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NAFTA negotiations, Australian leadership turmoil & Italian uncertainty


The highlight of last week's opening sessions for the USD 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.

Last week also saw a slew of economic data out for the US, continuing jobless claims posted a 1708k better than last weeks 1728K. Core PCE Price index YoY and MoM both printed a notch higher at 2.3% and 0.1% respectively. Personal income hit consensus of 0.3% while personal spending MoM was just above consensus of 0.35 and printed a 0.4%. Initial jobless claim rose slightly to 213K for last weeks print of 210K.

Last week's opening sessions saw the loonie reacted positively, on news that there was a bilateral agreement between the United States and Mexico. The trade agreement has long been a key driver of CAD fortunes and while we are still some way off a reformed accord this week’s progress goes a long way in easing fears talks will break down completely. 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.

However, despite upbeat trade expectations the CAD moved sharply lower after the month on month GDP growth stalled mid-week, printing below expectations and reducing the likelihood the Bank of Canada will raise rates again before years end.

For now, Loonie direction will remain tied to ongoing trade discussions and with significant challenges still to be resolved. Plus, there is still a strong possibility an agreement will not be reached before year end.

The euro has surged the last number of weeks, particularly against the USD, long forgetting the 13-month lows that we endured. However, at the moment the euro is seemingly stuck between strong fundamentals and Italian uncertainty. Whilst it has bounced back due to USD weakness and a little support from German data, there is a sense of déjà vu for the Eurozone with regards to the latest news of political risk. The Eurozone seems unable to escape these sort of events and once again the risk has come from Italy. Following on from the elections earlier in the year, which ironically passed by without a lot of reaction or concern from the market, the fresh Italian coalition is causing headaches for the market with the expectation that its first budget could blow through the EU’s rules limiting public deficits to 3% of GDP. So far the selloff has only been in Italian debt and not the euro itself with Italian 10 year yields hitting 4 year highs.

However the big risk to the EUR at the moment came in the form of a denied report from the Italian deputy Prime Minister, that Italy had asked the ECB to help with it’s bond sales. The constant worry about the upcoming Italian budget is the risk that it could cripple Italy. This is because in order to fund the budget, Italy may have to unwind previous reforms which could hamper future Italian growth prospects (Italian growth is already dwindling). This growth needs all the help it can get because Italy contributes 12% of the EU’s total GDP (as well as 12% of its population – punching) which in turn creates concerns about the EU’s future growth prospects. The ECB recently said that the main risk to its plans is trade tensions but we believe that Italy is more of a worry. This also isn’t an event that is going to go away anytime soon, after all, we are talking about the 2019 budget.

Following on from the long weekend the theme for sterling is much like the previous week’s; no data so instead the pound was driven by reports and stories around Brexit. One reprieve for many sterling buyers who are worried that Brexit will weigh on the currency’s performance is the report that the Brexit deadline, originally penciled in for the 18th-19th October could be extended by four weeks. The dialogue between Barnier and new Brexit Secretary Dominic Raab was positive and whilst the extension is good news, the original deadline was in place to allow the EU Summit time to vote on the Brexit deal.

All that said, Politicians sometimes have a knack of unwinding all of hard work they have done in one short interview and later in the week it was the turn of Michel Barnier appearing after his very consolatory comments, but this time the tone was much more considered.

Barnier stated that the EU would be prepared for all options with the UK and that a ‘no deal’ Brexit is part of this planning. The pound wobbled but in general, it has managed to hold onto its gains made earlier in the week. August was meant to be a quiet month for the currency markets and the pound was bereft of any data for the last couple of weeks. GBP/USD and GBP/EUR have swung over 3.3% and 2.1% respectively over the last four weeks however with September just around the corner, the return of liquidity (following Labor Day) and the return of concrete data for investors to dig their teeth into volatility could increase.

The AUD launched into last week cautiously, given the recent turmoil on the Australian Leadership front. The AUD had seen a drastic plunge following a frantic week of internal wrangling within the ruling Liberal-National coalition, in an attempt to avert a conservative-led move against then Prime Minister, Malcolm Turnbull. Despite narrowly clinging to power after an initial leadership vote, ultimately Turnbull he was ousted from office in a bitter party-room contest that ushered in the country’s sixth leader in the last decade, Scott Morrison. Mr. Morrison has pledged to “heal our party" after the party infighting and on the back of these statements and with the dust settling, the AUD saw a modest recovery to begin the week above 0.7319 versus the USD.

On the data front, the economic calendar was relatively quiet to close out the month of August, however, some key releases put pressure on the AUD. Starting at home, Private Capital Expenditures posted a nasty decline of 2.5% against an expected increase of 0.6%, implying slowing business investment in Australia. Further declines in building approvals with a reading of -5.2% against an expected decline of -2.2% also added fuel to the fire. Earlier in the week, Westpac also reported their mortgage rate increase which didn’t help concerns over the Australian economy either. The market rapidly unwound from its highs of 0.7362 earlier in the week and the AUD closed out the week below the 0.72 mark.

The New Zealand dollar maintained a largely tight trading handle throughout last weeks opening sessions, 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 2 weeks ago.

The New Zealand Dollar fell sharply through trade on Thursday, loosing almost 100 points and closing as the day's worst performer. ANZ’s business confidence report showed corporate assuredness had collapsed to levels not seen since the 2008 financial crisis, which in turn fostered a decline in investment and employment intentions casting a cloud over near-term growth expectations. The poor print comes on the back of Dovish RBNZ currency prompting markets to increase expectations the monetary policy committee will cut the OCR within the next 12 months.

Plunging through 0.67 and 0.6650 losses were compounded by a broader market-wide, risk-off tone. Weakness across emerging markets, led by Argentina’s request to bring forward the release of specialised bailout funding, prompting a further run on other emerging market assets and wider flight to safety. The NZD/USD closed the week at 0.6621.