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NAFTA Trade Talks Resume in Washington

By OFX

The US dollar has been on a tear since the start of the month and the last 24 hours has been no exception. The currency got a further boost from the release of much better than expected ISM Manufacturing PMI, showing the index rose to 61.3 vs. a 57.6 estimate, the highest reading since 2004. It bodes well for US employment data, due for release on Thursday and Friday, or moreover the much-anticipated Non-Farm Payrolls on Friday.

Meanwhile, the NAFTA story simmers away in the background, and we’re bound to hear more on this as the week moves on. As bilateral talks between the US and Canada showed signs of breaking down completely, there is a real concern the Trump administration will follow through and levy more tariffs on China and renege on any compromises expected by Europe or Canada. NAFTA negotiations resume today in Washington and market participants can only hope a resolution is coming.

The escalation in trade hostilities only dampens demand for risk, amplifying the attractiveness of the USD as a haven asset. Couple this with heightened concerns regarding the stability across key emerging markets and a subsequent flight of capital and ongoing macroeconomic strength fueling support for tighter monetary policy and it is hard to look past the USD as both a short and medium asset play.

The Canadian dollar yesterday weakened to a six-week low against its U.S. counterpart amid an uncertain outlook for Canada’s trading arrangement with the United States. There has been a little support for the loonie as NAFTA negotiations resume today in Washington.

On the data front today, we have Trade Balance Figures, exports last month were well above expectations, and the print was -0.63billion. Market Participants are not looking for Canada to move into surplus territory as expectations are for a -1.20B print. All eyes will be on the Bank of Canada's monetary policy announcement at 10 am this morning. While the Bank of Canada is expected to hold on interest rates, the bank may hold off this month due to the ongoing uncertainty of trade negotiations. The Bank of Canada raised rates at their last meeting in July; interest rates currently sit at 1.5%.

From a technical perspective, the USD/CAD pair is currently trading at 1.3175. We see first support at 1.3157 and second support is seen at 1.3114; any upward push will likely meet resistance around 1.3201 and 1.3245.

The Euro edged lower through trade on Tuesday caught up in the broader emerging market sell-off and push toward the safe-haven US dollar. Slipping back below 1.16 the Euro touched intraday lows at 1.1531 before finding support and closing marginally higher.

Trade concerns weighed further on the 19-nation combined unit as investors fear the Trump administration is in no mood to compromise or negotiate on Trade with the China, Canada or Europe following the breakdown of talks between the US and Canada and a suggestion the US will impose tariffs on German automakers.

A raft of services data for from Europe overnight did very little to support the euro, in the face of broader risk and geopolitical flows.

The USD dollar strengthened across the board yesterday and as such GBP/USD continued to trade on the back foot. A miss in UK Construction PMI didn’t do the pound too many favors early on with the index printing at 52.9 vs. forecasts for 54.9, this coming hot off the heels of the Manufacturing PMI miss yesterday.

Later on in the day, the pound did get a lift from a news report that stated the EU could offer new guarantees to the UK for a solution to avoid an Irish border post Brexit. Danuta Hubner, who chairs the European Parliament’s constitutional affairs committee said: “we are open to introducing some changes to the backstop solution so that it is politically acceptable for the UK.” Cable pushed higher by 30-40 points as a result. In other GBP related news Mark Carney said yesterday that he was willing to stay on as Bank of England governor, should it help “promote a smooth Brexit and an effective transition at the Bank.” The announcement also provided a bit of support to the pound, but it’s fallen back against the USD again this morning, this as the greenback catches another bid in the early European session.

Today on the data front we had UK Markit Services PMI print better than the expected 53.5 and posted a 54.3. The print did very little to support the pound.

The Australian Dollar enjoyed a day of mixed fortunes, oscillating between lows of 0.7160 and highs of 0.7230. The event of the day was, of course, the RBA announcement which as predicted, kept rates on hold. The statement was decidedly neutral in tone, and the lack of any further dovish sentiment sent the Aussie higher against the Greenback. The positive movement for the Aussie quickly shifted however as market sentiment reversed globally. Changing hands this morning at 0.7179, the Aussie again succumbs to off-shore forces abroad.

Kicking things off at home, the RBA extended its record run of policy inaction, holding rates steady at 1.5% as widely expected. The focus, however, was firmly on the accompanying statement for clues on the direction of the central banks thinking. The statement itself was broadly neutral in tone and notably did not mention Westpac’s decision to lift variable mortgage rates, basically shrugging off market concerns of rising rates. The statement also failed to mention emerging market turmoil and a laundry list of recent market concerns. The news sent the Aussie marginally higher although this quickly unwound as the day progressed.

The catalyst for the move downwards seems to have no crucial trigger with merely broad USD strength, and portfolio flows driving the market. The USD was heavily bought across the day as market participants in the US came back to work which saw the Greenback rise against most currencies, including the Aussie. Adding fuel to the fire, however, is the skittish demand for commodity currencies and emerging markets as Trump moves ahead with his additional $200bn tariff on China. Moving into Wednesday, the Aussie turns towards its Q/Q GDP figures for direction on the domestic front. Again, a key focus will be on off-shore headlines as well.

The New Zealand Dollar opens the North American session a shade below 66c against the U.S Dollar. Unable to hold on to the 0.66 handle the Kiwi came under selling pressure as the European markets opened for their day of trade. The NZD/USD pair was sold off and touched a 2 ½ year low of 0.6540 on the back of what appears to be USD strength across the board. There was no real trigger for the move. Reading reports this morning it seems that U.S and Chinese trade relations are keeping investors on edge.

Meanwhile, overnight the GDT Dairy auction was slightly weaker than markets were expecting. GDT price index declined 0.7% following the 3.6% fall witnessed in the previous auction and put some additional selling pressure on the Kiwi.

Looking ahead we have ANZ Commodity Prices due out later this morning, and further risks to the downside for the pair could be expected.