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Kiwi range bound as equity sell off fails to extend to currency markets

By OFX

The New Zealand dollar remained largely range bound through trade on Tuesday bouncing between intraday lows at 0.6535 and session highs at 0.6570. Despite ongoing pressure on equities and US treasury yields, amid a heightened risk off environment, moves within currency markets have been largely modest. Traditional haven plays are seeing traction with the JPY and CHF finding support, however the contagion and fear that has plagued stocks appears not to have spread to currencies at this point.

With little macroeconomic data on hand we expect the NZD will remain range bound, responding to newswire headlines as risk sentiment continues to evolve. While well supported on moves approaching 0.6435 we expect upside momentum to be largely muted as pressure on commodities, led by oil, and the broader risk off tone weigh on investors appetite to drive the Kiwi higher and extend on recent moves toward 0.66.

The Australian Dollar is slightly stronger this morning when valued against its American counterpart. Opening the morning at 0.7082, in familiar moves was sold off to critical support levels of 0.7054 as equities continue to bounce around, most notably energy and industrial stocks pulling the ASX 200 lower.

Geopolitical risks continue to hamper any upside through the 71 US cent handle in the short term as there was little to come out of RBA Governor Guy Debelle’s panel discussions yesterday on future monetary policy decisions.

The Australian dollar managed to recoup losses, bouncing off support to see overnight highs of 0.7090 as Federal Reserve member Raphael Bostic came out in support of a further hike this year but most notably mentioned that there was no need to keep the “Foot on the gas pedal”.

With little to no data on the horizon domestically, The AUD/USD will continue to see movement of equity plays and offshore developments. The Australian dollar opens this morning at 0.7084.

The Pound Sterling had a bumpy ride on Tuesday, initially opening the Asian Session around 1.2960 vs the Greenback and moving only between a 10-pip range either side. Once the European and North America session came underway the GBP/USD rallied up towards 1.3044 on the back of reports that the EU will offer the UK Prime Minister a UK-wide customs union in an effort to sidestep the Irish backstop issue. The backstop would only be activated if the U.K. and E.U. fail to reach agreement on how to prevent a hard border for goods on the island of Ireland at the end of the two-year transition period. The news showed Brexit deal optimism and a push in the Pound.

Unfortunately the move was short-lived as it will have to be negotiated beyond the Withdrawal Agreement as a separate treaty, the pair has settled back under the psychological 1.30 handle at 1.2980 at the time of writing.

Looking ahead, in the absence of any notable UK data investors are likely to focus on Brexit this week.

The United States Dollar enjoyed a mostly quiet day with little on the calendar to excite the market. Trading sideways for much of the day, the US Dollar Index (DXY) opens marginally lower against a basket of currencies at 95.93.

Despite some significant moves downwards in equities and bonds, currency markets have been well contained with only modest moves to write home about. Safe-haven currency the Japanese Yen remains the best performer but otherwise all major currency moves oscillated in a tight range of 0.4%. The flight to safety seen in a range of assets is reflecting the risk-averse sentiment currently infecting global markets. Gold and the Yen are currently having a moment but the Greenback appears to be failing to hold onto its safe-haven status.

Moving into the mid-point of the week the Greenback again enjoys a quiet day on the economic calendar. Headlines again look set to dominate direction.

The Euro remained largely range bound through trade on Tuesday edging marginally higher on the day having failed to take significant advantage in the broader USD sell off. The 19 nation combined unit edged lower through the morning following the European councils rejection of Italy’s 2019 budget draft. Officials chastised Rome, stating the draft budget “brazenly breaks EUR rules on public spending” and demanded a revised and corrected submission be proffered within 3 weeks. Fears Italy’s economic, fiscal and debt crisis will weigh on the ECB’s current monetary policy path and delay an expected summer 2019 rate hike have suppressed broader Euro gains, hurting the combined unit.

Having traded between 1.1440 and 1.1490 for much of the last 24 hours the Euro remains hamstrung on moves above 1.15 while appearing well supported on extension below 1.1375. Some support was offered yesterday on news The EU and Britain were moving closer to a Brexit Deal. Reports the EU may offer the UK a customs deal bolstered optimism the two side would reach an accord before March next year.

Attentions today turn to a host of manufacturing and service data prints as key macroeconomic drivers while newswire headlines drive broader direction.

Tuesday’s sessions saw the Loonie drift lower against the greenback as softness in oil prices and equity market declines hurt sentiment. It’s worth nothing that it did still trade in a tight range ahead of tonight’s important monetary policy decision from the Bank of Canada. The USD/CAD opens this morning Sydney time at 1.3082 whilst in the crosses the CAD is currently buying 0.6662 Euro’s, 1.0780 Australian Dollars and 0.5882 British pounds.

On the oil front, US crude futures retreated 2.4% on the day however we are still at elevated levels of $67.73 following comments out of Saudi Arabia indicating more supply could be provided should it be necessary. This reassured global investors, especially in light of possible supply constraints arising due to pending sanctions on Iran’s crude exports.

We have been saying all week tonight’s monetary policy announcement by the BOC is the key risk event for the week. Weaker than expected domestic data has pressured the currency however futures markets are still pricing a 25bp rate hike as a 90% chance. This would represent the 5th hike since July 2017 as the central bank continues to be of the view that the domestic economy is operating near capacity. Given a hike is virtually 100% priced in, the decision itself is unlikely to bring any upside to the CAD however the accompanying press conference and the introduction of the first Monetary Policy Report likely to be of key interest to markets.

Technical levels to watch out for on the USD/CAD are 1.3080 on the downside with any topside moves expected to meet resistance on moves approaching 1.3120.