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Dollar Index Reaches 14-Month Highs

By OFX

The US Dollar index saw further upside overnight after reaching new 14-month highs as the DXY reached 96.80, up 0.3% and breaking through resistance with definite room to advance towards 100. Dollar Strength continues to be the central theme in the market as banks in the European zone are concerned with their exposure to the Turkish Lira with Spanish banks owed approximately $83bn by Turkish borrowers. EUR/USD continues to be sold off in droves, dropping through 1.1400 support levels to an overnight low of 1.1301 against the US Dollar with next targets at 1.12.

Domestically yesterday, US Import prices for July showed a rise of 0.1%, while small business optimism was near survey highs in the latest release of the NFIB Small Business Index as a net 23% seasonally adjusted owners planned on creating new jobs for the country.

Retail Sales released this morning exceeded expectations with MoM for July posting 0.5% and YoY for July also a better print at 6.4%, previous was 6.1% while forecast was looking for only 4.4%. Capacity Utilization, Industrial Production and Manufacturing Productions all beat previous releases. North American Equity Market are all selling off this morning as risk off is the theme so far today.

The Canadian Dollar found support through trade on yesterday afternoon rallying back through 0.7650 as the Turkish Lira stabilized following reports the government would underpin the currency. The lira suffered heavily at the hands of a widespread risk appetite sell-off earlier this week, the loonie benefited from consolidation in broader positions as investors took stock and attention shifted back to Friday’s robust labor market print.

Having moved past the initial shock of the Turkish collapse investors focus returned to stronger macroeconomic indicators and an increased likelihood the Bank of Canada will raise rates again this year. While NAFTA negotiations continue to plague any upside in the loonie against the greenback, a deal appears nearer following an administration change in Mexico and a broad-based assurance Mexico will seek a Tri-lateral agreement.

With little of note on the economic calendar today the loonie will find its direction in broader risk trends ahead of the vital CPI inflation print on Friday. Commodities are in a risk off mode as well with gold down 12 dollar to 1188.8 an ounce and WTI slipping a $1.16 to 65.90 per barrel.

There was some robust data from the Eurozone yesterday as the second estimate of GDP for the second quarter was revised higher to 0.4% from an initial reading of 0.3%. At the same time the German ZEW Economic Sentiment survey printed -13.7 far better than the -20.1 priced in and streets ahead of last month’s -24.7.

Despite this sturdy pair of numbers, the euro is lower this morning as the market focus remains stuck on Turkey and the exposure Eurozone banks have to the beleaguered country. An announcement of tariffs is being imposed on US imports of cars, alcoholic drinks and leaf tobacco will do little to quell the situation. However, it appears the euro is the one suffering the most pain as a result. EUR/USD is down to 1.1313 and the EUR/CAD is at 1.4840. France, Italy and some other Eurozone countries enjoy a public holiday for Assumption Day.

GBP/USD fell back yesterday as UK wage growth figures missed the target. The Average Earnings Index which includes bonus payments saw a 2.4% rise 3m/y when a hold at the previous months 2.5% was expected. The Bank of England closely watches the data (which in theory fuels overall inflation). So the shortfall will have been noted by members of the Banks Monetary Policy Committee.

Overnight in the UK CPI numbers was released by the Office for National Statistics with a small uptick from 2.4% to 2.5% which was expected was confirmed. With the markets focus slowly withdrawing from Turkey there is minimal volatility as inflation figures met estimates.

As mentioned, the immediate panic from Turkey seems to be subsiding, although the situation is far from illustrating this is USD/TRY falling back towards the 6.0 handle after briefly breaching 7.0 early on Monday. USD/GBP trades at 1.2676 and GBP/CAD sits at 1.6626.

The Australian dollar continued its march lower through trade on Tuesday, plagued by ongoing concerns surrounding the state of the Turkish Lira. Investors demand haven assets increased amid fears the collapse will have a run on effect across emerging markets and European Banks exposed to the embattled Turkish economy. Despite the Lira stabilizing following a government pledge to support the currency, the AUD plunged through support at 0.7270 to touch intraday lows at 0.7222 as markets ramped up dollar holdings driving the Greenback to 13-month highs.

Since breaking critical technical support on Monday, the AUD appears vulnerable to further corrections with little stopping a consolidated move through 0.7230 and 0.7170. The recent leg down suggests we are entering new short-term ranges having enjoyed a consolidated period between 0.73 and 0.76. While Iron Ore remains under pressure, the Trade War rages on, and the Yield differential continues to widen there is little scope for a wholesale AUD upswing in the short term. With support on moves approaching 0.7230 and 0.7170 attentions now turn to tonight's employment figures. A soft read will dispel any notion the RBA will hike rates in H1 next year and only compound recent downside moves.

The New Zealand Dollar opens this morning relatively unchanged, currently trading at 0.6557. It wasn’t always a flat day for the Kiwi which did see a notable appreciation against the Greenback. Touching daily highs yesterday of 0.66, the Kiwi unwound those gains quickly to ultimately find support at current levels and end up where it began the day.

With a mostly benign economic calendar to contend with the New Zealand Dollar again found itself being driven by off-shore forces. The lead up to many Chinese data releases saw demand in the oversold Kiwi increase and appreciate slightly. Unfortunately for ‘risk-on’ currencies such as the Aussie and Kiwi, the news came in somewhat below expectations. Ultimately, the Kiwi fared well in the broad market sell-off and now sits at 1.1014 against its cross Tasman rival the Aussie. From there it was the same old story, with the USD strengthening across the broad and whittling down the Kiwi.

Without too much to drive the Kiwi domestically, attentions now turn to current headlines on the on-going Turkey situation for direction. Traders will also keep a close eye on a slew of US figures slated for release earlier this morning.