The US dollar continues consolidating its gains while we await news from the US-China deal
Monday 11 March, 2019
Daily Currency UpdateThe US dollar index continued rising in yesterday’s trading session around 0.30 percent, along with a pullback in North American equities. The main FX pair, the EUR/USD pair, fell around 0.40 percent in yesterday’s trading session, showing the US dollar’s strength. The volatility across different FX pairs is at historic lows. Such low volatility will eventually end with disruptive consequences. The timing is notoriously difficult to identify, but there are some apparent catalysts to keep an eye on. There are talks about a possible trade deal between Trump and Xi in late March at Mar-a-Lago. Critical areas of negotiation remain, including whether the US would drop its existing tariffs against China or refrain from invoking a move to 25 percent tariffs, as well as whether any deal should be done with immediate effect or be staggered and made conditional on China meeting its obligations to open its market and enforce IP rights. At the time of this writing, the US dollar index is trading at 96.81 and as long as it trades above 96.68, the US dollar index might try to test 97.37 in the following few days or hours, incurring another 0.50 percent increase. For example, the EUR/USD pair is trading at 1.1325 at the moment and it might test the 1.1300 handle if the strength in the US dollar continues.
Key MoversThe Loonie continued some of its bearish momentum during yesterday’s trading session. The USD/CAD increased around 0.30 percent at one specific point to finally close flat. However, this morning, the USD/CAD is rising 0.31 percent and it just touched an intraday high of 1.3350. The Bank of Canada might not move its interest rate in tomorrow’s BoC rate decision. Expectations are that it will be held at 1.75 percent. Technically speaking, the USD/CAD just tested the resistance at 1.3350. However, for today’s session, the movements might be limited given that the US Dollar has been moving within a low volatility environment. The uptrend in the USD/CAD pair is still in place and this pair might just have confirmed a bullish pattern (likely further weakness of the Loonie) when the pair traded above 1.3300 all morning yesterday. This means that the USD/CAD pair could continue moving to the upside in the following few days or hours, as long as it does not fall below the 1.3300 handle.
As well as Brexit negotiations, the other main domestic event for holders of the Euro will be this week’s interest rate decision from the European Central Bank due on Thursday. No change in benchmark rates is all but guaranteed so bank chief, Mario Draghi’s comments on the state of the bloc’s economy will likely be the main talking point. With the latest data showing the German and Italian economies treading water, will Draghi announce a resumption of his program of cheap bank loans, known as targeted longer-term refinancing operations? Draghi may decide to hold back on any stimulus announcement this time around with a Brexit deal and resolution of the China/US trade impasse possible by month end. The EUR/USD pair is trading lower this morning at 1.1330 or a 0.1 percent decrease, and the way how the US dollar is trading to the upside infers that the EUR/USD pair might test a support at the 1.1300 handle in the next few hours or days.
The GBP/USD pair continues trading on the back foot this morning, at 1.3121, a 0.44 percent decrease. UK Attorney General, Geoffrey Cox and Brexit Secretary, Stephen Barclay are due to resume negotiations with an EU delegation to trying to find a breakthrough with regards to the contentious Irish backstop situation. Brexiteers in the UK are ideally looking for legally binding changes to the text or a supplementary annex added to allay fears that we could be tied into a customs union with the EU indefinitely. However, a change in the guidance issued by the Attorney General confirming the backstop is temporary may be enough to win them over even if there isn’t a change to the text. If Cox can assure Prime Minister Theresa May and MPs that the backstop will not last indefinitely, then we could see May’s plan passed when it is scheduled to be voted on next Tuesday in parliament. The Markit/CIPS UK Services PMI came in at 51.3 when the expected number was at 50, and the Markit/CIPS UK Composite PMI for February came in at 51.5 when the expected number was at 50.1. The British Pound initially bounced after this data, but it has erased all gains since then.
The Reserve Bank of Australia kept interest rates on hold again overnight maintaining the 1.5 percent seen since August 2016. Some Australian banks expect rates to be cut later in the year to counter falling house prices being seen in Melbourne and Sydney. However, RBA Governor Philip Lowe currently considers this drop to be more of an “adjustment” after rapid rises seen over the past few years. There is more top tier data due tonight with 2018 Q4 growth figures being published and with an uptick of 0.5 percent from the previous quarter eyed. The AUD/USD continues to weaken this morning, and it is trading at 0.7075, a 0.24 percent lower. Technically speaking, the AUD/USD might test 0.7050 in the following few hours or days.
The Kiwi dollar is lower this morning with the NZD/USD pair dropping below the 0.6800 handle as a slight risk-off mood hit Asian markets overnight. It is likely China’s decision to lower its GDP target this year to 6-6.5 percent was the main reason for a sell-off in Asian markets, which pulled the Kiwi down with it. The NZD/USD pair trades at 0.6793 this morning, down 0.36 percent.
- USD/CAD: 1.3300 - 1.3404 ▲
- EUR/USD: 1.1300 - 1.1345 ▼
- GBP/USD: 1.3093 - 1.3165 ▼
- AUD/USD: 0.7050 - 0.7150 ▼
- NZD/USD: 0.6750 - 0.6812 ▲