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US and Mexico Ink a Deal ask Canada to Join

By OFX

The US Dollar continued where it left off, shedding another 0.6% on the US Dollar Index (DXY) to open this morning at 94.55. It was an eventful start to the week for the United States, with trade talks evolving with Mexico and Canada stealing the spotlight. Nevertheless, despite the new deals inked, the Greenback finds itself in negative territory.

The highlight for Monday was the news that the US and Mexico have reached an understanding on trade and taken the first step to a new free-trade agreement to replace NAFTA. Canada, the other original party, is also set to join negotiations, although Trump was somewhat dismissive of this, saying “we’ll see” to the suggestion. Overall, equity markets rallied across the US after the announcement although the Greenback conversely suffered. The impetus for the fall may be the increasing rhetoric from Trump on his primary trade war target. The new understanding with Mexico and moratorium on the EU tariffs have led speculators to believe Trump is shoring up relationships and focusing all his attention on the world’s second biggest economy, China. Tellingly, Trump commented in a speech in West Virginia that “China was on the way to be bigger than us in a short period of time. That’s not going to happen anymore”. The declines are likely also impacted from the unwinding of aggregate long positions taken by speculators, with many forces conspiring to precipitate the falls, such as the dovish Fed statement and China’s active steps to stabilize the CNY.

The Greenback is again set to enjoy a quiet day on the economic calendar with little to excite markets. Nevertheless, attentions remain affixed to the evolving trade conversations and President Trump.

The Canadian Dollar moved higher against the Greenback after initially seeing USD/CAD resistance at 1.3071 yesterday. The loonie then reacted positively on news that there was a bilateral agreement between the United States and Mexico. Talks are now expected to begin with Canada in trilateral cooperation’s between the three North American countries as Canada is pressured to come on board and sign the deal by Friday.

The Canadian Dollar moved immediately higher following Monday's announcement to reach two-month highs and up 0.6% as the USD/CAD saw 1.2955 the 100-day moving average. Resistance now moves lower to 1.2987, and 1.3029 while support is seen at 1.2903 and 1.2841 the 200 DMA.

Next movements to impact the Canadian dollar will be the keenly watched Trade Balance and GDP figures due to be released on both Wednesday and Thursday morning.

The Euro has drifted higher once again vs. the U.S Dollar touching a four-week high of 1.1693. Sentiment in the market had improved which wasn’t great for the Dollar following the US-Mexico trade deal and the US to overhaul NAFTA (North American Free Trade Agreement). They will now likely re-engage with Canada to reach a final agreement on NAFTA, a primary goal of the Trump administration.

German’s IFO Business Climate index surprisingly jumped up in August to 103.8 which beat July’s reading of 101.7; economist had forecasted a much smaller increase to 101.9. With U.S President Trump agreeing to refrain from imposing tariffs on European cars German companies have raised their business outlook and appear to be more confident.

Looking ahead we have low tier macroeconomic releases - M3 Money supply which measures the total quantity of domestic currency in circulation and deposited in banks, markets are expecting a 0.1% drop from 4.4% to 4.3%. Private Loans is also out which is expected to see a slight increase from 2.9% to 3.0%.

FX market activity was light yesterday given the summer bank holiday in the UK, however, GBP/USD still managed to capitalize on broad-based USD weakness to open this morning’s North American session at 1.2897. GBP/USD climbed 0.4% on the day as the USD selloff continued; pushing the USD 0.4% lower against its G10 peers.

In the absence of any significant UK data releases until September, traders will continue to monitor Brexit sentiment especially as UK politicians continue their preparations for a no deal Brexit. The lack of domestic data means markets will be taking cues from offshore releases, firstly in the form of US Q2 GDP and core consumption measures released out of the world’s biggest economy on Wednesday. Later in the week, we will get some critical Eurozone data through German unemployment numbers on Thursday and Eurozone Core CPI for August released on Friday.

Short-term levels to watch for the GBP/USD can be seen with support at 1.2865 and 1.2825, and resistance at 1.2903 and 1.2945 respectively.

The Australian Dollar is stronger this morning when valued against the US Dollar. The Aussie reached a high of 0.7356 overnight on the back of broad dollar's weakness and a definite risk on appetite in US equities.

On the data front today the macroeconomic calendar had nothing to offer today. Tomorrow will see the release of Housing Industry Association (HIA) New Home Sales data for July. On Thursday the Australian Bureau of Statistics will release private sector capex data for the June quarter which is expected to rise 0.9%, leaving annual growth at 3.5%. On Thursday there’s also data on July building approvals.

From a technical perspective, the AUD/USD pair is currently trading at 0.7349. We continue to expect support to hold on moves approaching 0.7300 while now any upward push will likely meet resistance around 0.7360.

The New Zealand dollar maintained a tight trading range throughout Monday fluctuating between intraday lows at 0.6669 and session highs at 0.6703. In the absence of headline, data sets the NZD took advantage of broader USD weakness and an upturn in demand for risk. News, the US and Mexico, had agreed a new bilateral trade agreement, coupled with increased intervention from the PBOC helped fuel further dollar downside and a correction from 12-month highs touched just two weeks ago.

The NZD is now poised for a break above resistance, flirting with moves beyond 0.67. While the USD advance has tempered somewhat significant upside remains stretched and moves beyond 0.67 and up to 0.68 will likely be hard won. With little of note on hand, today attention again continues with the broader trade developments and general risk appetite, ahead of tomorrow’s ANZ business confidence print.