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US-China trade news

By OFX

The Loonie was the second-best performer among major currencies after the British Pound. The USD/CAD fell 120 pips in the last week. BoC Governor Stephen Poloz defended the five rate increases since mid-2017 and cited two reasons why they have been on hold since October last year: The impact of higher rates on indebted consumers; and, risks to the investment outlook. Poloz still mentioned policy rates should move up into a neutral range but timing is “highly uncertain” due to the lingering questions around housing and investments. The next rate decision is on March 6th.

Minutes to the FED’s meeting last Wednesday revealed a discussion about the slow-inflation conundrum and concerns over weakening inflation expectations; a University of Michigan recent survey showed households expected the lowest inflation in half a century over the coming five years. The persistent shortfalls relative to their 2% target led FED officials to shelve their rate hiking plans for 2019, at least for now.

Trump suggested on Friday there was a “very good chance” the US and China would strike a deal. On Monday morning he twitted he will be “delaying the US increase in tariffs scheduled for March 1” and that assuming additional progress was made, they will be planning a Summit with President Xi. Equity futures and currencies like the AUD, NZD, CAD, EUR and GBP are all opening the week stronger versus the USD.

The market will be paying close attention to data prints coming out of the US this week. Data as of a late has been mixed, with strong labour data and mixed housing and capital investment data. Releases this week including GDP, Retail sales and Housing starts should allow markets, and the FED, to form a more complete idea surrounding the US outlook.

Business Confidence in Germany slid in February to its lowest level since December 2014, the latest sign of weakness in the Eurozone’s largest economy. On the EU, the Manufacturers Purchasing Index hit its lowest level in six years and suggests output is now contracting for the first time since 2013. The ECB minutes were consistent with the data, signalling disappointing growth, and investors are now speculating about further monetary policy support.

GBP ended the week higher but still below the $1.30 psychological handle as another week of Brexit uncertainty began to wind up. The pound had rallied midweek on hopes the UK PM Theresa May might seek material changes to her Brexit deal with the EU, but investor confidence appeared to wane with a lack of concrete developments.

If Britain leaves the EU without a deal next month, Europe’s Brexit negotiators will not end talks but reset their clocks to a new cliff-edge date: April 18th. According to the European Commission, by this date Britain must confirm whether to make about €7bn worth of net contributions to the EU’s budget for 2019. The choices made in the space of a few weeks may determine whether a no-deal Brexit becomes a hostile divorce or a more managed break that keeps a path to reconciliation open.

The AUD posted a 2-week high following a positive job figure on Thursday, spiking from 0.7150 to above 0.72, but a blow of negative announcements within hours of each other saw the AUDUSD breaking back below 0.7080. Customs at China’s northern Dalian port banned/delayed imports of Australian coal and Westpac changed its RBA call for 2019 to two 25bp rate cuts. The AUD was able to recover the lost ground on Friday though, trading back around 0.7150 in line with an uplifted Global risk sentiment.

The AUD, out of any of its G10 peers, has the most cuts priced in for this year, with chances of a cut standing at 86%. The RBA recently revised down its growth forecasts for 2019 and 2020 but the AUD seems supported in the short term as risk sentiment improves in line with Global Markets. The AUDNZD could be a good thermometer to keep an eye on, it broke below 1.04 following NZ’s strong retail data on Monday morning but then turned around and is now trading at 1.0420 following Trump’s tweet. The pair was trading around 1.10 back in September 2018.

Last Friday NZD found itself being dragged lower as the day went on, markets shifted their focus on the US-China trade talks and with China being one of the largest NZ customers the pair felt the pressure. Things didn’t change much offshore with the Greenback shrugging off a slew of negative U.S data pointing to signs of slowing growth in the underlying economy. The NZD/USD pair fell just below 0.68 and further risk to the downside can be expected.