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USD Tests 2018 High As Volatility Intensifies In Run Up To Month And Quarter End.

By Alex Edwards

GBP/USD has fallen gradually through the last 24 hours and is now trading at new lows for the year. It’s come as a result of a much stronger dollar. In fact, it was the strongest of the major currencies yesterday, supported in part by the continued worries over trade, evidenced by the performance of US stocks early on in the New York session yesterday.

BoE Governor Carney spoke yesterday too, and although he didn’t really touch on monetary policy, he instead spoke about how global risks had increased and how the banks’ capital had risen in order to withstand any negative Brexit related impacts to the economy.

It can’t be a great sign that despite the MPC votes last week, showing that one other committee member had joined two other dissenters in voting for a rate hike at the last meeting, that GBP/USD is trading at lows for the year so far. It suggests it might not be long before cable falls below the big 1.30 figure. If UK data disappoints between now and August and should the dollar continue its momentum higher, then a break could come sooner rather than later.

The dollar has been on a tear higher against most major currencies over the last day or so. The USD index has touched on a new year-to-date high as US/China traded tensions continue to rumble on. US data was released yesterday and was a bit mixed; durable goods data printed stronger than expected at -0.6% vs. -0.9% (still negative though) but the core headline which excludes transport items, printed weaker than expected at -0.3% vs 0.5%. In any case, the data was largely ignored as investors took flight to safety; stocks and emerging markets were sold heavily, which in turn benefited the greenback.

In other news from overnight the People’s Bank of China devalued the Chinese Yuan, again. The reference rate was set at its highest level since December and has only added fuel to the trade war fire. This event looks set to support increased dollar bids, at least in the run up to the end of the week. With month end, quarter end, and half year approaching we’re also likely to see some portfolio rebalancing and “squaring up” of books and currency positions – it could make for some heightened volatility over the next two days.

EUR/USD, like most other currencies vs. the dollar has fallen over the last few trading sessions. It look set to break down through the 1.15 level at one point but has recovered early this morning, perhaps in reaction to Angela Merkel’s comments at the beginning of the EU Summit in Brussels, albeit she focused on immigration saying that Europe’s fate may be determined by the issue of migration. German CPI has been released in the last few minutes too and whilst there is more inflation data due from Europe later on today, these latest figures have disappointed.

In other news The ECB has just released its quarterly economic bulletin and reiterated the points made by Draghi in his monetary policy presser earlier this month, including the point that EU economic expansion is broad-based. This may also be lending some support to the single currency this morning and may have helped it bounce off of 1.1525.

Much of todays (or the next few days) focus will be on the EU Summit. It’s also worth watching out for further US/China trade warring and quarter-end volatility, with half an eye on more European inflation numbers due for release today.

AUD/USD is lower again, driven down by a strengthening greenback. Like GBP/USD it’s now trading at a new 2018 low. There was no local data to go on overnight but AUD/USD did at least receive some support via the means of a well bid AUD/NZD pair - the kiwi was sold heavily post RBNZ announcement.

The commodity currencies look set to come under further selling pressure should the US/China trade war of words (and action) intensify. There isn’t much by way of Australian economic data due for release between now and the end of the week and so any moves will likely be driven by USD strength/weakness.

The Canadian dollar gapped lower vs. the dollar yesterday evening as Bank of Canada Governor Poloz spoke. He didn’t give too much away and was very coy on the potential for a rate hike in July. He said “I read the odds of an interest rate hike the same way I think you do by looking to see what’s going on in the market.”

The loonie recovered later on in the New York session as Poloz’ comments turned a little more positive. Markets perhaps also took a chance to fully digest what he had to say.

As expected, the RBNZ left interest rates on hold overnight. However, the accompanying statement was more dovish than market participants were expecting and the kiwi was sold, heavily. The central bank pointed to increased risks from the global economy and also said that “the recent weaker GDP outturn implies marginally more spare capacity in the economy than we anticipated.” Some NZ banks are now predicting the next move by the RBNZ will be a cut, but either way, any move seems some time off.