Daily Currency Update

Get access to our expert daily market analyses and discover how your currency has been tracking with our exchange rate tools.

Trump and Kim Jong-un in Singapore, ECB tapers quantitative easing and tariffs in full swing


Last week saw a full docket for Central Banks, with the Federal Reserve raising rates, the ECB Tapering QE, and as expected the Bank of Japan leaving policy alone. The greenback saw significant gains during the week; against the euro, it trades stronger by 1.53% and 1.08% against the yen. The greenback's value is positioning to rise further with expectations of more rate hikes from the Federal Reserve later in the year, Chair Powell signaling to market participants that inflation is on the rise as energy prices climb.

In other news, US President, Donald Trump and North Korean President, Kim Jong-un’s Singaporean summit made headlines around the world and lifted risk appetite in the markets. Although the meeting was short on ink-to-paper commitments, it seems to have opened doors to more friendly and open dialogue between the countries going forward, possibly laying the path to a denuclearized Korean peninsula at some point in the future. Although Kim is unlikely to lay down his nukes anytime soon the fact that the two leaders met at all is progress and further talks, possibly in Washington, could be on the horizon before the end of the year. Mid-week, focus was centered firmly on the Fed, as it raised interest rates to 2% which saw the USD rally across the board. The US economy has remained healthy which has led to the central bank shifting to a more hawkish outlook and moving away from their crisis-era guidance. Markets will now expect a further two rate hikes in 2018 and three more in 2019 with the probability of a September hike now sitting just above 80%. The Fed also revealed they are not overly concerned with inflationary pressures to the US economy as they state they are content with having inflation remain over the 2% target until 2020.

To end the week, and after the ongoing "Trade War" President Trump administration approved the 50 billion in tariffs on Chinese goods, with expectations are that the technology sector will be hit the most. The markets instantly reacted, with investors taking a risk-averse approach and flocking to safe-haven currencies. The USD rallied sharply to end Friday's session, and on the flip side of the coin, the DOW slipped roughly 250 points on the back of the approvals. What will next week hold?

The G7 meeting that preceded last week was in line with economist expectations, with President Trump ejecting the closing communique of the meetings. Trump on his flight to Singapore to meet North Korean Leader Kim Jong Un ordered his staff not to sign the communique, because of Trudeau’s false statements. There has very little that Trudeau said at the summit that he has not already said leading into the G7 Summit. Trudeau has said Canada will add tariffs of its own in retaliation for duties put on Canadian goods enter the United States.

As the week continued, Crude oil supported the petrol currency with a 0.63% spike in WTI crude oil prices following the weekly inventories report that showed a higher than expected draw in US stockpiles. However, the loonie was not able to take advantage of this modest gain in both oil and gold prices and ended up weakening around 0.9% versus the greenback on the back of broad USD strength following US strong economic data releases and divergent policy statements from the ECB and the FED.

To close out the week, economic fundamentals saw foreign security purchases rise in March to 9.1 billion from the previous of 6.1 billion and Canadian manufacturing shipments m/m for Mar were down -1.3% well off expectations of 0.6% and well below previous of 1.4%.

The Euro began last week reaching a session high, at 1.1820, after the new Italian Finance Minister Giovanni Tria, assured his commitment to the Eurozone membership and signalled prudent fiscal policies, which was well received by bond markets.

Mid-week, it was more of a USD strength story, after the relatively positive results from the US-North Korea summit, where “denuclearisation” was promised but few other details were given and Consumer Price Index coming as expected in the US, the USD gained on the back of rumours surrounding the next FED meeting. The WSJ reported that Powell is thinking of having a press conference after every FOMC meeting, suggesting they’ll be live and open to discussion which the market apparently interpreted as a sign of more rate hikes to come this year, maybe even 4 instead of the 3 priced already.

To close out the week, the ECB was at the center of the FX markets with their plan to end quantitative easing in December. The EUR endured a torrid day on the back of this news, as it suffered heavy losses against both the pound and USD. Indeed EUR/USD returned to levels more familiar of October 2017 and the euro is set for its worst weekly loss in 19 months. Whilst the market had entirely expected Mario Draghi to announce a taper to the central banks quantitative easing package both the taper and outlook from Draghi was dovish. In many regards, the reaction from the market and the selloff in the euro seems excessive given that Draghi was adopting his normal conservative and reserved manner. Whilst we may have to wait until the end of 2019 for the ECB to finally raise interest rates there remains support on EUR/USD around the 1.15 (IB) handle for the euro to hold on to in the meantime.

