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Kiwi driven higher into close as US-China trade tensions ease

By OFX

The New Zealand Dollar finished off the week higher and gained nearly 1% from its weekly open as commodity currencies rallied on Friday as risk on trades returned. Opening at 0.6580, the Kiwi was in a buoyant mood following the release of an increase in PPI Input & Output for the 2nd quarter of the year. Inputs rose 1% versus the previous quarter reading of 0.6%, mainly due to the increase in crude oil and milk powder.

Intraday moves tested resistance at 66 US cents before pushing through this barrier in the offshore session as a bout of US dollar weakness took hold in the markets. Eventual highs were seen at the close at 0.6630 as trade negotiations re-surfaced between the United States and China, giving some hope to emerging markets.

On the economic docket domestically this week is the release of Retail sales and Trade Balance figures as the Kiwi opens higher this morning at 0.6640 against the US Dollar.

After spending the week below the 73c handle and touching an eighteen-month low of 0.7214 against the U.S Dollar, the local unit staged a recovery during the North American session and managed to close the week at 0.7314. The move was mostly linked to a broad-based USD sell-off and a rebound in base metals. Copper, iron ore and oil all rose as well as seeing a pull-back in the U.S Dollar index, the DXY closed the session at 96.13, 0.48% lower.

On another note, the RBA Governor Philip Lowe spoke before the House of Representatives delivering his half-yearly testimony, its seems both he and the RBA remained upbeat on economic growth prospects, and have indicated that the board was unlikely to raise rates for a while, but ruled out a rate cut. From a monetary policy perspective, the testimony offers little in terms of new information, and continues to flag an unchanged outlook for the RBA for some time. On the exchange rate, Governor Lowe noted that a lower AUD will be "helpful".

Looking ahead, there are no economic data releases locally today, tomorrow however the RBA is due to releases its monthly minutes.

On a technical front we have support sitting at 0.7270 and 0.7230, with resistance up at 0.7340 and 0.7380.

The Great British Pound closed higher Friday, bouncing of mid-week lows at 1.2662 and edging back through 1.27 following a string of largely positive macroeconomic indicators. Thursdays upbeat retail sales print fostered an improvement in broader investor confidence and short-term expectations the British economy is transitioning away from a sluggish start to 2018.

The momentum carried through trade on Friday as the USD dollar fell across the board. However, despite upside gains and a bounce off 14 month lows the correction wasn’t enough to drive Sterling out of a sixth consecutive weekly depreciation. Brexit continues to hang over broader sentiment and remains a risk to medium term GBP valuations, especially as we move ever closer to a no deal Brexit. With little headline macroeconomic data on hand to drive direction into the end of the month attentions again turn to Brexit developments ahead of renewed round of talks next month.

The nearer we move to a Cliff-edged exit scenario the greater the concern across broader markets and with implied volatility increasing over the last fortnight we can expect ongoing uncertainty and downside pressures for the GBP through the coming weeks.

The US Dollar fell across the board on Friday as commodity currencies lead upside movers. The greenback closed the day’s worst performer following an uptick in optimism surrounding US-China trade tensions ahead of talks later this week. Rumours US and Chinese delegates are mapping out plans to end trade hostilities helped fuel demand for commodity led currencies like the CAD, AUD and NZD while fueling the rebound in emerging markets.

Despite the Dollar Index falling six tenths of a percent through trade on Friday and reversing some of the weeks earlier gains the shift in trade-based sentiment is merely a short term correction for now. A consolidated solution to recent trade hostilities needs to be found before a significant shift in underlying momentum undoes broad based US strength.

Attentions now turn to US China Trade talks on Tuesday and Wednesday while Central bank communication is again in focus as the Fed and FOMC offer the minutes from the August meeting ahead of next months key rate announcement.

The Euro enjoyed a week of mixed fortunes with an out and out resolution to the Turkey issue still in the works. Nevertheless, the Fibre did manage to post a small weekly gain despite bottoming out at 1.13 during the week. Opening this morning at 1.1438, the Euro looks to have reversed a three-week losing streak although demand for the Euro remains subdued.

The appreciation of the Fiber looks to have been driven by off-shore forces rather than inherent demand for the Euro with the USD falling across the board. The catalyst in this case is further trade talks between the US and China which saw risk-sentiment turn positive. Rumours suggest that they are planning a roadmap to put an end to the dispute by November, a decidedly positive outcome according to market pundits. Turkey, however, continues to look problematic for the Europeans although the rhetoric around a contagion effect has been dialled lower. Markets have mostly come to accept that any spill-over effects will be limited in scope.

There were some further encouraging signs for the Euro however, that did aid in its recovery during the week. Q2 GDP came in better than expected at 0.4% with German GDP in particular posting an 0.5% growth. Inflation however, continues to be a problem with the figure dropping by 0.3% for the union. Overall the releases had minimal effect on the valuation of the Fibre but nevertheless painted a picture for investors.

Moving forward into the new week, attentions now turn to some minor macro-economic releases from Germany and developing headlines in the US.

The Loonie was a bit of a mixed bag last week as weakness in commodity prices and risk sentiment more broadly continued to weigh on the commodity linked currency. Friday’s July inflation read ensured the softness was short lived as the Canadian Dollar surged 0.8% against the greenback to touch intraday highs of 1.3168. The 3% read represents a 7-year high and came in significantly above market expectations of 2.5% and increases the likelihood the Bank of Canada will raise benchmark interest rates again this year, causing the CAD to appreciate.

This week sees Canadian Retail sales for June released on Wednesday as well as commentary from BoC Governor Poloz speaking on Sunday. In light of the stronger than expected CPI number on Friday, markets will be watching the commentary closely for any indication of timings of future interest rate decisions.

On the technical front, first support can now be seen at 1.3000 and on the upside, resistances are aligned at 1.3135 and 1.3190 respectively as risk sentiment out of emerging markets and commodity prices expected to continue to drive direction.