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Upswing in risk sentiment pushes Kiwi higher

By OFX

There was optimism for the New Zealand Dollar to climb back to the US 70 cent handle following a stronger open to the week at 0.6920. Unfortunately the release of retail sales for the quarter banished any chance of this as sales grew by a disappointing 0.1% and well below the last quarter of 1.4%.

As expected we saw initial movements lower following the release to low of 0.6885 at the close of domestic play. In offshore trading we saw a quick rebound as equities pushed higher on waning trade tensions, the Kiwi bouncing to 0.6950 on open this morning.

With little on the domestic data front today, investors will look towards the release of Thursdays trade balance figures, with expectations of a surplus of NZ $200m.

The Australian Dollar jumped to three-week highs through trade on Monday pushing through resistance at 0.7530 to touch 0.7587. Commodity currencies led the charge after comments from key US treasury figures suggest the Trump government will ease off on threats to impose Tariffs on China’s exports. The comments, made Sunday, helped bolster demand for equities, and risk led assets as commodities continued their multi week rally.

Having offered little throughout last week Monday’s advance saw the AUD test the top end of recent ranges and sits only marginally below key technical resistance handles at 0.7590/0.76. While buoyed by renewed risk appetite and an uptick in oil and copper prices the specter that is stagnant inflation and wage growth hang heavy over further upside moves, with extended gains expected to be hard won. Last week’s quarterly wage growth report and monthly labour market print only affirm the slack within the economy and do little to bring forward inflation and interest rate expectations. When compared with the FOMC dot plot and US treasury notes the yield differential remains firmly with the world’s base currency and we expect will ensure gains are capped at or near the 0.76 handle through the short term.

Direction today will be largely governed by broader market trends and currency flows as the domestic macroeconomic docket remains free of headline risk events and attentions turn to Wednesday’s commentary from RBA Governor Lowe for further direction.

The Cable failed to break its slow decline as it once again edged lower throughout Monday. With little on the macro-economic front to drive direction on Monday, the Pair was traded aggressively throughout the day to ultimately end lower than its open, reaching its lowest point for the year at 1.3390. Benefitting from a softening of the bullish USD however, the Sterling did post a shallow bounce during the American session, opening this morning at 1.3429.

Moving forward throughout the week, the Pound looks to the start of a fresh round of Brexit negotiations. With no solution to the Ireland border issue in sight, the Pound could continue to suffer the consequences of protracted negotiations. Domestically, the Bank of England turns its focus to their Inflation report later today and their CPI reading on Wednesday. Traders will take particular interest when taken in the context of a possible August rate hike.

With a quiet day on the release front the US dollar has retraced its gains late yesterday after recently hitting some multi-month highs. The U.S dollar index which measures the greenbacks strength against a trade weighted basket of currencies rose to a fresh five-month high of 93.94 before hitting resistance and paring back most of its gains.

Investors have been sitting on the side lines eagerly awaiting developments between the US and China. US Treasury Secretary Steven Mnuchin said that the two countries have set up a framework for addressing future trade imbalances, and have also agreed to suspend the tariff threats that led to high volatility on global markets earlier this spring. China has said to agree to buy more US goods to help narrow the trade deficit the two countries have but didn’t agree to the specific target of $200 billion.

In other news the 10-year treasury yields also retreated however still above the 3% mark. The S&P hit a high of 2739, the Dow Jones industrial average rose 1.27% and tech-heavy Nasdaq also up. Meanwhile, demand for gold appeared to be waning as the yellow metal touched new 5-month low against a rising dollar.

EURUSD was up 0.2%, closing around 1.1790, despite uncertainty around the new Italian Government proposal to issue short-term notes as part of its debt-management plans, with some traders arguing that is the first step towards a parallel currency. The pair dropped to fresh yearly lows at 1.1717 amid concerns about the potential fiscal risks that the new Italian Government will bring, but then managed to recover on the back of broad USD weakness.

From a technical perspective for the EURUSD, 1.1709 should act as near-term support, while 1.18 might be tested today on the upside as first resistance.

Commodities continued rallying on Monday on the back of renewed optimism about Global trade. Agricultural and energy commodities outperformed other asset classes, WTI crude climbed to levels not seen since 2014, providing support to the loonie.

Following comments by US representatives that the trade war is “on hold”, the risk-on tone came back to put some pressure on the USD, which dropped 0.7% against the CAD. The USDCAD dropped all the way to 1.2788, after opening the week around 1.2880, the cross was not able to hold above the initial support found around 1.28 and now is set to try and push through the low of the month, 1.2733. Resistance should be found initially around Yesterday’s opening level at 1.2880.