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A Good Q2 Earning Season Lifts the S&P Back to All Time Highs

By OFX

US equity markets opened higher this morning as the strong second-quarter earnings season comes to an end. The S&P is only 14 points away from its all-time high reached back in January of this year.

Weekly initial jobless claims today report 213k claimants’ vs expectations of 220k. The Producer Price Index was also published today in the US, and this is the first reading after Chinese tariffs have been imposed. Month over month PPI for July had a reading of 0% vs 0.2% previous while core YoY was sighted at 3.3% vs expectations of 3.4%

EUR/USD continues to trade around the 1.16 handle as traders continue to focus on the trade dispute between the US and China in the absence of any other significant news so far this week. Tomorrow’s CPI number is the main event of note this week which is also expected to show a 0.2% monthly uptick.

Yesterday morning to start the North American trading session it looked as if it would be a continuation of Tuesday’s CAD selloff, the USD/CAD continued its ascent early in the day to touch a month to date high of 1.3117 before retreating to levels nearer to 1.3010. The loonie came under selling pressure earlier in the week and escalated further yesterday following Foreign Affairs Minister Chrystia Freeland called on the release of women rights activist Samar Badawi from prison August 2nd.

The diplomatic dispute between Canadian and Saudi officials escalated with the Saudi Sovereign Wealth Fund under orders to sell down Canadian assets and freeze all new business deals. The initial shock of the Saudi stance has now only had a limited impact on the loonie, especially as oil prices were also softening, indicating to market participants the aggressive actions by the Saudi's will have limited impact on the Canadian economy.

The euro has slipped a little this over as more news emanates from Italy re its proposed 2019 budget. In an interview with Bloomberg, Deputy Prime Minister, Luigi Di Maio indicated he was willing to play hardball with EU policymakers in an effort to get his coalition government’s proposed budget pushed through.

The new administration is hoping to implement a lower, flat tax rate and is expecting some flexibility will be granted by the EU with regards to a loosening of rules re deficits to get the proposals enacted. Away from Italy, it’s another quiet day from euroland with no data due this week, or indeed next. GBP/EUR remains depressed, falling to its lowest level since October 12th, 2017 this morning. It currently trades 1.1095 after hitting 1.1072 earlier this morning. USD/EUR hold below resistance of 1.16 and buys at 1.1598, EURCAD finds support at 1.5100 and trades at 1.5102.

Sterling’s slide continued yesterday with GBP/USD dropping below 1.29 for the first time in nearly a year as Brexit concerns continue to weigh on the pound. If it weren’t the parliamentary recess and holiday season, then there would have likely been some other news that may have lifted the pound however it’s a quiet time of the year, and the markets’ focus remains on international trade secretary, Liam Fox’s “no deal” comments from the weekend.

There is little data again today from the UK; however, tomorrow we finally get something to potentially take traders’ minds off Brexit by way of Q2 GDP numbers. An uptick from Q1’s 0.2% to 0.4% is predicted and should this beat estimates then sterling should get some temporary relief. GBP/USD is at 1.2896 and GBP/CAD 1.6798.

The Australian Dollar remained relatively unchanged in overnight trading, opening this morning at 0.7417. The Aussie managed to hold its gains for much of yesterday’s session, only falling below the key 0.74 handle at the close when it touched 0.7388. Despite the setback, commodity currencies were stronger across the board, and the Aussie was no exception. The AUD recovered strongly to hold above the key 0.74 handle to start the Thursday session.

Market volatility remained mostly suppressed in overnight trading with trade tensions again taking the spotlight. President Trump firstly confirmed that there would be a 25% tariff on $16b worth of Chinese imports implemented on August the 23rd. Initially, markets took the news in its stride as the report was widely expected, however, there was a general softening across the board. Commodity currencies then moved higher against its counterparts after stronger than expected Chinese trade data, ultimately leaving the market in a tenuous, risk-off environment.

The ongoing trade war between China and the US is still a significant risk being watched by the Reserve Bank of New Zealand and has weighed heavily on risk-sensitive currencies such as the kiwi in recent months. Although the US has not directly targeted New Zealand, the island nation is likely to be affected as global supply chains shift.

The Reserve Bank of New Zealand (RBNZ) overnight kept the official cash rate steady at 1.75 percent. We now expect the RBNZ to keep interest rates at this level through 2019 and into 2020, longer than initially projected. The RBNZ mentioned that while recent economic growth has moderated, they expect it to pick up pace over the rest of this year and be maintained through 2019.

From a technical perspective, the NZD/USD pair is currently trading at 0.6646, down over a full U.S. cent after the interest rate decision, from yesterday’s high of 0.6761. We continue to expect support to hold on moves approaching 0.6688 while now any upward push will likely meet resistance around 0.6851.