 0.73 mark before succumbing to off-shore pressures from the United States. Again, it was President Trump that was the catalyst for volatility with a clear escalation in his rhetoric with regards to China and tariffs. The risk-on sentiment quickly shifted to risk-off with emerging markets and commodity currencies all feeling the crunch. The global market for base metals also received its own fall which only exacerbated the Aussies declines.

The AUD also felt the pinch domestically with a poor reading in the CAPEX, falling building approvals and Westpac’s mortgage rate hike all adding fuel to the fire. This was then further exacerbated on Friday with reports of rising tensions with China, as Australia looks to ban Huawei mobile phones from its mobile network market. China has responded by denying visas for a number of Australian journalists, inferring a deterioration in our relationship with China.

The pair now turn to a new week firmly against the ropes with traders first turning to retail sales for direction. As always, investors are keeping a close eye on the changing politically landscape for clues as well.

The New Zealand Dollar struggled to mount any significant directional momentum through trade on Friday moving between 0.6607 and 0.6660 when compared against the Greenback. With Consumer Confidence easing in August the local unit remained on the backfoot for most of the day. According to the ANZ the index fell 0.7% to 117.6 in August, the lowest in two years. Most of the weakness reflected greater concerns about the outlook however, the index remains above its long-run average. Early Friday, Fonterra reduced its forecasted milk price payout for FY19 from $7 to $6.75. Fonterra chairman John Monaghan said the change was in response to stronger milk supply signals coming from some of the world's key dairy producing regions. The move was not unexpected and this had little impact on the market.

Looking ahead today we see the release of New Zealand’s Overseas Trade Index which measures the change in price of internationally traded goods.

On the technical front expects to see first line of support sitting at 0.6600 followed by 0.6550 with resistance up at 0.6660 followed by 0.6720.

The Great British Pound fell through trade on Friday ending a mid-week rally spurred on by hopes a Brexit deal will be brokered. Investors looked to absorb profits on moves above 1.30 selling into the rally on Friday and pushing the pound back below 1.2950. Brexit price action remains cautious, despite EU and British leaders optimism a deal will be struck. Markets remain wary of extending gains ahead firm evidence a deal will be negotiated and it is likely Sterling will continue to struggle as underlying economic softness adds to Brexit uncertainty. With the current account deficit growing and corporate confidence shrinking there is a real fear a no-deal Brexit will force larger corporates into Europe while the deficit balloons further when measured as a percentage of GDP.

Opening this morning buying 1.2917 attentions now turn to Manufacturing and Services data, while Tuesday’s Inflation hearing headlines the macroeconomic docket as investors seek greater guidance on BoE policy expectations moving forward.

The US dollar edged higher into the weekly close recouping the early week losses as risk appetite soured and investors sought haven assets. The upbeat and trade positive news from earlier in the week failed to maintains its momentum through Thursday and Friday as investors reacted to reports the US and Canada were unlikely to reach an in-principal deal that would see both bilateral and Trilateral NAFTA agreements progress. Hope a deal could be struck turned quickly on comments from President Trump and Canadian Foreign Minister Freeland. Freeland intimated Canada is looking “for a good deal, not just any deal”; while Trump doubled down on pressure claiming, “Any deal with Canada would be totally on our terms”. As talks stalled investors scrambled to buy back into the dollar as haven plays took precedence into the end of the session.

Further support came from heightened emerging market concerns as Argentina’s Central Bank voted to raise interest rates to 60% in an emergency meeting on Thursday, amplifying concerns exposures to increasing US interest rates will only tighten the squeeze on emerging markets and extend haven plays further strengthening the USD.

With markets closed for Labor Day Monday we expect a quiet start to the week ahead of Manufacturing and services data and US non-farm payroll numbers. We expect the growth story to be affirmed in this week’s data sets with trade and broader risk sentiment driving direction.

The Euro opens this morning in negative territory, trading around the 1.1600 mark against its US counterpart. The Euro was mostly the victim of market risk aversion as flights to safety became the moniker of the day last week. Spurred on by a breakdown in US and Canadian trade talks, the market took a decidedly risk-off tone to close out the week. It wasn’t all to blame from off-shore forces however, with the market also reacting negatively to poor news on the domestic front.

Initially adding fuel to the fire was a poor reading on the August preliminary inflation which failed to meet expectations for the Eurozone. While inflation was up 2% Y/Y, the core reading printed at 1% vs the previous 1.1%. While the economic news was only a close miss, the number did put pressure on the Euro. The political situation in Europe also came under fire with Italy’s sovereign debt rating downgraded by Fitch to BBB, an outcome that is decidedly negative for the Eurozone with the Euro also feeling the pinch.

The Euro also came under fire from off-shore events with President Trump again proving the catalyst. His recent comments that Europe’s solution to auto tariffs “was not good enough” left the market jittery that maybe a reconciliation with the US wasn’t on the cards. This sentiment was all but affirmed when the US and Canada failed to reach an agreement on the new NAFTA. Markets, fled to safety soon after with the Euro also part of the sell-off.

The Canadian Dollar fell sharply through trade on Friday as hopes high level trade talks would prompt an in-principal agreement to revive NAFTA broke down. Having enjoyed strong upside momentum through the front half of last week following a bilateral trade agreement between the US and Mexico was reached the Loonie looked poised to extend gains as rhetoric and commentary proved promising leading into the US imposed friday deadline. Talks however soured as President Trump reiterated earlier comments suggesting a deal would “be on our terms” while Canada Foreign minister responded in kind confirming “no deal was better than a bad deal”. Tumbling back through 0.77 the CAD lost some 90 points into the close buying just 0.7652 at last bell.

With most investors celebrating the labor day long weekend we expect thin volumes and little action through trade on Monday ahead of Trade balance data and a BoC rate statement Wednesday. Recent strength across inflation and labour market indicators could prompt the Bank of Canada to issue a surprise rate hike driving the dollar back through 0.77 and toward resistance at 0.7750.