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US exits the Iran Accord, Oil Spikes, NZ & UK interest rates on hold

By OFX

It's been a good few weeks for the US Dollar, closing out last week with the crown of "best week of the year". It started Friday with a slight gain, probably related to the lack of progress made on the US-China trade talks but it then dropped close to session lows after US non-farm payrolls came weaker than expected for April (164k vs. 193k expected). It didn’t take long however for the USD to recover and reach levels not seen since January.

However, could the dollar's rapid advance over recent weeks be coming to an end? US Consumer Price Index figures were released mid-week, with year over year for April printing a 2.1% Y/Y CPI, softer than the 2.2% expectation. With this inflationary gauge softening, the USD saw a fall against its G10 counterparts, and the EUR/USD found the floor at 1.18 and USD/JPY a ceiling at 110. The aftermath of President Trump’s decision to withdraw from the Iran nuclear deal also saw commodity prices benefit this week, with Oil hitting another fresh 3.5 year high. As US/Iran relations continue to deteriorate, US/North Korea relations continue to improve with North Korean leader Kim Jong-Un releasing three American detainees on the back of US Secretary of State, Mike Pompeo’s visit to Pyongyang. The gesture seemed to have aided risk sentiment, with USD/JPY making another play for 110.

This week also saw House Speaker Paul Ryan make the comment that a notice of a NAFTA deal must be given by May 17th for the current Congress to vote and pass it into law before a new Congress is sworn in this December.

Oil was in the spotlight this week after President Trump’s decision to withdraw from the landmark nuclear accord will likely lead to a tightened supply of crude in the global markets. Strengthed by uncertainty pre-announcement, then retreating post, Oil prices ultimately returned to 3 ½ year highs once the dust settled. The Canadian dollar is benefiting as the oil products and services are a significant component in the Canadian economy.

In currency news, the USD hit a one month high against the CAD, as the trend channel of the last two weeks was broken. It’s wasn't as much a weaker loonie as it was a stronger greenback and the Loonie remained reasonably well supported against the euro and the pound. At the end of the week, Canadian employment change was expected at 20k however came up -1.1k short. The full employment change, which represents the number of full-time positions last month published a 68.3k, and for this month and April's released at 28.8k, the Canadian unemployment rate remains at 5.8%.

NAFTA still presents the biggest risk to the Canadian dollar and should ultimately be the deciding factor on whether the BOC delivers further rate hikes. The negotiations have been going on for over 8 months. Trade officials from the US, Mexico and Canada have indicated that progress has been made and if an agreement is reached, this should lead to a bullish outlook for the currency. All eyes will be on May 17th, as a notice of a NAFTA deal must be given at this time for the current Congress to vote and pass it into law before a new Congress is sworn in this December.

It was a very quiet week in the Eurozone with little data of note and bank holidays leading to thin trading conditions. The economic slowdown in the Eurozone of late has seen a lot of last year’s gain erased and persistently under-target inflation isn’t helping its cause either.

The main focus this week in the Eurozone was centered on negotiations between Italian political parties, with the anti-establishment Five Star Movement and right-wing League party reportedly coming close to forming a coalition government after months of political wrangling. There has been little reaction in the FX space after the reports however the spread on Italian and German yields is at its widest since March as investors begin to get a touch jittery over what the populist policies could mean to the country with Europe’s largest debt burden.

To cap out the week, attention shifted to ECB President Mario Draghi speech at the State of the Union conference organized by the European University Institute in Florence. Draghi urged political leaders to focus on the potential shortfalls in the way the euro is set up, with the aim to prevent another crisis. Draghi's emphasis on finding money to help governments hit by deep recessions and the sharing of government funds he believes could provide "an extra layer of stabilization" for countries facing economic and market turmoil, that otherwise couldn't be calmed through national budget and economic policies. Mr. Draghi also highlighted the zone's progress on economic recovery in the years following the global financial crisis and the follow-on Euro area sovereign debt debacle.

