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Commodity currencies suffer as US-Asia trade relations take a different turn

By Alex Edwards

The pound showed some early signs of a recovery yesterday on the back of – you’ve guessed it – Brexit related news. After the government was defeated on three fronts in the Commons on Tuesday, one such defeat meaning that MPs will be able to exert more influence by voting on what they want the government to do, some are theorising this could work in May’s favour; if her deal is rejected and amended, it could deliver a softer Brexit, meaning some Brexiteers may feel the PM’s deal is better.

Then, UK Services PMI printed weaker than expected at 9:30am on Wednesday, which put GBP/USD on the back foot, again. The index came in at 50.4 vs. expectations for 52.5. The dollar also made broad and mild gains yesterday, despite a lack of economic data, and by the end of the day yesterday GBP/USD was trading closer to the 1.27 big figure than it was the 1.28 figure.

It was President George H.W. Bush’s funeral yesterday and with US stock markets closed, US data scheduled for release that day was moved to today, so it’s set up for a potentially busy and volatile day today with US ADP Non-Farm Employment Change, ISM Non-Manufacturing and a speech by Fed Chair Powell all due.

It was a quiet day on the U.S. dollar front as stock markets were closed to pay their respects to the late President George H.W.Bush. The Dollar Index (DXY) remained flat trading in a tight range after reaching an intraday high of 97.20.

The latest Beige Book Report - a summary of commentary on the current economic conditions by the Federal Reserve District – was released yesterday. It showed that most districts saw modest to moderate growth over the last two months as consumer spending held steady despite a tightening in labour market conditions.

Markets look to ADP non-farm employment figures - a forerunner to tomorrow’s Non-Farm Payrolls, and a speech by Fed Chair Powell.

EUR/USD finished Wednesday little changed. EU final Markit Composite PMI for the month of November came in at 52.7 yesterday, better than the initial estimate of 52.4, but below October's reading of 53.1. EU Retail Sales were also released, increasing by 0.3% for the month October, beating expectations, although the yearly reading fell short of the market's forecast.

There are no scheduled data releases from Europe today, so all eyes will be focused on US data releases and risk events, as well as the usual Brexit headlines.

New outlets reported overnight that the Chief Financial Officer of the Chinese telecoms gian Huawei has been arrested in Canada and is now facing extradition to the US. The company is being investigated over possible violations of sanctions against Iran. Anyway, the markets didn’t react too well to the news, given the rising trade tensions between the US and China of late, and Asian stocks were sold heavily overnight. The AUD was also sold too, given its close trade association with China, and after trading close to .7300 this time yesterday, opens near to the .72 figure this morning.

Australian economic data released overnight, by way of Retail Sales and Trade Balance didn’t do the local unit too many favours either, with the former printed in line with market expectations at 0.3% and the latter under expectations.

The Canadian dollar plummeted to a 1 week low yesterday following the Bank of Canada announcement to leave its benchmark interest rate unchanged at 1.75%, as expected. The statement said that low prices for oil and cutbacks in crude oil production could affect the pace of future rate increases and poses potential risks to global trade.

The central bank will release its statistics on Trade Balance today; the difference in value between imported and exported goods during the reported month, while traders will also be keeping a close eye on data releases from across the border.

The NZD lost ground overnight, for a lot of the same reasons that the AUD did – see above. There were no local data releases overnight, and so traders’ attentions will likely remain affixed on the developing US-China story and US data and risk events due later today.