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Risk Remains Off Before Central Bankers Speak In Portugal.

By Alex Edwards

“Risk off” was the theme for most of the morning yesterday in London as the US/China trade war of words reared its ugly head again. The USD strengthened and GBP/USD slipped under the 1.3200 figure to a new calendar year low. The Brexit headlines didn’t help the pound’s cause either, this after the House of Lords defeated the government on giving MPs a “meaningful vote” on any outcome from negotiations on Monday. The Commons is set to vote on whether they agree with the House of Lords today, the result of which could be very tight.

Investors will also be trading with an air of caution ahead of tomorrow’s Bank of England monetary policy meeting. There’s less fuss over this announcement, compared to last, with the central bank unlikely to change its stance too significantly and almost certainly likely to leave interest rates on hold. There’s no top tie economic data due for release from the UK today.

The trade concerns propelled the greenback against most of the major currencies yesterday, apart from the usual safe haven suspect’s including the JPY and CHF. Global equity markets lost ground too as investors shunned risk through the early part of the week and most of the day yesterday. The Dow closed down almost 1.2%, the Dax down 1.2% and the FTSE down 0.36% as President Trump threatened tariffs on an extra $200bn worth of Chinese goods.

Although markets are trading with caution, it doesn’t seem many investors are convinced by the threats, otherwise there would likely have been bigger moves in FX. However, with the day ahead being light on data, this story will likely continue to dominate currency markets. US Current Account and Existing Home Sales are due for release. Fed Chair Powell is also due to speak at a panel discussion at the ECB Forum in Portugal today.

The euro lost more than 100 points vs. the US dollar yesterday as risk sentiment waned and investors sought out safe haven assets. ECB President Draghi spoke at the ECB forum but said little to positively influence the single currency. He took a neutral stance on monetary policy when delivering opening comments for the meeting of central bankers in Portugal, saying that the ECB would be patient when it came to determining when to hike interest rates and that confidence in the path of inflation is rising.

Mario Draghi is due to speak again today and may have more of an impact this time around. The data docket is looking pretty light so unless Draghi and co. do say something surprising then the euro is likely to remain subdued through most of today’s session.

Commodity currencies were hit hardest yesterday. The Australian dollar plunged through key technical supports on marking new 13 month lows at 0.7345 as changes in RBA commentary and broader trade concerns weighed on the currency. Having broken below the 0.7430 and 0.7400 U.S cents the AUD suffered a rapid sell off as risk sentiment all but evaporated from the market following threats from U.S President Donald Trump on tariffs.

The comments sufficed to fuel and reignite concerns surrounding broader trade tensions between the world’s two largest economies, heightening fears an all-out trade war could damage global growth. When coupled with a change in language issued within the RBA’s monthly minutes wherein the board removed assertions the next interest rate adjustment would be up. The shift in RBA rhetoric suggests the RBA may be adjusting its stance to prepare markets for a possible rate cut and only highlights the burgeoning gap between central bank interest rate policies.

AUD/USD has since recovered, supported by steady bids in AUD/JPY and is making a move back towards the 74 US cent mark.

The loonie continued to trade on the back foot yesterday, losing 0.6% versus the USD with USDCAD trading all the way up to a new year high at 1.3286.

The 1.3240 level on the USDCAD acted as resistance during the start of the European session but the CAD was impacted but further trade concerns, not only from the US-China drama but also from Trump declarations around NAFTA, saying Canada treats the US “horribly” from a tariff perspective.

Uncertainty around OPEC next output debate put some downward pressure on oil, which also weighted negatively on the loonie.

A bout of risk aversion came into play during the Asian session yesterday as trade tensions between United States and China continue to play out; NZD/USD, like AUD/USD, was sold off. The latest GlobalDairyTrade auction did no favours for the kiwi as markets saw the index fall to negative 1.2% and the second consecutive fall for the month. Westpac consumer sentiment for the month was down 2.6 points for the month of June as consumer confidence waned and households’ ability to save remained low. NZ Current Account, released overnight, was a small beat but it’s largely been shrugged off by kiwi traders.