Despite kicking off the week with a public holiday, the pound was one of the better performing major currencies in the week's opening sessions, with the Cable recovering from May the 4th's break below the 200-day moving average for the first time since April 2017. The continued selling pressure largely caused by growing Brexit worries, political concerns, poor economic data and increasing expectations that the Bank of England would leave interest rates on hold at Thursday’s MPC meeting.

Fortunes turned mildly for the pound come the late afternoon of Wednesday session, as news broke that Japan’s Takeda Pharmaceutical had agreed to buy the UK-listed Irish drugmaker Shire for $46 billion. On the tail of this news, the Cable pushed back through the 1.35 figure and on to a high of 1.3560 but was short lived as Trump inevitably announced that the U.S. would pull out of the Iran nuclear deal, pushing the US dollar higher against the GBP, mostly on safe-haven demand. Closer to home, European leaders are pledging to uphold the pact, but whether that carries much sway we’ll have to see.

Moving onto the week's top-tier release, around three weeks ago it was all but guaranteed that we would be seeing a 25bp hike in Bank Rate however after a stream of soggy data and a dovish interview by BoE Governor, Mark Carney with the BBC where he highlighted (again) his concerns the impact Brexit could have on the UK economy, the Bank of England’s Monetary Policy Committee decided to keep rates on hold at 0.5% and the decision to stay put was no surprise. The accompanying Inflation Report, statement and press conference by Mark Carney highlighted how the economy had hit a soft patch of late adding drag to growth. A lot of this drag was put down to the bad weather seen in Q1 however recent poor data indicates this has rolled over to Q2 and can’t all be attributed to the Beast from the East. Markets still expect a 2018 rate rise however an August move now looks to be off the table leaving around an 80% chance of a hike in November.

 

 

 

The Australian dollar began the week edging marginally higher as softness across U.S Non-Farm Payroll wage growth and broader employment gains momentarily deflected the U.S Dollar's upward momentum. Despite finding support at and around the psychological 0.75cent handle the AUD remained under broader downward pressure as investors sold into upward rallies and the US dollar marched ever higher.

Mid-week, the dollar marked fresh 11-month lows tumbling through 0.75 to touch 0.7434 and was one of the days worst performer when measured against G10 counterparts. The Euro’s move below 1.19 amid political turmoil in Italy led the Aussie lower as the USD continued to advance against a basket of currencies and touched year to date highs despite gains being capped by Trump’s withdrawal from the Iran Nuclear Deal. Although well publicised, the US’s withdrawal led to an escalation in risk adverse trade and only dampened demand for commodity-linked and emerging market currencies.

Recouped losses suffered mid-week rebounding back above 0.75 U.S cents on Thursday as softer than anticipated US inflation data for April befouled what has otherwise been a string of upbeat macroeconomic data sets for the world’s largest economy. Attentions now turn to US consumer sentiment for direction into the weekly close while RBA minutes, Quarterly Wage prices and Labour market data all fleck next week’s docket and provide possible markers for direction within recent ranges.

With diverse employment figures released in North America on May the 4th, the Kiwi began the week holding above support levels of US 70 cents. Opening the domestic session at 0.7040, we saw small gains to an eventual intraday high of 0.7054 and tapering off into the European Open.

The theme of the week was Thursdays RBNZ rate statement where official cash rates were expected to remain on hold at 1.75%. The RBNZ has long warned of needing a pickup in inflation levels and wage growth before there is any change to its current neutral bias. In the last quarterly report released by the RBNZ, in a survey of expectations, we saw one-year inflation to remain flat while two years ahead had a 0.09 percentage point increase to 2.11%. When the inflation expectations were released there was a slight dip to 2.01% for the two-year reading and an average one-year inflation of 1.8% and as expected interest rates were left on hold at 1.75%, leaving them unchanged since November 2016.

Later in the week, RBNZ Governor Adrian Orr released his first monetary policy statement since coming into power on the 27th March. Remarks on softer inflation levels and a downgrade in GDP growth saw a more dovish statement than expected, delaying any expectation of higher moves for the official cash rate till Q3 2019. To close out the week, Orr spoke in front of the Finance and Expenditure Select Committee and despite Orr presenting a downgrade in future growth in his previous statement he suggested that the local economy was “Well balanced, employment very strong with inflation low and stable”.