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Greenback Gains as Emerging Market Concern Heighten

By OFX

The US Dollar primarily held onto gains enjoyed into last weeks close as a US Labor Day holiday ensured thin volumes through much of the day. The worlds base currency-maintained a near one week high against G10 counterparts as trade tensions, highlighted by the break down in NAFTA negotiations, and ongoing emerging market concerns prompted broader US dollar demand.

Investors reacted to comments from President Donald Trump at the weekend wherein he reportedly warned Congress not to meddle with talks to revamp NAFTA as there was no need to keep Canada in the agreement if they failed to cede to US demands. The comments came on the back of a similar criticism issued on Friday and have dampened any expectation a trilateral trade agreement will be reached in the near term. The break down only adds to an escalation in global trade tensions. Emerging market concerns also weigh on investors’ appetite for risk as escalating economic crises in Turkey and Argentina are prompting a flight of capital away from developing economies and back into the USD.

Attentions now turn to ongoing trade talks and key manufacturing data and construction spending figures out later this morning in North America. The data and trade headlines will give the greenback its broader direction through trade on Tuesday.

The USD/CAD has moved within a tight 30-pip range on Monday mostly because markets were closed Canada and the US as North America observed the Labor Day holiday on Monday. With no local economic releases for the loonie traded in a broad range over the last 24 hours. The loonie tested support at 1.3061 and currently sits at the resistance of 1.317.

Today we had the release of Markit Manufacturing PMI for August expectations were for 56.9 and the printed number came in above expected sighted at 57.8. More importantly, market participants will be keenly attuned to tomorrows Bank of Canada monetary policy decision on interest rates which are expected to remain unchanged at 1.5%. As mentioned participants are expecting the BoC to hold this month but will be watching for clues on the possibilities of an October rate hike.

On the technical front, initial support is seen at 1.3090 while resistance is at 1.3157 and 1.3201.

A series of PMIs were released from the Eurozone yesterday morning. The Eurozone print came in better than market forecasts but the indices for Germany, France and Italy mostly disappointed, and so the euro was reasonably steady early on.

Euro traders now turn their attention to a relatively quiet Tuesday on the domestic economic calendar with only the M/M PPI figures to drive direction. Off-shore releases may also affect the pair, however, with ISM Manufacturing PMI due for release in the US. In the meantime, we’re seeing the dollar catch a bit of a bid with EUR/USD falling to fresh week lows this morning.

The pound fell on Monday following the negative Brexit headlines over the weekend, namely Barnier’s reaction to the Chequers proposal. The quid was sold off further following the release of a weaker than expected UK Manufacturing PMI print on Monday, which came in at 52.8 vs. 53.9. It was the weakest print for 25 months. Meanwhile, the USD continued to strengthen through the day despite it being a public holiday in the US and Canada.

Cable is licking its wounds a bit this morning, but there’s good support at and just under the 1.28 big figure. Perhaps it will get a lift if the current BoE Governor Carney announces today that he will be staying on beyond June next year, this as speculation mounts in the papers. He’s due to hold a press conference this afternoon.

UK economic data to be aware of is the Construction PMI which missed expectations of 55.8 posting a 52.9. UK Inflation Report Hearings have also been released. As usual, Brexit rhetoric and headlines will no doubt continue to dominate, though.

Markets were relatively quiet with the US on holiday and investors took the opportunity to take profits off the table. Grinding its way above the 0.72 handle, the Aussie opens this morning in North America just under at 0.7182 after a dismal start to the week which saw the Pair touch its lowest level in 20 months. The Aussie participants turned focus to the RBA policy announcement overnight in which RBA left rates unchanged at 1.5%. It was widely expected interest rate would remain unchanged and neutral tone in the RBA statement held the Aussie within its current trading range against its trading peers.

The Australian Dollar spent much of Monday below the 0.72 level, bouncing between 0.7164 and 0.7215 for much of the session. The impetus for the declines were poor domestic figures and growing concerns over mortgage rate increase, with the latest salvo from the ABS also hurting the Aussie. M/M Retail Sales was released in Australia on Monday, showing a 0% gain against a forecast of 0.3% growth, a decidedly bearish outcome. The Aussie also felt the impact of disintegrating relations with China and the escalating US-China trade war. Overall, the mix of negative news pushed the Aussie lower.

The Aussie participants turned focus to the RBA policy announcement overnight in which RBA left rates unchanged at 1.5%. It was widely expected the interest rate would remain unchanged and the neutral tone in the RBA statement held the Aussie within its current trading range against its trading peers.

The New Zealand Dollar has moved within a tight range against the U.S dollar, but the move was still lower. NZD/USD touched a high of 0.6622 during Asian trade and then began a steady decline on the back of weaker than expected Trade Index. The Statistics New Zealand showed that the Terms of Trade Index improved to 0.6% in the second quarter from -2% in the first quarter but fell short of the market expectation of 1%. The kiwi touched an eventual low of 0.6597 just before the start of Tuesday's session.

Looking ahead at the economic docket we will see the GDT fairy auction take place tonight with an expected increase in the overall price index of about 2%.

On the technical front, we see initial support at 0.6590 and then 0.6545. On the upside, resistance is seen at 0.6660 followed by 0.6715.