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Aussie edges lower by a modest pullback in investor risk appetite

By OFX

The AUD/USD pair reached a fresh 2-week high yesterday of 0.7159 but quickly retreated from the level to 0.7100 support. The main theme of the session was broad based US dollar strength helped by a modest pullback in investor risk appetite.

On the local data front today we will see the release of September monthly employment figures. The economy is expected to have added 15K new jobs in the month, while the unemployment rate is foreseen at 5.3%, despite an expected decline in the participation rate, to 65.6% from 65.7% in August. The country will also release the Westpac Leading Index for September, previously at 0.1%.

From a technical perspective, the AUD/USD pair is currently trading at 0.7107. We continue to expect support to hold on moves approaching 0.7085 while now any upward push will likely meet resistance around 0.7160.

The USD strengthened marginally overnight, leading to a weaker NZD to open the Asia-Pacific session. The Kiwi did have its moments however, touching just below 0.66 throughout most of the day. Opening this morning at 0.6552, the Kiwi is set to enjoy another benign day on the economic calendar.

Direction was mainly attributable to off-shore forces for the New Zealand Dollar with little to drive the Kiwi throughout the day. The Greenback rose, almost by default, as negative news in Europe and Canada conspired to buoy the USD. The Aussie followed a similar pattern, falling against the Greenback to match the Kiwi. For much of the day, the NZD/AUD cross has been trading in a tight range, oscillating between 0.9210 and 0.9240.

The Headlines also added to the NZD’s concerns with reports that Trump is planning to ramp up the tensions between the US and China. Initial reports suggest that Trump is planning to withdraw the US from the Universal Postal Union, implying higher shipping charges for China. Adding to the narrative is the US Treasury Department’s semi-annual currency policy report where the US may label China as a currency manipulator. By the treasury’s own three-point criteria, China is not a currency manipulator, however politics may trump economics in this case.

Moving into Thursday, the Kiwi looks to a quiet day on the calendar. Off-shore headlines and news will again provide direction.

The Great British Pound edged lower through trade on Wednesday following an unexpected dip in inflation throughout September. While broader attentions have been squarely affixed to ongoing Brexit negotiations the softer CPI print forced sterling back below 1.3150 as investors expectations for tighter monetary policy wavered. The bank of England has said further interest rate amendments will largely depend on the UK agreeing a trade deal with the EU and Wednesday’s soft print offers support for a sustained period of neutral policy.

Brexit optimism has waned through the week leading into today’s summit as Prime Minister May looks to forge a favourable exit agreement. With upside moves largely constrained investors will be looking to any headline indicating a deal has been reached. While a deal would certainly prompt upside support for the Pound investors remain conscious of troubles facing May at home and the need to then force any agreement through parliament. Investors are unlikely to fully extend bullish bets ahead of an agreement being ratified.

Attentions turn to Day one of the EU summit with headline risk driving direction.

The US Dollar Currency Index (DXY) has boosted to its highest levels this week after the Federal Reserve released a more bullish statement than expected supporting further rate hikes in the future.

Opening the morning at 95.10, the Index rallied to an overnight high of 95.66 and continues its climb as every Federal Reserve member supported future hikes into next year. Notes said that they will need to go beyond normalization of rates and into a more restrictive stance.

The USD/JPY continued its rally higher gaining forty basis points off the news as the CME Fedwatch tool is now pricing an 80% chance of one more hike before year end with another two forecast in 2019.

On the agenda this evening is the release of Philly Fed Manufacturing Index and Unemployment claims.

On Wednesday the Greenback strengthened against all of its major rivals with the EUR/USD reaching a low of 1.1496 on the back of a combination of softer local equities and undermined by ongoing political tensions.

On the data front yesterday EU annual CPI was confirmed at 2.1% in September as expected, although the core reading printed 0.9% vs. the expected 1.0%. EU Construction Output was mixed in August, down 0.5% monthly basis, but up 2.5% from a year earlier. Looking ahead today and the EU calendar will be quite scarce, with only Germany publishing the Wholesale Price Index for September.

From a technical perspective, the AUD/USD pair is currently trading at 0.7107. We continue to expect support to hold on moves approaching 1.1490 while now any upward push will likely meet resistance around 1.1520.

The Canadian Dollar opens weaker this morning against is US counterpart, the USD/CAD hovered between 1.2935 and 1.2960 during the Asian session and then found it wings to gradually begin its ascent towards the 1.30 psychological handle. The main catalyst for the move was a sharp drop in Crude oil and a demand for the Greenback in anticipation for the latest Fed meeting minutes. The Fed took a more hawkish tone at its September meeting when it raised interest rates and dropped the word “accommodative” from its policy stance. Markets have priced in an 80% chance of a hike in December.

In economic news, Manufacturing Sales fell 0.4% in August, nearly as expected, following a revised 1.2% gain in July (was +0.9%). The decline in total shipments during August was driven by an 8.3% pull-back in motor vehicle sales, which followed gains in June and July.

In other news, the Canadian stock market was also weaker as energy stocks declined on weaker crude oil prices. The S&P/TSX Composite Index was down 49 points or 0.3% to close at 15,529 on Wednesday. Losses in the healthcare sector also stood out on the first day of cannabis legalization.

Tonight we see the release of ADP Non-Farm Employment Change.