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Geopolitical Risks are the focus for the Greenback

By OFX

The USD closed the week almost flat, after being down more than 0.3% during Friday session, the USD was able to recover on the back of a spike in US Treasury yields after stronger than expected US Sentiment data (University of Michigan U.S. sentiment Index came at 98.8 vs. 98.3 expected). After three straight weeks of rising, the USD couldn’t manage to close the week higher, apparently finding some topside resistance at its 55-week moving average.

For the week ahead, markets will continue paying attention to US-China trade talks as China is planning to send Vice Premier Liu He to Washington. Donald Trump has paved the way for more constructive trade talks with China has given the green light to the US Commerce Department to save the Chinese company ZTE Corp. from bankruptcy. Last week the dollar surge looked like it had run out of steam with the currency hitting a number of key levels against the Japanese Yen and Euro. With concerns of a US-China trade war diminishing the greenback may see the demand.

On the Geopolitical front, the US will be opening its new embassy in Jerusalem. The US and Israel call the move of the embassy the first required step for peace in the region. On the data front, this week traders will be watching how the US retails sales performed in April.

The CAD couldn’t hold gains on Friday and was one of the few G-10 currencies to weaken against the USD as oil prices declined more than 1% during the day. Still, the loonie managed to close the week more than 0.4% stronger versus the USD. USDCAD closed around 1.2790, up 0.2%, after Canadian employment data came weaker than expected (net change in Employment was -1k vs. 20k expected). Up until then, the CAD was more than 0.20% up versus the USD, with the USDCAD trading as low as 1.2730.

NAFTA talks will continue this week, and they seem to be going well, at least according to Canadian Foreign Minister Chrystia Freeland. A May 18th informal deadline stated by House Speaker Paul Ryan spoke of for US Congress to pass the new agreement into law before Congressional elections in November. There is a growing risk that there will be no agreement before Friday.

We will also see the release of Canada’s latest CPI figures and Retail Sales numbers. All in all a big week ahead for the Loonie and most significantly toward the end of the week.

The Euro advanced on Friday, up 0.2% versus the USD. Although the EURUSD was not able to break the 1.20 level, the pair climbed as much as 0.4% to 1.1968 on Friday. It’s the highest level since last Monday, but couldn’t keep the upward momentum as US Consumer sentiment data came slightly better than expected, supporting some USD demand towards the end of the session.

This week will bring some interesting developments as the EU will get an update on Brexit, while Angela Merkel will be meeting Vladimir Putin. On the data front, markets will be paying attention to the latest GDP and Industrial Production numbers on Tuesday plus Consumer Price Inflation on Wednesday.

It seems to be a while since we last talked of the risks towards the euro from political uncertainty, however similar to Brexit headlines these are creeping back to the fore. Over the weekend the prospect of a coalition between the anti-establishment parties, the Five Star Movement and Northern League, looks more and more likely. Tomorrow the focus will be on Germany as it delivers its latest GDP figures as well as its economic survey but the market is mainly expecting that the Eurozone’s most significant contributor will show a slowdown, mirroring the performance of the rest of the block.

The Great British Pound is slightly stronger this morning when valued against the US Dollar, trading a 24 hour high of 1.3570. Looking ahead this week and all eyes will be on Tuesday’s employment data release which is expected to remain steady at 4.2 percent. Wages are forecast to have posted a modest advance in the three-month to March, coupled with easing inflation, should further dent chances of any future interest rate hikes. The GBP/USD pair is currently trading at 1.3543. We continue to expect support to hold on moves approaching 1.3490 while now any upward push will likely meet resistance around 1.3580.

The week kicks off with the UK’s wage growth figures on Tuesday as well as the latest jobs numbers. Following on from a particularly disappointing week last week for the sterling, we may have to see a sharp jump in these figures for there to be a rebound for the currency. However, the importance of these figures should not be understated, wage growth in particular. From the back end of last year until very recently both the market and the Bank of England wanted to see the real wage growth deficit to narrow, and while this has finally happened, it was disappointing Q1 GDP figures at the final hurdle that meant the MPC kept rates on hold last week. Wage growth, therefore, remains paramount.

Market participants have maintained that the summer was meant to be relatively quiet for sterling with regards to Brexit headlines and importantly the downside risks that these bring. However, these headlines appear to be creeping back in more and more, and at the weekend Theresa May’s two options for a new customs policy both came under attack from within putting increased pressure on the Prime Minister and the pound.

The Australian Dollar maintained a tight trading range throughout Friday, closing the week marginally higher. With little macroeconomic data on hand to drive direction, the AUD muddled along between intraday lows at 0.7520 and Australasian session highs at 0.7540 before broader USD weakness bolstered returns into the weekend. The worlds base currency retreated for a 3rd consecutive day and while losses were largely muted as investors appeared content in banking profits and reassessing positions allowing the AUD to touch highs at 0.7568.

Upside momentum remains challenging to foster however the speed of the AUD depreciation has seemingly stalled as the US Dollars upward trajectory shifts pace. While the broader picture remains mostly unchanged a shift toward more stable risk sentiment, stalled treasury yields, softer CPI and labor market data, and amendments in Fed speeches have tempered expectations for a 4th rate hike this year. This moderation has enabled the AUD to mainly hold onto support above 0.74 and 0.7430 and avoid the next bearish step down to ranges between 0.7230 and 0.7380.

Attentions now turn to all vital wage growth data Wednesday and employment data Thursday as crucial drivers of domestic direction.

The New Zealand dollar finished the week 1% lower as it closed below US 70 cents for the first time this year. Opening Friday morning at 0.6965, we saw slight movements higher after the release of Business NZ Manufacturing Index. The released showed the sector in a continued position expansion for April and the highest reading of 58.9 since 2016.

There was little shift after the release of NZ Food Price Index figures shortly after as we saw last intraday highs of 0.6982. Despite Inflation figures in the United States slightly missing expectations on Friday evening at 0.2%, the Kiwi saw an eventual close lower of 0.6955.

Domestic news is light on this week with a focus on the latest Global Dairy Trade Auctions out Wednesday as the New Zealand Dollar opens this morning at 0.6960.