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Geopolitical risks ripple through the markets

By OFX

The week kicked off with US Treasury Secretary Mnuchin comments at the forefront of investors minds. "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” he stated. 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 and also closed above 3% which dampened investors sentiment. As these 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. Current expectations for three hikes this year with one in June fully are priced in, however, chances of four this year are rising towards 50/50.

Mid-week, focus shifted to FOMC minutes release, which revealed the Fed seem optimistic about the economy with the labor market continuing to strengthen and economic activity rising at a moderate rate. FOMC officials said that the economic outlook warranted another interest-rate hike “soon” with markets already pricing in a 90% rate hike in June.

In other news, U.S president Trump called off the historic June 12 summit in Singapore with North Korean leader Kim Jong Un, the meeting would have been its first face-to-face between the two. In Trump's letter addressed to “His Excellency” he wrote, “Sadly, based on the tremendous anger and open hostility displayed in your most recent statement, I feel it is inappropriate, at this time, to have this long-planned meeting”. Adding “Your talk of nuclear capabilities, but ours are so massive and powerful that I pray to God they will never have to be used”.

To cap off the week, Central Bankers were front and center with the ECB’s Benoit Coeure speaking, BoE Governor Mark Carney, FOMC member Powell, Fed President Evans, and finally, FOMC members Raphael Bostic and Robert Kaplan rounding off the speeches.

The loonie kicked off the week with a public holiday, in observance of Victoria Day and opened to support, with Brent Crude Oil hovering around $80 a barrel and the aforementioned diffusing of a potential US/China trade war. 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 support was short-lived, with the loonie losing around 0.2% mid-week versus the USD, as negative headlines started to hit the wires with Trump hinting that the North Korea summit might not happen on June 12, bring the geopolitical risk trade back in boosting the greenback.

In Oil news, Crude prices fell after reports the Saudi Arabia and Russia discussed adding 1 million barrels a day to global production. The reasons are over the last 17 months OPEC and its oil alliance have succeeded in curbing the oil glut, and oil prices are expected to rise. OPEC and other nations are to meet in Vienna on June 22nd to discuss next steps. OPEC is considering an output increase due to concerns about Venezuela and Iran potential slower supply. This week also saw NAFTA talks heat up again after Mexico stated it is not going to be pressured on negotiations after the US launched an investigation in auto tariffs. A spokesperson for the Mexican President was quoted saying,” If an agreement is to be reached, it will be one that truly benefits Mexico. If these conditions do not exist, Mexico will not move forward." Is this the proverbial line in the sand, USDMXN trades at 19.62 up 0.20%?

For the week ahead, Market Participants are in limbo as to the Canadian dollar direction and all eyes are focused squarely on the BOC Interest Rate Announcement followed by the 1st quarter GDP figures. The central bank has flagged the GDP numbers as the growth metric it watches to curb inflationary pressures by raising interest rates. The Bank of Canada's overnight rate is expected to remain at 1.25% after the announcement next week.

EUR/USD continued its decline this week, under pressure for a few political reasons, namely 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.

Hitting fresh 6 month lows through trade on Wednesday, data showed the Euro area continues to suffer softness across broader macroeconomic indicators. Manufacturing and service sector business conditions, in particular, softened through the month to date, compounding slowdowns across other key economic markers and exacerbating expectations that monetary policy will remain accommodative well into 2019.

To cap off the week, we saw a moderate rally on the back of the US/North Korean news, helping the single currency teeter on the 1.17 support level, however, it didn't last long. The pair has now broken down through the big 1.17 figure as dollar bids gather pace and key support levels at 1.1712-15 are broken.

GBP/USD started the week with a fall to its lowest level since December, largely a result of a broadly stronger greenback. As was the case across of bucket of currencies, risk sentiment improved little following Treasury Secretary Mnuchin comments that the U.S.’s trade war plans with China were on hold.

Downward pressure has also been bolstered 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.

A late-week recovery came on the back of news that Donald Trump had cancelled his meeting with North Korea’s Kim Jung Un, news of which was initially dollar negative. The pound also got a further boost following the release of better than expected retail sales data; the headline number was strong a 1.6% m/m vs. expectations for a reading of 0.8%. The last set of retail sales data was also revised up.

The Australian Dollar jumped to three-week highs through trade on Monday's session, 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.

Mid-week, the AUD tumbled following a dour report on construction work completed throughout the first quarter. Seen as a precursor to GDP data the soft print does little to expel fears the Australian economy is still running below capacity and only reinforces expectations monetary policy will remain accommodative through the short-medium term.

To close out the week, we see the AUD modestly stronger against the greenback, triggered by an advance in worldwide equities and headlines alluding that the trade war between China and the US was on a brink of getting solved. For the week ahead, the calendar is reasonably quiet. Watch for building permits on Wednesday, expected to have softened in April by 3.0%, and May New Home Sales to be out on Friday.

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%.

Mid-week attention shifted to the RBNZ published research paper, which covered hypotheticals around unconventional monetary policy should they need to be used in the future. Despite RBNZ Assistant Governor John McDermott calming markets in an interview with Bloomberg by saying that there is “no imminent prospect” there still a higher chance than previous that they could use negative cash rates if need be. The Kiwi was sold off in droves following the news and shed nearly half a cent back below 69 US Cents following the interview and once again tested two-year lows as the NSD/USD cross remains vulnerable.

Thriving trade balance numbers capped off the week, with a surplus of NZ $263M for the month of April, boosted by an increase in Kiwifruit exports by 82% and solid numbers across a majority of sectors.