Negative sentiment in global markets consolidates US dollar gains
Thursday 1 January, 1970
Daily Currency UpdateThe US dollar had a mixed week as market participants re-evaluated the effects of the Fed’s dovish monetary policy. There are stronger winds of a likely recession in the US, following the inversion of the yield curve (one of the most trustworthy indicators) last Friday. The inversion is explained by the 10-year Treasury bond yield being lower than the 3-month government paper yield. This happened in contrast to Fed Chairman Powell’s statement that he still sees robust economic fundamentals in the US. There are no rate hike expectations in the US, and there are expectations of interest rate cuts, following some indications of slower economic growth and muted inflation. For today, a “risk off” environment remains the catalyst for FX markets, especially for the US dollar. President Trump can stop worrying because Special Counsel Robert Mueller’s 22-month inquiry found that there was no collusion with Russia during the 2016 campaign, and insufficient evidence to find that President Trump obstructed justice. The US dollar increase last Friday was helped by weak manufacturing numbers in the Eurozone. For instance, German manufacturing collapsed and the regional composite PMI slipped to 51.3 in March from 51.9. This morning, the US dollar index is trading without any change since last Friday.
Key MoversThe Loonie continued falling last Friday and the USD/CAD pair increased almost 0.5 percent (weaker Loonie). Risk aversion captured the entire Friday trading session, but it got worse when retail sales numbers were published. Retail sales decreased for the third consecutive month according to Statistics Canada, declining 0.3 percent to CAD 50.1 billion in January. Sales were down in 4 of 11 subsectors, which represent 52 percent of retail trade. The Loonie was the biggest loser last week, decreasing 0.7 percent versus the Greenback, 0.6 percent versus the Euro, 0.4 percent versus the Pound, and 0.9 percent versus the Aussie dollar. Not long ago, last Wednesday, Canadian Finance Minister Bill Morneau said that Canada is not heading into recession. From the crude oil price standpoint, the OPEC seems to be having a terrible time assessing the outlook for demand. Furthermore, the change by the OPEC committee to delay an April meeting to June has created uncertainty and injected volatility into prices; this is creating some pressure on the Loonie. Technically speaking, the USD/CAD is finding resistance at around 1.3450 and it might have a support at 1.3380 for today’s trading session.
The Euro crashed lower on Friday following the release of Services and Manufacturing PMI. The Manufacturing PMI tumbled from 49.3 to 47.6, a 71-month low. The Services PMI fell only marginally, and the Composite Output PMI retreated more moderately from 51.9 to 51.3, implying the overall economy is doing much better than industry for now. The most significant blow was felt from the German release. The Manufacturing PMI plunged from 47.6 to 44.7, a number only seen amidst the global financial crisis in 2008-2009 and briefly in 2001. In France, both Manufacturing and Services PMIs disappointed, and both fell back below 50, though both remain above the lows reached in the past few months. This morning though, the EUR/USD is trading higher at 1.1317, a 0.15 percent increase.
Just when you think things couldn’t possibly get any worse for Brexit, we get hit with a whole heap of fresh speculation. The week ahead is shaping up to be decisive for how the UK withdrawal process will look. Since the extensions of the UK’s withdrawal, it remains incredibly unclear (or confusing) for the next steps. Prime Minister Theresa May is expected to update ministers on her Brexit strategy when she chairs a meeting of her cabinet this mornin. We will then move on to a series of possible alternatives/amendments which MPs will debate. Moving on to Tuesday, May could bring her withdrawal deal back for the so-called third meaningful vote. However, the government says it won't do that unless its sure it has enough support to win. Wednesday is when indicative votes would be held. We should wrap on Thursday when a second possible opportunity for meaningful vote three. The prime minister may hope that Brexiteers will finally decide to throw their weight behind her deal because indicative votes have shown that otherwise, the UK could be heading for the sort of softer Brexit they would hate. If the above isn’t enough to confuse and give you a headache, the weekend headlines would undoubtedly contribute. Media reports have suggested that May’s leadership is being challenged with names being placed in the hat as her possible replacement. It’s also been reported that her deal could gain more support should she announce her resignation. The British Pound has opened Monday morning up at 1.3225 or 0.16 percent.
The Australian Dollar still sits below the 0.7100 handle against the US dollar with an increase of 0.28 percent during the European session. Direction for the Aussie will come from the US-China trade talks this week with one eye firmly on the RBA rate statement next week. For this reason, we believe ranges will be relatively tight this week as we have nothing to note on the domestic docket this week.
The Kiwi is not a currency that’s on the tip of everyone’s tongues at the moment. In fact, it falls quite low down the pecking order. We had witnessed sideways trading since the Fed’s dovish statement last week but here’s hoping this week brings some welcomed news and direction. Wednesday will be the critical date for the Kiwi; the Reserve Bank of New Zealand is to announce its benchmark interest rate and publish a rate statement. No change in the rate is expected, but given the global slowdown, it would be interesting to hear how the RBNZ feel this may affect the Kiwi Dollar. The NZD/USD pair trades at 0.6897, representing a 0.33 percent increase.
- USD/CAD: 1.3395 - 1.3475 ▲
- EUR/USD: 1.1269 - 1.1350 ▲
- GBP/USD: 1.3150 - 1.3235 ▲
- AUD/USD: 0.7084 - 0.7120 ▲
- NZD/USD: 0.6860 - 0.6930 ▲