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US Dollar On A Tear As U.S. Puts Trade Wars With China “On Hold”

By OFX

Concerns over potential breakdown of trade talks between US and China caused major equity indices to weaken on Friday. The S&P 500 lost 0.3% and the Nasdaq fell 0.4% however, Dow was unchanged for the session.

Over the weekend the US Treasury Secretary said “we’re putting the trade war on hold. So right now, we have agreed to put the tariffs on hold while we try to execute the framework”. A Chinese official on Friday denied reports saying that an offer has been made to purchase American goods and cut its surplus with the US by $200 billion. Adding to this, US treasury yields were holding above and also closed above 3% which dampened investors sentiment.

Relatively quiet on the release front today in the US market. This week, at least as far as economic data is concerned, the focus will be U.S. FOMC Meeting Minutes on Wednesday evening, then on Durable Goods Orders on Friday, closely followed by a speech by Fed Chair Powell.

The loonie is opening slightly better this morning, around 1.2880, after having a very weak session on Friday that saw the CAD loosing as much as 0.5% versus its US counterpart. Canadian economic data was mixed on Friday with CPI inflation printing in line with market expectations. Headline Retail Sales, released at the same time, came in at 0.6% vs. expectations for 0.3% but with auto and parts stripped out of the number, it printed at -0.2% vs. 0.5%. Bets on a rate hike this month were severed on the news and USD/CAD gapped higher by +100 points.

Unfortunately for the CAD, NAFTA negotiations don’t seem to be going as expected while retail sales excluding autos came weaker than estimates. Also, yields didn’t support the CAD as Consumer Price Index Year-over-year also missed estimates.

It’s a public holiday in Canada today, so no data is due for release. Levels to watch for the USDCAD this week are 1.29 and then 1.2950 on the upside while first support for the USD should come around 1.28.

EUR/USD has continued its decline through Friday and overnight. Not only is it suffering at the hands of a stronger buck but it’s under pressure for a few political reasons, namely a questions about the intentions of the newly formed Italian coalition wanting to stay in the Eurozone. Markets are also worried that their proposals for lower taxes and increased public spending are a natural recipe for an increasing budget deficit. It’s a story that’s likely to weigh on the single currency through most of this week, albeit it’s a public holiday in most of Europe today so any form of selling may be a little less aggressive over the next few hours.

This all said, the euro remains unchanged vs. the pound and GBP/EUR opens this morning at very similar levels to Friday morning, and at more or less the mid-point for the range over the last few weeks or so. Data wise this week traders await the release of a series of French and German flash services and manufacturing PMIs on Wednesday and the ECB Monetary Policy Meeting Accounts on Thursday, arguably the main release of the week.

GBP/USD has fallen to its lowest level since December this morning, largely a result of a broadly stronger greenback. Risk sentiment has improved a little too after Treasury Secretary Mnuchin said that the U.S.’s trade war plans with China were on hold. With little by way of economic data releases on Friday from either side of The Pond, there was nothing to prevent the cable sell trend from abating. The pair broke down through the 1.35 big figure and is now flirting with 1.34.

There are quite a few public holidays throughout Europe and North America today so trading conditions will be thinner (and potentially volatile) although it means there’s less data prints so in the same breath it may also be a quiet start to the week. On the data front this week it’s a busy one with UK Inflation Report Hearings due tomorrow, UK inflation on Wednesday, various BoE Carney speeches towards the end of the week, UK Retail Sales on Thursday and UK Second Estimate GDP on Friday. By the end of this week the central bank will be hoping to be a lot clearer on an anticipated path for monetary policy.

The Australian dollar offered little through trade on Friday maintaining the mid-week recovery and holding above 0.75 U.S cents. The AUD bounced about amid a 30 point range touching intraday lows at 0.7494 while falling short of pushing through resistance at 0.7530 having touched 0.7529.

Risk appetite waned into the weekly close and weighed not only on US equities but commodities and broader yields while the Euro crashed through 5-month lows sending the USD to year to date highs. Despite broader selling pressures the AUD found support in commentary from US Treasury Secretary Steven Mnuchin, who confirmed “we’re putting the trade war on hold” stemming fears global growth will unravel further in the face of sweeping trade taxes. While the response was muted, hinting at a deeper uncertainty within the market, the comments were enough to prop up the AUD and encouraged optimism and a 20-point bounce on open.

Attentions this week turn to commentary from RBA Governor Lowe on Wednesday while the FOMC meeting minutes Wednesday and commentary from Fed Chari Powell Friday will steer direction through the latter half of the week. With broader ranges intact and volatility easing we expect the AUD will hold between 0.7430 and 0.7580 though the short term.

The New Zealand dollar saw short term relief after bouncing off critical long-term support levels last week of 0.6850. Opening Friday morning at 0.6870 we saw the Kiwi claw back above 0.69 US Cents during the domestic session and movements higher in offshore trade.

Driven recently by trade wars between China and the United States, Treasury Secretary Steven Mnuchin advised that most recent talks were put on hold causing a pause on the strength of the US Dollar and the NZD/USD cross to close higher at 0.6920. Further movements today will be dictated by the release of retail sales for the quarter this morning hoping to match the previous strong release of 1.7% on seasonally adjusted terms.

The New Zealand Dollar opening this morning at 0.6920.