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RBA remains neutral stance, AUD touches two-week highs on US-China trade news

By OFX

Tuesday’s session saw the Australian Dollar trade within a 70-pip range as the RBA reiterated its near-term monetary policy neutrality and the greenback broadly retreated on US-China trade news. The minutes released by the RBA yesterday flagged a number of “significant uncertainties” for the domestic economy, citing china specific risks emanating from cooling domestic demand and trade tensions. Concerns over the wealth effects of house price weakness on consumption were also raised, house prices fell by the largest amount since 1983 in the three months through to January.

Unsurprisingly the Aussie fell on the release with AUD/USD retreating from 0.7139 to 0.7115 and continued its slide in the London session to touch intraday lows of 0.7106. Headlines indicating the US is demanding a stable Chinese Yuan as part of current trade negotiations forced the greenback lower across the board and allowed the Aussie to rebound and make fresh 2-week highs of 0.7174. The NZD was also buoyed by the news however the AUD/NZD cross rate still managed to grind 20 points higher to 1.0430.

Looking ahead we have the ever important Q4 wage price index released this morning. Both the RBA and investors will be closely watching the read for any indication of a pickup in wage inflation. With markets expecting a 0.6% rise in Q4, any deviation from this will likely result in AUD volatility. That said, we see technical resistance for AUD/USD at 0.7175 before the psychological 0.7200 handle. On the downside, support is evident at daily lows of 0.7106.

The New Zealand dollar advanced through trade on Tuesday, buoyed by optimism surrounding US/China trade talks and sell off in USD safe haven holdings. The Kiwi jumped through 0.6850 to touch intraday highs at 0.6886, a 70 point advance on the day and a recovery of the losses suffered through the back end of trade on Monday. Risk appetite helped fuel demand for risk correlated currencies on Tuesday as optimism surrounding trade Talks and a resolution to recent hostilities helped bolster expectations for a return to traditional trade patterns.

In the absence of headline data events this week the NZD has taken its cues from offshore flows and risk demand with broader ranges between 0.67 and 0.69 largely maintained. We expect the NZD to fluctuate toward the top and lower end of said ranges through the short term as markets respond to shifting geo-political developments and adjust positions to account for a shift in global monetary policy expectations.

With little of note on the docket today attentions turn to the US federal Reserve’s meeting minutes as a window into Fed policy.

The Great British Pound leapt upward through trade on Tuesday shooting through 1.30 on renewed hopes May and her Brexitiers will strike a compromise with the EU and avoid a messy no deal divorce. Sterling edged sideways for much of the domestic session before rallying strongly, pushing through 1.30 to touch intraday highs at 1.3073, a two-week high.

The move came in the absence of any significant headline news, instead markets clung to reports May was willing to drop the Malthouse Compromise, a sign she and her negotiators are becoming more realistic in their negotiations with EU officials. The concession lowers the likelihood of a hard Brexit in six weeks’ time. While some analyst suggest the scale of the move was overplayed and technical trigger points contributed the largest daily advance in a month the fundamentals behind the move highlight just how vulnerable sterling is to volatile moves through the short term.

Macroeconomic data sets are taking on less importance as we move closer to March 29 and until a deal is reach or article 50 is extended and the official exorcism from Europe complete the Pound will continue to ebb and flow in response to headline news events.

The greenback continued its descent overnight following dovish comments from Cleveland Federal Reserve President Loretta Mester that there might be the need for just the one rate increase later in the year. Mester supported the governments decision to remove guidance on the next moves for interest rates as the DXY shed 0.3% overnight. It was also noted that Mester expects the economy to slow with inflation to continue to sit near the Federal Reserve target of 2.0%

Opening at 96.80, the Dollar index which measures a basket of currencies against the greenback saw intraday highs of 97.09. Eventually sold off to 96.45 as low liquidity on the markets looked to be a major factor in larger swings overnight as participants return into the market from Presidents Day. Investors look towards this evening eagerly awaited FOMC minutes release which hopes to show more guideline on future interest rate decisions.

The DXY opens at 96.52 this morning and sitting square against the Japanese Yen at 110.57.

The Euro bounce continued through trade on Tuesday, extending the recovery off last weeks 3 month low and pushing back above 1.1350. Ongoing optimism surrounding fresh US-China Trade talks and hopes they will resolve recent trade tensions and help bolster an upturn in the Global growth narrative drove the combined unit higher as investors looked to unwind safe haven holdings.

Having tested key supports at 1.1240/50 last Friday the Euro has been well bid as its correlation to global risk continues, allowing investors to largely overlook softer than anticipated Italian industrial orders and a drop in European bond yields. The cloudy outlook for the European economy is weighing on investor demand and adding to downward pressure on bond returns. Markets remain cautious of extending upside moves ahead of key data sets this week and the ECB’s next policy meeting on March 7. The policy setting committee is expected to lower growth and inflation projections, extending its period for accommodative monetary policy and extinguishing hopes an end to ultra-loose monetary policy was imminent.

Direction will continue to stem from broader risk appetite trends while tomorrow service and manufacturing data sets will provide a key macroeconomic insight into the broader growth narrative. Softness across these data points will likely stimulate a move toward the lower end of recent ranges and may be the catalyst forcing a break below 3 months lows at 1.1234.

The Canadian Dollar has in the last few hours strengthened against the US Dollar after several news outlets claimed that the U.S. was pressing for a stable yuan exchange rate in trade talks with China. Despite Trump saying that talks with China were going well and suggested he was open to pushing off the deadline to complete negotiations the Greenback has taken a hit and the USD/CAD rate moved from 1.3281 down to 1.3205 and fresh 6-day low.

In the absence of any local data, the loonies strength is driven by outside influences including the price of crude oil gaining some traction as well as further dovish comments from a Fed member.

On the technical front, the price is rebounding from a daily trend support of 1.32, resistance can be seen at 1.3280