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Kiwi consolidates as global markets retreat to safe harbour

By OFX

The New Zealand Dollar continues to consolidate in the general risk-off environment over the past 24 hours. Initially the Kiwi dipped to a fresh low of 0.6548 but otherwise held its ground as emerging markets broadly softened and market conditions favoured the strengthening Greenback. Opening this morning at 0.6563, the NZD looks to be stuck in a number of geopolitical cross-currents.

The main story of the day was again emerging markets, the main contributor to the collapse in risk sentiment. The Turkish Lira again dominated headlines with their surprising appreciation against a rampant USD. The Lira strengthened by about 5% after Qatar committed to a $15b direct investment package for Turkey. Regulators in Turkey also highlighted further limits on FX swaps which helped ease concerns for the Lira. Despite the positive step forward, the rhetoric stepped up a notch with President Erdogan announcing tariffs on a variety of US goods. Despite the appreciation in the Lira, emerging markets continued their broad sell-off, pointing to other under-lying issues with the sector.

Commodity prices also found little support in this market, with Copper in particular falling another 4% to post a 20% drop from its recent peak in June. Adding fuel to the fire was a 2-3% drop in oil prices and further weakening in the Chinese Yuan.

Overall, the New Zealand Dollar was caught in the cross-winds as broad weakness in emerging markets, falling commodity prices, US monetary Policy, Chinese growth and trade wars all begin to take its toll. As a currency that benefits from risk-taking, this environment does not help the Kiwi’s fortunes. The New Zealand Dollar now looks to hold its ground with attentions firmly affixed to off-shore events.

The Australian dollar edged marginally higher through trade on Wednesday pushing back through key supports at 0.7230. With broader direction driven by fluctuations in risk sentiment following the Turkish lira’s collapse the AUD came under increased pressure following a lackluster quarterly wage growth print. Wages grew at a moderate pace through the 2nd quarter but failed to excite investors or prompt any amendment to expectations for RBA monetary policy change, further exacerbating the burgeoning yield gap between the RBA and FOMC. The mediocre print forced the AUD toward intraday lows at 0.7203, opening the door for a consolidated break below 0.72.

While the immediate panic following the Lira collapse on Monday has subsided somewhat the AUD outlook through the short term remains bearish. Ongoing trade hostilities threaten global growth, iron ore prices face mounting pressures and the gap between US and Australian interest rates appears likely to only widen through the coming 6-12 months. Having gapped lower we now appear to have entered a new trading band with little upside momentum on hand to drive the AUD back toward 0.74/0.75.

Attentions remain squarely fixed on broader risk sentiment while US retails sales offer some macroeconomic direction as we near the end of another week.

The Great British Pound is weaker this morning when valued against its US counterpart. The Pound Sterling fell to a fresh yearly low of 1.2661 against the greenback. Fears of a no-deal Brexit keep undermining Pound's demand.

On the data front yesterday we saw July inflation figures, with yearly Consumer Price Index (CPI) up 2.5%, as expected, after holding steady at 2.4% in the previous three months. U.K. inflation accelerated for the first in eight months in July, boosted by the cost of auto fuel, transport tickets, computer games and food. Retail Prices Index (RPI) also for the month of July fell to 3.2% from the previous 3.4%. Today we will see the release of July Retail Sales this Thursday, expected to post a 0.2% monthly advance after falling by 0.5% in June.

From a technical perspective, the GBP/USD pair is currently trading at 1.2696. We continue to expect support to hold on moves approaching 1.2665 while now any upward push will likely meet resistance around 1.2735.

The US Dollar index continued its momentum as a sell off in commodity based currencies in emerging markets fueled the DXY run up to higher highs overnight of 96.96. The major slide in Metals saw movements back into safe haven assets in a general risk off tone. US Dollar initial moves higher were supported by a strong reading in United States retail sales for the month of July with the suggestion that the economy is more robust than expected. A rise of 0.5% was the best performance in Q2 in four years as the growth story continues and is supportive of future interest rises this year by the Federal Reserve.

The EUR/USD cross continues to see yearly lows as 1.13 was tested overnight before rebounding overnight to 1.1345 following a rally back in the Turkish lira, A 6% swing was seen higher for the Lira following the announcement of Qatar pledging a $15bn investment in the Turkish economy.

On the Agenda today of importance is the Philly Fed Manufacturing Index and Building permits in the United States as we expect markets to continue to see heightened volatility on current emerging market risk with the Volatility Index spiking to its highest level since June.

The Euro opens this morning largely unchanged against the US dollar despite touching its lowest levels since July 2017. Touching lows of 1.1301 in the London session before rebounding 50 pips early in US trade, EUR/USD then stabilised around the 1.355 handle. The bounce was largely attributable to a mild correction in the greenback and a further rebound in the Turkish Lira. The rise in the TRY did little to stem the broad-based losses in European and US equity markets with commodity prices and emerging market currencies also being sold off.

The remainder of the week presents a light calendar for the Euro, with no macroeconomic datasets due out of the eurozone, traders will continue to take their cues from offshore releases and risk sentiment out of emerging markets. With Risk sentiment front of mind, EUR/CHF and EUR/JPY will continue to serve as an indicator of EUR direction more broadly. Given the overnight price action, EUR/USD topside resistance can now be seen at 1.365 with 1.3000 a key level of downside support.

The Canadian Dollar fell through trade on Wednesday pushing back below 0.76 to touch intraday lows at 0.7587. Despite a broader consolidation across G10 currencies following a pledge from Turkey’s central bank to underpin the Lira the CAD gave up gains hard won on Tuesday and extended the downward depreciation that started in the immediate risk based sell off.

The Canadian dollar moved lower as investors looked to square positions on narrowing expectations to BoC will raise rates again in 20178. Despite strong gains across employment data last week, the run on effect to wage growth and inflation remains subdued as household earnings narrowed and inflation expectations held steady ahead of Friday’s CPI print. Signs of lackluster price pressures suggest the BoC will maintain its current monetary policy stance when it next meets in September leaving little doubt the US will extend a yield advantage.

Attentions remain squarely fixed on Friday’s CPI print.