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President Trump, EU President Juncker strike deal, NAFTA negotiations resurface


The United States Dollar began last week on road to recovery as demand for the greenback returned to the market. The catalyst for the reversal of fortunes, albeit small, was the upbeat data from the Federal Reserve Bank of Chicago which showed the National Activity Index rose to 0.43 in June. However, the good news was significantly counter-balanced by a 0.6% reduction in existing home sales.

The excellent start continued for the Greenback, however, as commodity currencies began to depreciate against the USD when China announced it would inject $74b of liquidity into the market, further easing their accommodative monetary policy. The CNY immediately plunged 0.4% which contributed to declines across the board for commodity currencies.

The big headline last week came out of Europe this time with conciliatory comments from President Trump after his press conference with EU President Juncker. While the comments by both presidents after the meeting were vague and unhelpful, a halt on tariff implementation is nevertheless more than the market expected. The positive market sentiment saw equity markets and the EUR appreciate significantly initially, although these were both later reversed due to unrelated announcements. Nevertheless, positivity returned to the market which led to a modest recovery for the Greenback, close out the week near the 0.8580 mark.

With a very light week on the economic data front for Canada, market participants paid close attention last week to resuming NAFTA negotiations. Foreign Affairs Minister Chrystina Freeland visited Mexico with outgoing and incoming counterparts after talks were stalled for the July 1st Mexican Presidential elections. Trump has threatened to scrap NAFTA and put together singular deals for Canada and Mexico, also saying that he would prioritize a Mexican agreement first.

Mid-week the loonie benefited from a US dollar sell-off which was also bolstered by rising crude oil prices. WTI pushed back towards $70 a barrel for the first time in seven days providing the loonie a tailwind.

To close the week, we saw the loonie was trading at the highest level in a month versus the USD, around 1.3030, but couldn’t hold onto gains despite comments by US Trade Representative Robert Lighthizer around NAFTA and the possibility of reaching a tentative accord next month. USD/CAD closed the week at 1.3053.

As we near August, we get closer to what is typically a quiet period for the Eurozone as traders and business’ take time off and head to the beach for a break.

Last week’s main event, which turned out to be a non-event, was the European Central Bank interest rate decision, keeping rates unchanged, as expected, and reiterating the pledge to keep them flat until mid-2019. No change of policy was almost guaranteed, so the markets primary focus was on the comments of ECB chief, Mario Draghi’s, held at a press conference 45 mins after the release. To summarize, Draghi sounded fairly upbeat in his accompanying presser and despite the risk of a trade war, the ECB president said that the latest data indicated the region was “proceeding along a solid and broad-based growth path”.

In other EUR data, the monthly tranche of PMIs has been released with a mixed bag of results being shown. The Eurozone’s purple patch of expansion seen late last year has been replaced with a more modest pace of output of late highlighted by the reduction in PMI figures. German manufacturing for July printed 57.3 beating expectations but some way off the series of >60 readings we saw either side of Christmas. Eurozone Manufacturing as a whole came in at 55.1 ahead of the 54.7 forecast. The EZ Services number printed 54.4 slightly worse than the 55.0 predicted.

Sterling has been under pressure of late as political concerns re: Brexit weigh on the currency with political in-fighting and high profile resignations in PM, Theresa May's cabinet, however, it was a fairly quiet start to last week from the pound's perspective.

There was no top-tier UK data to begin the earlier sessions, however, one piece of news to catch sterling holder’s eyes was at a forum in Liverpool where Bank of England Deputy Governor, Ben Broadbent stated he hadn’t decided on whether to vote for a rate hike next week. Broadbent is seen as a dove amongst the Monetary Policy Committee so it could be seen as a hawkish signal that he’s contemplating voting to raise rates. Chances of a hike are around 80% currently.

Another small crumb of comfort may be reports that UK PM, Theresa May is set to take charge of Brexit negotiations going forward. With former Brexit Secretary, David Davis resigning in the wake of the new plan for future trade/customs being revealed it appears the PM will be taking a more assertive role alongside new Brexit Secretary, Dominic Raab. We could see a (very) limited recovery in sterling over the next six weeks as parliament has its summer break and Brexit news thins out a little however we are now only three months before a future trade/customs plan is meant to have been thrashed out by so it could only be a temporary reprieve.

Having opened a shade above 74c at the start of last week, the Australian Dollar came under selling pressure as the Asian session kicked into full swing. The AUD/USD touched a low of 0.7373 against the US Dollar and with little local data the Aussie remained centred on Chinese currency developments. China’s central bank injected 502 billion Yuan to financial instructions via its one-year medium-term lending facility (MLF) with rates unchanged, a move which was totally unexpected by the market.

Weighing further on the Aussie was U.S data released by the Federal Reserve Bank of Chicago. The National Activity Index boosted by the upbeat production-related indicators jumped up to 0.43 in June from -0.45 in May a move that pushed the US Dollar index higher. On the commodity front, oil, gold and base metal prices were all a tad lower.

Mid-week saw the release of Australian CPI figures, with headline inflation remaining flat at 0.4% q/q which was below expectations and shifted just into the RBA’s target range of 2-3% at 2.1% y/y. Additional, the trimmed mean CPI, which is the RBA’s preferred measure, edged down 0.5% q/q while was on a y/y basis at 1.9% y/y. Market pricing is implying that the cash rate will remain unchanged for a considerable period of time, with a less than 50% chance of a hike in the next 12 months.

To close out the week, Australian Import Prices increased at a faster-than-expected pace in the three months ending June. The import price index climbed 3.2 percent sequentially in the second quarter, faster than the 2.0 percent rise in the first quarter. It was the third consecutive quarterly increase and above the 1.9 percent rise economists had forecast. The increase was driven by higher prices paid for petroleum, petroleum products and related materials, general industrial machinery, electrical machinery, apparatus and appliances. On a yearly basis, imports prices grew at a faster rate of 6.0 percent in the June quarter, after a 2.6 percent gain in the March quarter. Data also revealed that export prices grew 1.9 percent quarterly and by 6.6 percent yearly in the June quarter.

The New Zealand Dollar gave up gains enjoyed into last weeks opening sessions as deeper depreciations in the CNY weighed on the unit.

Despite reasonable and improving domestic economic performance, New Zealand’s exposure to a global slowdown, in particular, the Chinese value chain has driven the Kiwi to record short positions and been a primary catalyst for the renewed downside. However recent strength across commodity prices has helped firm support on moves toward 12 month low and 0.67.

Mide-week, the Kiwi shook off a softer than anticipated trade balance print and found support through Wednesday's sessions as the embattle Chinese Yuan edged marginally higher while trade talks between the US and Europe appear to have eased tensions and fears for an all-out trade war. President Trump and EU President Juncker met in Washington with both sides allowing concessions in an agreement that is hoped will ease trade barriers.

The impromptu press conference helped ease concerns linked to an escalating trade war and fostered a short-term upward run on commodity currencies. The Kiwi however then gave up gains as investors expect Trump attentions to return to US-Sino trade hostilities. As the tariff battle between the US and China continues and the CNY remains under pressure the upside demand for the NZD will likely be short.