Without much in the way of major economic data to begin last week, the markets were more concerned with what the G7 meeting might bring. The meeting itself was civil, but events since have been anything but as the US Government and key allies continue their war of words on trade. With this, risk sentiment took a hit early in the week, and commodity currencies gapped lower when markets opened.

Mid-week, the Sterling slipped as April’s Manufacturing Production m/m saw its biggest decline in output since October 2012. The -1.4% print was far worse than the rise of 0.3% forecast and GBP/USD dropped around half a cent as a result. Worryingly for the sector, it looks like the bad weather we had in March can’t be held responsible for the fall so it could be indicative of something more serious for the UK economy. Adding to sterling’s woes the UK trade deficit widened by over £2b for April compared to March. Following this, the release of the annual CPI figures held firm at 2.4% and reaffirmed the markets view that inflation remains an issue for the UK economy moving forward, putting further pressure on the BOE to intervene.

Attention quickly turned to the Fed rate decision near the end of the week, which saw the US central bank raise rates to 2% causing the pound to retreat initially before rebounding and despite the majority of the market looking elsewhere, Brexit, Theresa May and rebel Tory MPs couldn’t remain out of the spotlight. Dominic Grieve (chief rebel), announced that the language of the amendment that he and his colleagues has backed on Tuesday night had been changed and he had been duped. Whilst there are suggestions of some underhand tactics from the government towards the Remain Tory MPs it is another step forward for Theresa May and the flexibility afforded the government decreases the chance of a no deal Brexit scenario. The pound heads into the weekend on the back foot against the dollar whilst hitting 10-day highs against the euro. Looking towards this week, there is the latest Bank of England meeting and statement, however unlike the ECB and Fed, this will not be a ‘live’ meeting little is expected. Domestic Brexit updates are becoming more and more frequent over the last few weeks and expect next week to be the same.

Despite the discord emanating from the G7 summit in Quebec at the beginning of last week, the currency markets reaction was not particularly prevalent, with markets beginning the week in seemingly a ‘wait and see’ mode.

A busy domestic and global docket prompted renewed volatility and traders looked keenly towards the NAB business survey as well as the housing finance report for April, released on Tuesday. The RBA continually points to strong business sentiment as justification for it’s elevated economic growth outlook, and after the largely positive print, the Australian Dollar touched highs at 0.7625 before moving lower.

In other news, all eyes were on Singapore with US president Donald Trump meeting with North Korean Leader Kim Jong-un. With denuclearization of the Korean peninsula, a key objective for Trump, any fallout from these negotiations would likely weigh on the AUD with traders looking to shed risk. For the most part, investors absorbed news from Singapore then brushed aside the ambiguous promises of denuclearisation and peace the AUD moved lower as attentions shifted to the FOMC and its June rate statement.

Having signaled the possibility of 2 more rate amendments before years end and hinted at three rate hikes in 2019, the US Dollars yield advantage over major currency counterparts is only expected to grow. The RBA is still some way off raising domestic interest rates and while broader economic signs are positive the lag in wage growth, labour market slack and inflation expectations is expected to continue through the short term making it increasingly difficult for the board to justify a rate hike. The Australian Dollar now looks to take a breath to close out the week with an empty domestic calendar to look forward to. Attentions now turn to the Bank of Japan and their upcoming policy statement release.

The NZD began last week down against the AUD with the NZD/AUD cross hitting a low of 0.9230. From a data perspective, manufacturing sales data, released on Monday, came in slightly above expectation, however, analysts are still predicting next weeks Q1 GDP read to be soft.

The week saw relatively little to excite the domestic traders, with the macro-economic calendar very lean, the majority of the week was dictated by news abroad. Turning to our neighbours in Australia, investors looked forward to an employment reading, however, were somewhat disappointed, a soft print of 12.0K vs 18.8K expected. Further abroad, there is the always significant Chinese industrial production and retail sales numbers to digest, with the later released 0.9% weaker than anticipated.

To close out the week, investors focused on the Business NZ PMI (Manufacturing Index) which is considered to be a good indicator of the overall economic health in New Zealand. The result, manufacturing expansion in May came back down to more steady levels of expansion. The seasonally adjusted PMI for May was 54.5 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was 4.6 points lower than April, but still the third highest result over the last six months. Movements into this week will largely be determined by sentiment off the back of the G7 meetings, which this year are being held in Quebec.