US Sanctions on Iran Go into Effect Today
Tuesday 7 August, 2018
Daily Currency UpdateThe Greenback has appreciated modestly overnight to its highest level since July 19, the index (DXY) rose from 95.23 up to 95.52 on the back of on-going tensions between the United States and China. China has lashed out and said it would impose duties of 25%, 20%, 10% and 5% on U.S products worth more than $60bn that is if Trump was to follow through with further threats on Chinese imported goods.
The greenback had a strong start to the week with EUR/USD dropping below 1.1550 for the first time since late June. The dollar benefitted from ongoing concerns re-trade tensions throughout the day however after a sell-off through the Asian session, equity markets pared their losses, and most bourses are trading in the green this morning. The big geopolitical event yesterday was the re-introduction of US sanctions against Iran which came into effect overnight. The penalties include the Iranian government’s purchase of US bank notes and dollar related transactions as well as targeting the investments of precious metals and commercial planes amongst other measures to target Iranian industry. Further sanctions targeting Iran’s oil sector are due to come into effect in November. We are likely to see a deterioration of relations akin to the tit for tat insults that US President, Donald Trump and North Korean Leader, Kim Jong-un traded throughout last year. However, Trump has stated he would be willing to meet with the Iranian leader, Hassan Rounhani for face to face discussions. Many will be hoping a Trump/Kim Singapore-style summit will resolve matters at some point in the future however this seems lightyears off at present.
Key MoversThe Canadian Dollar moved to the lower end of recent ranges but failed to excite with any broad-based shifts through trade on Monday. In the absence of headline, data sets the Loonie edged downward touching intraday lows at 0.7669 as US-China Trade tensions continue to simmer adding support to traditional haven plays and bolstering the Greenback.
China’s proposition of retaliatory tariffs on $60bn of US exports helped fuel demand for the world base currency as, much to the ire of President Trump, many analysts see duties as dollar positive. The ongoing threat to trade continues to weigh on the Canadian dollar as amended NAFTA agreements remain unsigned. While reasonably well supported on moves approaching 0.76 US cents the Canadian dollar remains open to a significant downward correction should NAFTA breakdown.
The aforementioned of more US sanctions due for November targeting Iranian oil sales are likely to act as a support for WTI crude oil prices which should in theory support CAD as we near Christmas however overall risk aversion may nullify these gains. We will find out later in the year. Friday’s employment numbers are the only major event on this week’s schedule from Statistics Canada. USD/CAD trades at 1.2985.
The Euro edged marginally lower through trade on Monday slipping through 1.1550 to touch intraday lows at 1.1530 against the greenback. In the absence of headline macroeconomic data politics dominated direction as rumors suggest the likelihood of a no deal Brexit looms larger, while US-China Trade tensions continue to simmer and bolster the worlds base currency.
Suggestions the UK may be forced to leave the European Union without a firm trading agreement forced the Euro to a five-week low and opened the door for a possible test of supports at 1.15. That said the 19-nation combined unit is reasonable well bid on moves toward 1.15 and we suspect a new catalyst or spark will be required to force a break below this handle. We remain of the view that while short-term pressures have created an immediate bearish downtrend the medium and longer-term forecast remains bullish, however, caveat this with the possibility of softness should the ECB push back its monetary policy tightening timeline.
With just middle-level data on hand, today attentions remain squarely directed to ongoing Brexit developments as the primary source of broader direction.
Monday saw the pound plunge to 11-week lows against the greenback as growing concerns surrounding Britain’s planned exit to leave the Euro Zone continue to build. The Sterling weakness was further exacerbated while the USD was boosted by US-China trade war rhetoric, China has proposed retaliatory tariffs on US goods to the tune of $60 billion.
Cementing its status as the worst performing currency over the last month when valued against the greenback, falling 2.5% against the dollar and 1% against the Euro respectively. Yesterday’s fall can be attributed to comments made by UK trade Secretary Liam fox which served as a warning that there was a “60-40 chance” the UK would exit the European Union in March with no agreement.
The GBP/USD pair rebounded off lows of 1.2917 to reach levels of 1.2940 representing a 0.5% intraday depreciation. With nothing of note regarding data releases early this week, traders will be looking towards Fridays Q2 GDP release which will serve as an important marker for the state of the domestic economy with a strong read likely to be interpreted as supportive of BoE’s decision to raise interest rates last week.
Monday was a benign day with little market action to drive momentum for the Aussie with pundits mainly taking a ‘wait and see’ approach. The tight trading range reflected this as Traders looked forward to Tuesday’s rate statement from the RBA as a catalyst. The Reserve Bank of Australia left rates unchanged overnight which was widely expected by the markets. The accompanying statement was perceived to be a touch dovish; however, the Aussie was relatively unmoved. It’s likely to be deep into 2019 before we see any action from the RBA as trade tensions continue and inflation remains under target.
Otherwise, it remains a rather lifeless economic calendar for Australian traders with few risk events on the horizon. The Market will continue to monitor the headlines for on-going geopolitical trade tensions and the RBA statement for direction.
The New Zealand Dollar dipped intraday yesterday against its US counterpart following the release of second-quarter unemployment data. The jobless rate rose to 4.5% which beat expectations of 4.4%. Meanwhile, private sector wage inflation rose 0.6% in the quarter for a 2.1% annual increase which was in line with expectations. The NZD/USD moved from 0.6819 down to 0.6803 following the report and then dragged lower offshore to touch an eventual low 0.6781. Markets are expecting the RBNZ to increase rates in late November, all speculation at this stage as it is dependent still on the economy retaining momentum to push inflation higher.
Looking ahead, as tensions once again flare between the US and China with news of US Treasury's Lighthizer is to consider increasing the tariff rate on $200 billion of Chinese goods to 25 percent from 10 percent the Kiwi could come under selling pressure in a risk-off environment. There is no economic data out locally, markets will turn to the UK where the Bank of England is expected to raise interest rates.
- USD/CAD: 1.2945 - 1.3030 ▼
- EUR/USD: 1.1527 - 1.1627 ▼
- GBP/USD: 1.2937 - 1.2987 ▼
- AUD/USD: 0.7382 - 0.7440 ▲
- NZD/USD: 0.6749 - 0.6798 ▼