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NAFTA back in the spotlight, BoE raises interest rates and the "trade war" continues...

By OFX

Major equity indexes in the United States started last week on a softer note and extended their losses as tech-giants continued to suffer sharp losses on disappointing earnings results. The tech-heavy Nasdaq 100 index dropped as much as 1.5% declining for a third-straight session. Netflix erased nearly 5% to lead the losses in the FAANG (Facebook, Amazon, Apple, Netflix, Google) group.

On the US data front, last week saw the release of the June Personal Consumption Expenditures (PCE) inflation report along with personal income & expenditure figures for the month of June. All came in at estimates, yet Core Personal Consumption Expenditures missed a 1.9% vs consensus of 2.0%. The FOMC also began two days of meetings in regards to setting monetary policy, and market expectations were for the Fed keep interest rates at the current 2.0%.

Despite the Fed upgrading its assessment of the U.S. economy, an interest rate increase was skipped, leaving the cash rate at 2% for now. However, the committee is widely expected by market participants to approve a quarter-point increase at the September meeting. The statement said the labor market has "continued to strengthen," language consistent with the June meeting. Traders in the futures market are indicating a 91.4 percent chance of a September increase and a 68.2 percent probability for another move in December.

The loonie began last week well supported, the catalyst being broad USD weakness and a 2% increase in WTI crude oil prices amid potential supply disruptions.

The strength, however, was short-lived, with the loonie coming under pressure following reports that American officials had taken the “highly unusual” step of rejecting Canada’s bid to take part in senior-level NAFTA talks between the U.S. and Mexico later this week. USD/CAD pushed 50+ points higher on the news.

Towards the end of the week, the Canadian dollar moved marginally lower through trade on following its G10 comrades lower against the Greenback as trade tension dampened risk sentiment and forced investors toward traditional haven assets. Touching intraday lows at 0.7669 the loonie met selling pressure as investors watch trade hostilities between the US and China worsen and feared this might spill over into protracted NAFTA negotiations. The CAD has been trading in a tight range against the greenback through the last week. The oil-driven unit found support overnight following a rebound in oil prices. With WTI crude trading at 68.96 bouncing off 66.89.

Determined to finish the week on a positive note, the CAD had an excellent release for Canadian Trade Balance numbers with imports and exports almost a net-net. Imports posted a 51.32B while exports printed a 50.7B, giving a Trade balance figure of -0.63B vs. expectations of -2.30B. Canadian Exports exceeded expectations by 1.99B if this trend continues over time the loonie will be well supported.

The Euro began last week on a high note, rising 0.40% to 1.1705 amid broad USD weakness and a strong Swedish GDP number. Yields in the US spiked less, in relative terms, than other major currencies as the market positioned itself for end of month flows and potential monetary policy changes in Japan and UK.

Mid-week saw the EUR/USD cross soften, with a set of generally mixed data releases failing to support the single currency; Spanish GDP printed at 0.6% vs. 0.7%, European CPI Flash Estimate printed at 2.1% vs. 2.0% and European Prelim Flash GDP printed at 0.3% vs. 0.4%. A host of European Manufacturing PMIs were released too, and like the aforementioned data, it was all a bit mixed, and so not particularly supportive of the Euro.

With all eyes on the Bank of England to close the week, the Eurozone did release its latest set of producer prices which beat expectations. However, with half the market distracted and the other half anticipating Friday's jobs figures from the US, EUR/USD touched on a two week low.

Last week opened with a bout of range bound trading for GBP/USD pair, amid a lack of economic data or any fresh or major political/Brexit headlines. GBP investors were seemingly taking a cautious approach to trading ahead of Thursday’s Bank of England monetary policy announcement. The odds of a rate hike were priced at around 90%, and a rate hike thereafter (and before the end of the year) at about 12%.

And as expected, for the first time since March 2009 the Bank of England raised interest rates back to 0.75%. It was, however, the hawkish 9-0 vote from the bank’s MPC members that surprised the market slightly causing the pound to surge.

There are many thoughts that the high level of credit that consumers still hold could become a burden on some households, with levels of debt still relatively high. Waiting until 2019 could have been an option however for the Bank of England, however they pushed forward, buoyed perhaps by their upwards revision in growth. Moving forward Mark Carney stressed in his press conference that if the economy continues above and beyond its current path, which we hope it does, then more hikes will follow at a gradual pace. For sterling though, the risks still are centered around Brexit. Whilst there was a small bounce and the promise of further hikes down the line the market hasn’t flocked to the pound which suggests that Brexit concerns, which are many, still remain at the forefront.

The Australian dollar offered little to excite investors through last weeks opening sessions and trade on Monday maintained a tight 30 point handle, ignoring broader equity weakness and a general risk-off environment. Broader risk sentiment was weighed down by another day of heavy losses across US tech stocks and with little news flow prompting direction the AUD struggled to mount any meaningful extensions towards support or resistance.

The early focus for the week was firmly on the Bank of Japan, amid rumors of a monetary policy stimulus 'tweak' on the horizon. In a bid to ease pressure on its domestic banking sector the BoJ was expected to amend its yield curve controls, a move that could prompt a reduction in Japanese institutional investors demand for foreign bonds. In the end, the eagerly anticipated BOJ meeting saw a more dovish stance than expected and with inflation forecasts downgraded and with the decision to keep interest rates at record lows for an extended period of time, the Japanese Yen was sold off in droves and the AUD/JPY cross reached a two week high rallying from 82.20 to an overnight high of 83.20.

Towards the end of the week, the ongoing trade war saga saw the Australian Dollar trend downward, ignoring Thursday's upbeat release of a large increase in trade surplus figures for the month of June. Despite the large surplus of $1.87bn, both imports declined to -1% and exports contracted from 4% to 3%. The export surplus was mainly fueled by a boost in the energy sector with LNG shipments rising by 14%. Support at 0.74 was taken out quickly as investors digested the news and an exodus in risk appetite saw the AUD/USD dip to 0.7360.

President Donald Trump once again released further news of a potential increase in tariffs on $200bn worth of Chinese imports to 25% from the previously announced 10% in the previous month. Markets saw a surge in the US Dollar against a basket of currencies and with no sign of calm on either side by both China and the United States there is the potential to see further volatility over the coming weeks for the Australian Dollar and could look at a retest of yearly lows of 0.7310 in July.

The New Zealand dollar began the week drifting higher against a softer Greenback, as investors waited for a number of central bank meetings.

On the local data front, economists were keenly focused on the release of ANZ Business Confidence. The survey has reported negative confidence for the past nine months, and the local data released did not provide much support to the pair with the survey showing more weakness in business confidence, down to a 10-year low. The outlook for July showed 45% of businesses were pessimistic about the general outlook for the economy with confidence sliding before the general election in 2017. Economists believe a shift down in confidence can be also due to a labour-led government and uncertainty about the policy direction.

The end of the week saw New Zealand Dollar dip against its US counterpart following the release of second-quarter unemployment data. The jobless rate rose to 4.5% which beat expectations of 4.4%. Meanwhile, private sector wage inflation rose 0.6% in the quarter for a 2.1% annual increase which was in line with expectations. The NZD/USD moved from 0.6819 down to 0.6803 following the report and then dragged lower offshore to touch an eventual low 0.6781. Markets are expecting the RBNZ to increase rates in late November, all speculation at this stage as it is dependent still on the economy retaining momentum to push inflation higher.