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The Dollar Index continues to climb in this season of tightening

By Nick Parsons

The Trump administration has delayed the aluminum and steel tariffs that were to be imposed May 1st until June 1. The main reason for the extension is that principle agreements have been made with Europe, Argentina, Brazil and Australia. Canada and Mexico are in negotiations with the United States on NAFTA which will cover cross-border trade between the three countries. Treasury Secretary Mnuchin will be traveling to China this month to hash out a trade agreement of some sort in hopes to calm a potential trade war which has only been a war or words; with no implementation.

The Federal Reserve is expected to leave interest rates unchanged this week, even as US 1st quarter GDP posted better than the expected 2.0% at 2.3% last Friday, the drop in growth from Q4 of last year 2.9% will give the Fed merit to remain cautious in tomorrow’s release. It has been noted that economic growth in the US and inflation pressure will warrant the Fed to continue on its tightening path through the latter part of this year. ISM Manufacturing PMI is expected at 58.4 slightly lower than previous of 59.3, the indicator shows expansion within the industry on levels above 50.0, while below 50.0 indicates contraction.

US equity futures are pointing to a softer open in continuation of yesterday’s sell off, which saw the Dow down 148pts and the S&P down 21.86pts. The Dollar Index continues to flourish as markets correct and is up 0.45 point or 0.48% to 92.26 that is up 2.29% from the beginning of April

Israel Prime Minister was speaking on television yesterday citing Iran’s ten years of nuclear deception; this sent oil prices higher to 69 dollars a barrel for WTI. As of this morning, oil prices have retraced 1% as Netanyahu’s comments are not seen as groundbreaking in the region. Canadian gas price range in Ontario at 1.37 a liter while in Vancouver they are seeing price hit 1.60 a liter.

Governor Poloz is due to speak at a luncheon in Yellowknife to the Chamber of Commerce; the speech will address Canadian household debt. Canadian fundamentals are light this week, so Governor Poloz's comment should draw lots of attention by market participants. The Bank of Canada is due to release its interest rates on May 30th the day before 1st quarter GDP the main BOC metric on forecasting future rate hikes. February monthly GDP is expected at 0.3% today slightly higher from last month January release of -0.1%. The loonie is expected to remain in its range, but the first resistance of 1.2861 has breached as we write and puts the second resistance of 1.2903 into play.

The loonie is expected to remain in its range, but the first resistance of 1.2861 has breached as we write and puts the second resistance of 1.2903 into play. The Canadian dollar continues to push higher against its European counter heading into May.

Today is Labour Day throughout Europe with most of the continent enjoying a public holiday. Lower liquidity levels on the back of the day off appear to have accentuated cables move lower and the dollar’s gains this morning. Thursday sees Flash CPI readings from the Eurozone with the headline number expected to hold at 1.3% and the core number expected to drop to 0.9%. With inflation persistently under target the question remains what taper will be announced by the ECB at their June meeting, will they stop altogether or decide to extend for 3-6 months at a lower level?

Recent slowdowns in EZ activity and dollar strength may mean policy makers make less of a reference to the EUR/USD exchange rate as we near Junes crucial get together.

Sterling’s decent has continued this morning as latest HIS Markit/CIPS Manufacturing PMI numbers missed target pushing cable below 1.37 for the first time since early January. The report came in at 53.9 a 17 month low for a sector which had held up well since the Brexit vote, aided by sterling’s fall in value after the referendum.

The report’s authors advised “While adverse weather was partly to blame in February and March, there are no excuses for April’s disappointing performance, making the chances of a near term interest hike in interest rates by the Bank of England look increasingly remote.”

Having capitulated versus a rampaging US Dollar last week the bumpy ride continued for the Australian dollar yesterday which succumbed to selling pressures on approaches towards the 0.7580 mark. Providing some support early in the piece, numbers from China yesterday showed manufacturing conditions had slightly eased in April. 

Whilst ongoing fears of trade battles between two of the world’s largest economics, The United States and China continue to sit front and centre of investor’s mindsets, slowing export order growth last month still wasn’t enough to signal a broader contraction in the metric which is closely tied to a barometer of underlying business conditions. 

In moving into the first day of the new month, the economic calendar remains littered with top-tier macro events with The Reserve Bank of Australia kick starting proceedings today. Despite the fact policy makers are widely expect to retain the official cash rate, at a record low of 1.5 percent for a 19th consecutive month, market participants are bracing for higher liquidity through-out the course of today’s session. Opening in a softer position versus the Greenback at a rate of 0.7533, the AUD is equally well supported this morning versus both the Kiwi (1.7025) and the Sterling (0.5470).

The New Zealand Dollar continued its decline overnight as we look to test December ’17 lows. Opening the week just under the 0.71 cent handle against the USD dollar, the Kiwi was hindered mid-morning after the release of ANZ Business confidence levels. A net reading of 23% of all businesses in New Zealand were discouraged about the year ahead for the local economy. The biggest dip was the construction sector whereby the residential intentions dropped from +33% to +9%.

The intraday low hit 0.7065 shortly after the release before a solid rally at the close of business all losses paired in a meager 25 point range for the domestic session. Unfortunately there was no such recovery in overnight markets as the US dollar run continued its bullish canter. The New Zealand dollar hit an eventual low overnight of 0.7030 in the North American session and opens this morning at 0.7035 as we await the latest Building consents figures.