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Greenback Gains as Risk Appetite Deteriorates

By OFX

US-China trade sentiment soured further overnight, forcing US Equities and treasury yields lower through US trade with the S&P500 down 0.7% and Treasury yields falling to 2.82% and 2.5% for the 10 and 2 years respectively. In contrast, we saw the USD index rise 0.8% on the day to touch 9-month highs as the deterioration in risk appetite continued to support the safe-haven currency. The price action was precipitated by commentary from one of Trump's key economic advisors regarding China’s reply to US trade demands which have been deemed ‘unsatisfactory’, and the president would not be retreating on China.

In other news from overnight, the People’s Bank of China devalued the Chinese Yuan, again. The reference rate was set at its highest level since December and has only added fuel to the trade war fire. This event looks configured to support increased dollar bids, at least in the run-up to the end of the week. With month end, quarter end, and half year approaching we’re also likely to see some portfolio rebalancing and “squaring up” of books and currency positions – it could make for some heightened volatility over the next two days.

The Canadian dollar gapped lower vs. the dollar yesterday evening as Bank of Canada Governor Poloz spoke. He didn’t give too much away and was very coy on the potential for a rate hike in July. He said, “I read the odds of an interest rate hike the same way I think you do by looking to see what’s going on in the market.” The probability of a rate hike at the July meeting fell to 52% from 61% before the comments.

The loonie recovered later on in the New York session as Poloz’s comments turned a little more positive. Markets perhaps also took a chance to digest what he had to say entirely.

EUR/USD, like most other currencies vs. the dollar has fallen over the last few trading sessions. It looks set to break down through the 1.15 level at one point but has recovered early this morning, perhaps in reaction to Angela Merkel’s comments at the beginning of the EU Summit in Brussels, albeit she focused on immigration saying that the issue of migration may determine Europe's fate. German CPI has been released in the last few minutes too, and while there is more inflation data due from Europe later on today, these latest figures have disappointed.

In other news, The ECB has just released its quarterly economic bulletin and reiterated the points made by Draghi in his monetary policy presser earlier this month, including the point that EU economic expansion is broad-based. This may also be lending some support to the single currency this morning and may have helped it bounce off of 1.1525.

Much of today's (or the next few days) focus will be on the EU Summit. It’s also worth watching out for further US/China trade warring and quarter-end volatility, with half an eye on more European inflation numbers due for release today.

GBP/USD has fallen gradually through the last 24 hours and is now trading at new lows for the year. It’s come as a result of a much stronger dollar. In fact, it was the strongest of the major currencies yesterday, supported in part by the continued worries over trade, evidenced by the performance of US stocks early on in the New York session yesterday.

BoE Governor Carney spoke yesterday too, and although he didn’t touch on monetary policy, he instead talked about how global risks had increased and how the banks’ capital had risen to withstand any negative Brexit related impacts to the economy.

It can’t be a great sign that despite the MPC votes last week, showing that one other committee member had joined two other dissenters in voting for a rate hike at the previous meeting, that GBP/USD is trading at lows for the year so far. It suggests it might not be long before cable falls below the significant 1.30 figure. If UK data disappoints between now and August and should the dollar continue its momentum higher, then a break could come sooner rather than later.

The Australian dollar opens weaker this morning against its US counterpart on the back of further trade tensions between the trump administration and China. As global risk sentiment continues to Sour, the Aussie dollar is struggling to keep pace with the safe haven USD. The Aussie has fallen to an 18month low overnight of 0.7324 and is expected to remain under pressure as the yield differential continues to move in favor of the USD.

Looking ahead today and the Australian macroeconomic calendar is empty with no relevant data releases. Therefore the Aussie Dollar most likely follows the lead of equities. Japan will release retail sales figures for May at 9.50am AEST.

From a technical perspective, the AUD/USD pair is currently trading at 0.7344. We continue to expect support to hold on moves approaching 0.7300 while now any upward push will likely meet resistance around 0.7430.

The New Zealand Dollar has been one of the worst performers amongst its G10 counterparts with the bulk of the damage done during Wednesdays New Zealand Session. The fall in the Kiwi is seemingly a byproduct of weakening global risk sentiment and a weaker than expected business survey which showed confidence activity indicators slipping lower.

The underperforming currency fell from 0.6840 to 0.6779 against its US counterpart, representing its lowest level since June 2016. In what was of no surprise to markets, the RBNZ opted to keep its cash rate on hold at 1.75%. However, there were some slightly more dovish tones emanating from the subsequent statement. RBNZ governor Orr reinforced that the direction of the next rate move was still uncertain and that the government’s fiscal spending plans were lower and later than anticipated.