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RBA keeps rates on hold, trade concerns weigh on the Eurozone

By OFX

The US Dollar primarily held onto gains enjoyed from the previous week's close as a US Labor Day holiday ensured thin volumes through the week's opening sessions. 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.

The Canadian dollar closed last week on a positive note, recouping most of the week's losses. The catalyst behind the loonie jump was the upbeat message from Senior Deputy Governor of the Bank of Canada Carolyn Wilkins speech in which she describes the Canadian economy as being on “solid footing” and households are “adjusting well” to higher interest rates. All signs and signals are there for the BOC to raise the rate at it next scheduled interest rate announcement and monetary policy report due on October 24, 2018. Wilkins cited the "gradual" approach that the central bank is taking as appropriate as the recent spike in inflation is seen as temporary and not because of over demand. Canada remains out of a trade agreement with NAFTA negotiations still ongoing, and this is also in the economic model the BoC use to calculate if a hike is “prudent at this juncture.”

On the data front, The Bank of Canada held interest rates steady on Wednesday as expected and reiterated that while more hikes would be needed to keep inflation on target. The BOC's interest rate remains at 1.50 percent. The Canadian Central Bank has raised rates four times since July 2017 in response to the growing economy.

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

Trade concerns weighed further on the 19 nation combined unit as investors feared 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. The market remains relatively skittish as the risk-off environment continues to dominate market sentiment.

The started last week poorly, 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. In fact, it was the weakest print for 25 months.

On the flip side of the coin a better than expected UK Services PMI print gave the pound a bit of a lift, but so too did a mild about-turn in risk sentiment. The biggest market-moving news of the week, at least as far as GBP was concerned, came from a Bloomberg news release that reported Britain and Germany were willing to drop key Brexit demands. Specifically, the report said “the British and German governments have abandoned key Brexit demands, potentially easing the path for the EU and UK to strike a deal”. GBP/USD gapped 100 points higher, back through 1.29 on the news.

What goes up……well, it didn’t last long. Within a couple of hours a German government spokesman said that their position on Brexit had in fact, not changed. The net impact on the pound was still positive however, and GBP/USD finished the week hovering where it started.

The Australian Dollar enjoyed a week of mixed fortunes, oscillating between lows of 0.7160 and highs of 0.7230.

Kicking things off, 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.

To close out the week, the Aussie was buoyed by a positive trade balance reading which saw exports increase their margin over imports. The latest figure was surprisingly higher than expected and saw the Aussie break through 0.72. These gains, however, were quickly unwound after ANZ, and then CBA announced they’d follow Westpac and increase their mortgage rates. The market reacted poorly to the news on the implications of the rise, despite the RBA’s lack of concern for small rate movements.

The New Zealand Dollar has managed to recoup early losses from last week where we saw the pair touch a multi-year low of 0.6530 vs the Greenback.

On the data front, last week saw the release of the ANZ Commodity Price Index which reported a drop of 1.1% month on month for August which was its third consecutive monthly decline. The index is down 0.5% year on year and reports show that of the 17 commodities in the ANZ's index, seven fell, four were unchanged and six lifted. The data had little impact on the Kiwi and despite touching a near 30-month low the Kiwi managed to recoup some losses on the back of a broad-based USD weakness. Elsewhere 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.