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AUD remains range bound while PBOC adds short term support

By OFX

The Australian Dollar edged marginally higher into last weeks close yet fell short of pushing back through the 0.74 U.S cent handle. Broader trade tensions and tightening US Labour market conditions forced the AUD toward intraday lows at 0.7359 before the Peoples Bank of China stepped in to defend further depreciations in the value of the Yuan driving both the AUD and NZD higher.

The PBOC have long claimed they are comfortable with broader currency devaluation however the extension in losses and intraday lows at 6.89 prompted intervention and committee members stepped in to defend the currency. The PBOC introduced a 20% reserve requirement on FX forwards making it difficult for speculators to bet against the unit and temporarily halting the slide. The AUD long seen as a G10 proxy for the CNY and CNH bounced on the announcement jumping back toward 0.74 to touch session highs at 0.7406 before closing marginally lower at 0.7399.

With most enjoying a bank holiday Monday attentions now turn to Tuesday’s RBA rate statement for direction through the start of the week.

The New Zealand dollar is slightly stronger against the US dollar after American jobs growth was weaker than expected. The Kiwi climbed almost half a US cent on Friday night after US non-farm payrolls showed 157,000 jobs were added in July, fewer than the 193,000 economists expected. The Kiwi dollar found some support on Friday after the People's Bank of China reintroduced a 20 percent reserve requirement for foreign exchange forwards. China is New Zealand's biggest trading partner and the heightened trade tensions have weighed on the kiwi dollar.

On the data front this week sees ANZ Commodity Prices on Monday. On Wednesday sees the release of Global Dairy Trade (GDT) which is weighted-average price of the 9 dairy products sold at auction and is a leading indicator of the nation's trade balance. However, all eyes this week will turn to Thursday’s Reserve Bank of New Zealand (RBNZ) Monetary Policy Statement which should see the official cash rate remain steady at 1.75%.

From a technical perspective, the NZD/USD pair is currently trading at 0.6742. We continue to expect support to hold on moves approaching 0.6688 while now any upward push will likely meet resistance around 0.6851.

The GBP/USD pair closed the week around the 1.3000 level representing a fourth consecutive week of depreciation against the worlds base currency. The majority of the price action can be attributed to broad based USD strength however the sterling does continue to be weighed down by the increasingly uncertain Brexit deal. We also saw the BoE raise interest rates from crisis era lows on Thursday which failed to boost the pound with the supporting commentary signalled the BoE is in no hurry to make further hikes.

Friday’s session saw the pound come under increased selling pressure after the BoE Governor Mark Carney’s comments which served to highlight the risks associated with the impending Brexit deal. With Brexit uncertainty still front of mind for traders, Carney’s comments went as far as to say that the possibility of a no deal Brexit is ‘uncomfortably high’ and that post Brexit vote economic growth has failed to meet forecasts.

Bearish sentiment was also not helped when July’s UK PMI’s was released on Friday. The number is closely watched by traders as a reliable indicator of future growth with some market commentators commenting that it raises questions over the previous days rate hike.

GBP/USD opens this morning at 1.3000 and is relatively well supported at the 1.2900 level with any upside moves expected to meet resistance around the 1.3155 handle.

The Greenback has traded in a narrow band against its six rivals, the U.S dollar index which measures the greenbacks strength against a trade weighted basket of currencies moved between 94.98 and 95.37. Employment figures out of the states were mixed, Non-Farm payroll numbers came in below consensus estimates at 157,000 vs an expected 193,000. The unemployment rate move back down to 3.9% from 4% with the participation rate holding steady at 62.9%. Wage growth matched forecast with a 0.3%. Separately, the July ISM nonmanufacturing index also missed consensus forecasts, coming in at 55.7. A reading of at least 50 indicates expansion.

Meanwhile, the People’s Bank of China announced it will require a reserve ratio of 20% on currency forwards. The increased reserve requirement will make it more expensive to bet against the currency.

Looking ahead, the economic calendar is light today, traders will be watching out for the Central bank’s meeting for further clues on interest rates.

The Euro edged lower into last weeks close consolidating moves below 1.16 as the U.S Dollar remained steady against most major counterparts. Non-Farm Payroll numbers printed marginally below expectations while broader labour market indicators hinted to tightening labour market conditions driving Greenback gains and affirming mid-week FOMC calls the US economy is running at near full employment.

Having made a brief foray back above 1.16 the Euro moved to touch intraday lows at 1.1570 as softer than expected services data further highlighted the sluggishness plaguing the broader European economy. The lackluster print only serves to exacerbate the burgeoning gap forming between the US and Europe while amplifying the divergence in monetary policy outlooks through the short term.

Despite recent short-term softness, we still see medium and longer-term upside for the 19 nation combined unit. The pace of the US advance appears to be stagnating while monetary policy upside is largely priced into the value of the worlds base currency. With strong supports forming on moves approaching 1.15 we anticipate the Euro will move back toward 1.18 – 1.20 before year end.

Attentions this week turn to again to broader trade tensions for direction as the domestic macroeconomic docket remains largely free of headline data events.

The Canadian dollar failed to break outside wider weekly ranges Friday bouncing amid short range support and resistance at 0.7680 and 0.77 U.S cents. Despite a softer than expected uptick in US employment gains the CAD failed to gather any significant upward momentum as broader labour market tightening consolidated US Federal Reserve calls the US economy is nearing full employment. The consolidation of US labour market conditions supports bets the Fed and FOMC will raise rates twice before the end of the year and we expect will continue to weigh on the Loonie through the short term.

Looking ahead broader trade tensions and ongoing NAFTA developments continue to dominate medium and longer term forecast as an agreement appears closer.

Attentions this week turn to Labour market data Friday as the main driver on the domestic docket.