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FOMC Minutes are the most significant Fundamental this week

By OFX

With a quiet day on in market fundamentals, the US dollar has retraced its gains late yesterday after recently hitting some multi-month highs. The U.S dollar index which measures the greenback's strength against a trade-weighted basket of currencies rose to a fresh five-month high of 93.94 before hitting resistance and paring back most of its gains.

Investors have been sitting on the sidelines eagerly awaiting developments between the US and China. US Treasury Secretary Steven Mnuchin said that the two countries have set up a framework for addressing future trade imbalances, and have also agreed to suspend the tariff threats that led to high volatility on global markets earlier this spring. China has said to agree to buy more US goods to help narrow the trade deficit the two countries have but didn’t agree to the specific target of $200 billion.

The dollars bull-run has slowed over the past 24 hours as traders take stock with possibly one eye on Wednesday night's FOMC Meeting Minutes from May 2nd's get-together. As 10 year Treasury yields continue to rise in line with expectations of four 2018 hikes from the Fed the dollar has rallied over recent weeks and we may get extra momentum should the minutes from the meeting show both September and December are seen as live meetings. Current expectations are for three hikes this year with one in June fully priced in, however, chances of four this year are rising towards 50/50. EUR/USD has just retaken 1.18 and USD/JPY is around 111 ahead of a relatively quiet day data-wise. Its likely Trump, North Korea, and trade will be the main influence over the greenback today.

Canadians enjoyed a public holiday yesterday in observance of Victoria Day. Brent Crude Oil hovering around $80 a barrel and the aforementioned diffusing of a potential US/China trade war have added support to the loonie at the start of the week.

Following comments by US representatives that the trade war is “on hold”, the risk-on tone came back to put some pressure on the USD, which dropped 0.7% against the CAD. The USDCAD dropped all the way to 1.2788, after opening the week around 1.2880, the cross was not able to hold above the initial support found around 1.28 and now is set to try and push through the low of the month, 1.2733.

Much of Europe enjoyed a long weekend with the Whit Monday holiday being observed throughout the continent. There is no data of note today from Europe so it’s likely to be Italian politics which dominate the headlines. Coalition talks are ongoing with the Five Star and Northern League populist party’s reportedly favoring political novice Guiseppe Conte to be next Prime Minister.

Controversial policies they are looking to enact include a lower flat rate income tax, basic payments to the poor and a loosening of EU fiscal rules in an effort to increase borrowing. Given that Italy has Europe’s largest debt pile it appears the proposals will be met with stiff resistance especially from Germany. We get the next snapshot of the EZ’s economic health tomorrow with the monthly PMI gauges expected to show a slight slowdown in output. USD/EUR trades around 1.1793.

Downward pressure has been added to sterling over recent days as rifts within the Conservative party re-emerge over the future customs relationship the UK will have with Europe post-Brexit. With sterling already suffering from yet another change of tune from Bank of England Governor, Mark Carney re interest rate rises; divisions at the top echelons of UK government have done little for the mood of pound bulls. GBP/USD dipped below 1.34 yesterday for the first time this year and looks likely to remain under pressure until the divisions can be healed, which is far from certain. Should weekend reports that a snap general election is called come to fruition then we can expect another leg lower.

Tomorrow sees top-tier UK data kick-off with crucial inflation numbers released. The Consumer Price Index is expected to remain at 2.5% y/y so anything higher may add some relief to the pound. Today we have public sector net borrowing with a £7.2B deficit predicted for April. GBP/USD is around 1.3445 at present rising a short time ago on the back of some slightly hawkish comments from MPC members testifying to the Treasury Select Committee.

The Australian Dollar jumped to three-week highs through trade on Monday pushing through resistance at 0.7530 to touch 0.7587. Commodity currencies led the charge after comments from key US Treasury figures suggest the Trump government will ease off on threats to impose Tariffs on China’s exports. The comments, made Sunday, helped bolster demand for equities, and risk led assets as commodities continued their multi-week rally.

Having offered little throughout last week Monday’s advance saw the AUD test the top end of recent ranges and sits only marginally below key technical resistance handles at 0.7590/0.76. While buoyed by renewed risk appetite and an uptick in oil and copper prices the specter that is stagnant inflation and wage growth hang heavy over further upside moves, with extended gains expected to be hard won. Last week’s quarterly wage growth report and monthly labor market print only affirm the slack within the economy and do little to bring forward inflation and interest rate expectations. When compared with the FOMC dot plot and US treasury notes the yield differential remains firmly with the world’s base currency and we expect will ensure gains are capped at or near the 0.76 handle through the short term.

Direction today will be largely governed by broader market trends and currency flows as the domestic macroeconomic docket remains free of headline risk events and attentions turn to Wednesday’s commentary from RBA Governor Lowe for further direction.

There was optimism for the New Zealand Dollar to climb back to the US 70 cent handle following a stronger open to the week at 0.6920. Unfortunately, the release of retail sales for the quarter banished any chance of this as sales grew by a disappointing 0.1% and well below the last quarter of 1.4%.

As expected we saw initial movements lower following the release to low of 0.6885 at the close of domestic play. In offshore trading, we saw a quick rebound as equities pushed higher on waning trade tensions, the Kiwi bouncing to 0.6950 on open this morning. With little on the domestic data front today, investors will look towards the release of Thursday's trade balance figures, with expectations of a surplus of NZ $200m.