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Loonie Falls as Risk Appetite Wanes.

Jeffrey Scott

The Canadian Dollar slipped back below 0.77 through trade on Thursday despite ongoing and increasing optimism surrounding NAFTA negotiations. Talks between the US and Canada are reportedly progressing quickly, and there is still an open possibility an in-principal agreement will be found before the US imposed deadline this week.

Despite upbeat trade expectations the CAD moved sharply lower after the month on month GDP growth stalled, printing below expectations and reducing the likelihood the Bank of Canada will raise rates again before years end. Consolidating moves below 0.7750 the loonie edged below 0.77 to touch 0.7692 as broader risk-off sentiment forced a shift toward haven assets, driving the USD higher.

On the economic docket to close the week we have Producer Price Index figures and Raw Material Prices out this morning, market participants have factored in a slight uptick for each. After the data investors, attention will remain squarely focused on ongoing trade discussions.

The United States Dollar finds itself in positive territory for the first time this week as President Trump outlined another escalation over the trade war with China. The US Dollar Index opens this morning at 94.80, a marginal increase of 0.18% across a basket of currencies.

It was an otherwise slow day on the economic calendar, the US Core PCE Deflator for July came in at 2% y/y as widely expected, barely registering with investors. The massive hitting impact came from its usual source this year with President Trump announcing that the next round of US tariffs on China will be proceeding unimpeded. Markets reacted as expected with emerging market currencies depreciating significantly on the news. Safe-haven currencies such as the Swiss Franc, Japanese Yen and US Dollar all appreciated against their counterparts, highlighting market concerns over the trade spat. Adding to the worries was Argentina, with President Macri’s surprise request to the IMF to speed up its release of their $50bn bailout package. In what is an alarming development, Argentina’s 60% interest rates have failed to stem the depreciation, exacerbating concerns on emerging markets and supporting the US Dollar.

The Greenback now turns its attention to the economic calendar, with Michigan Consumer Sentiment and Expectations. Baker Hughes Oil Rig Count is reported in the early afternoon count is expected to remain unchanged at 860. The focus of market participants is squarely placed on the headlines on global trade.

The Euro held above the 1.17 handle during the Asian session on Thursday however, as the European markets opened the pair was unable to hold on and saw a steady decline down to 1.6417 vs. the U.S Dollar. The catalyst behind the move was a drop in EU Business and Consumer Confidence numbers, the survey reported economic confidence dropped to 111.6 in August which was worse than expected of 111.9. Confidence numbers have been declining for the past few months after topping a high of 115.3 in January. The business climate indicator also weakened from 1.30 to 1.22. Meanwhile, consumer confidence was unrevised at -1.9 but still down from the -0.5 reading in July.

Meanwhile, German unemployment numbers for August remained unchanged at 5.2%, the rate has been steady now for the past 3 months.

The pressure from the dollar could also weigh on the Euro, and the Euro will not find any favors from the situation in Italy. The cost to Italy for its latest bond auction hit a fresh four year high yesterday as investor confidence wanes around the future growth prospects in the country. As mentioned previously, Italy contributes extensively to Europe, and as the coalition government pushes the boundaries on its 2019 budget, there are concerns that debt levels will balloon.

The Great British Pound enjoyed sustained upward momentum through trade on Thursday as rhetoric from Europe and London suggests a bespoke deal can be reached. The Pound largely held onto moves above 1.30 briefly edging lower as broader risk-off sentiment drove the USD higher.

Sterling touched one-week highs against the Euro forcing the 19-nation single currency back below 0.90 pence as markets garnered fresh hopes a “no-deal” Brexit will be avoided following comments from top Negotiators. The comments have added to recent GBP volatility making it increasingly expensive for sterling bears to hold short positions with the more aggressive shorts unwound helping to consolidate the current upturn. That said, despite the shift in rhetoric this week a final Brexit deal is still some way off, and the spectra of a no deal divorce continues to cap upside moves.

Attention today remain with ongoing Brexit developments.

The Australian Dollar finds itself below the 0.73 handle again after another horrendous day backed by trade war concerns. Opening this morning at 0.7226, the Aussie was also unsupported by domestic news with Westpac’s mortgage rate hike, weaker Capex and falling building approvals all conspiring to add to the selloff.

Starting at home, Private Capital Expenditures posted a nasty decline of 2.5% against an expected increase of 0.6%, implying slowing business investment in Australia. Rounding out a rough day for the Australian economy was further declines in building approvals with a reading of -5.2% against an expected decline of -2.2%. Earlier in the week, Westpac also reported their mortgage rate increase which didn’t help concerns over the Australian economy either. The market rapidly unwound from its highs of 0.7362 earlier in the week.

Adding fuel to the fire, however, was further comments from President Trump who outlined his commitment to additional Tariffs on China. Market optimism that reconciliation was around the corner quickly evaporated as Trump put those thoughts to bed. The risk-on sentiment promptly shifted to risk-off with emerging markets and commodity currencies bearing the brunt of investor concern. The Australian Dollar now limps to the close of the week with little on the economic calendar to digest. All eyes will be fixed on the Headlines for direction moving into September.

The New Zealand Dollar fell sharply through trade on Thursday, loosing almost 100 points and closing the day’s worst performer. ANZ’s business confidence report showed corporate assuredness had collapsed to levels not seen since the 2008 financial crisis, which in turn fostered a decline in investment and employment intentions casting a cloud over near-term growth expectations. The poor print comes on the back of Dovish RBNZ currency prompting markets to increase expectations the monetary policy committee will cut the OCR within the next 12 months.

Plunging through 0.67 and 0.6650, losses were compounded by a broader market-wide risk-off tone. Weakness across emerging markets, led by Argentina’s request to bring forward the release of specific bailout funding, prompting a further run on other emerging market assets and broader flight to safety. The move toward haven assets saw the NZD touch intraday lows at 0.6635, and with little of note on the macroeconomic docket, Friday attentions and direction remain influenced by ongoing fluctuations in risk appetite.