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The Dollar Index Pushes Higher on Risk Moves

By OFX

The US Dollar Index (DXY) appreciated 0.33% to start the new working week, opening this morning at 95.34. The catalyst for the move upwards was stronger than expected US wage growth as well as fresh new threats from President Trump on Chinese imports. Market sentiment decidedly shifted towards safe-haven currencies which saw the Greenback strengthen further than it already has this year. The US Non-Farm Payroll report surprised markets adding 201,000 new jobs in August, beating expectations of 191,000. Also, average hourly earnings rose 0.4% month-on-month and by 2.9% year-on-year, which was the highest wage growth print in almost a decade supporting the Fed’s assertion that the tight labor market would lead to higher wages and price inflation. The implications were not lost on the market which saw US treasury yields move sharply higher as well as boosting expectations of the Fed tightening monetary policy further. The Dollar also benefitted from the sentiment, rising higher on the news against most of its counterparts.

New threats from the President also boosted demand for the Greenback despite not announcing the $200bn tariffs on Chinese imports. President Trump did say that it could happen “very soon” but so far, the duties have not yet been implemented. It was another ratchet up of the rhetoric that saw the USD appreciate further with his statement suggesting he was considering putting higher tariffs on all Chinese goods, leading to negative sentiment on market movements. The news hit riskier assets the most and saw steep depreciation for many China aligned currencies.

With little headline data on the domestic docket throughout the week ahead, direction will continue to derive from ongoing trade developments.

The Canadian Dollar fell throughout trade on Friday touching one-week lows at 0.7569 after employment data fell short of broader expectations. Surprisingly the economy lost more than 50,000 jobs throughout August, the most significant monthly decline since January and well outside analyst expectations for labor market expansion, while an uptick in Full-time employment helped pacify investors and ensures another rate hike is still on the table.

Having fallen almost one percent through the week, the Canadian dollar remains vulnerable to trade talk and risk appetite trends. Verification President Trump and the US will look to impose a further $267 billion tariffs on Chinese Imports only escalates recent uncertainty following the break down in trade talks at the end of last week. There is an increasing fear Trump and the US will look to implement Tariffs on Canadian auto-makers, a move that could have significant consequences for the broader Canadian economy.

With little headline data on the domestic docket throughout the week ahead, the direction will continue to derive from ongoing trade developments. Support for the USDCAD pair is seen at 1.3157 and 1.3114 while resistance is 1.3201 and 1.3245.

EUR/USD moved within a 1.11% range last week from lows of 1.1530 on Wednesday and a high of 1.1659 on Thursday. The pair moved off its perch of 1.1649 on Friday and relinquished all gains made earlier in session following strong US employment data. The US Nonfarm Payroll report surprised markets adding 201,000 new jobs in August, beating expectations of 191,000. Also, average hourly earnings rose 0.4% month-on-month and by 2.9% year-on-year, which was the highest wage growth print in almost a decade.

Regarding local data, German industrial production was weaker than expected, falling by 1.1% in July, after declining 0.7% in June. The annual pace of growth of industrial output eased to an increase of 1.1% in July, down from a rise of 2.7% in June. Eurozone Q2 final GDP came in unchanged as expected at 0.4% but the year-on-year numbers were revised to 2.1% from 2.2%. Looking ahead, the macroeconomic calendar is full and kicks off with the Eurozone’s Sentix Investor Confidence. This survey of 2,800 analysts and investors has surprised to the upside in the past two months, reaching 14.7 points in August. A similar figure is likely for September.

The Great British Pound extended gains on Friday against the Greenback reaching a high of 1.3027 after European Union negotiator Michel Barnier said the EU was open to discussing other “backstops” on the Brexit issue. Unfortunately, those gains were short-lived after Greenback rallied on the back of strong U.S. jobs data. U.S. job growth accelerated in August and wages notched their most significant annual increase in more than nine years.

Overnight UK Gross Domestic Product (GDP) data released higher at 0.3% from expectations of 0.1%. Last week the IHS/Markit Institute indicated that the British manufacturing industry had slowed down to its lowest expansion rate since July 2016 – July 2016 was just after the Brexit referendum. On Tuesday we will see UK Jobless Rate which is expected to remain at 4.00%.

From a technical perspective, the USD/GBP pair is currently trading at 1.2945. We continue to expect support to hold on moves approaching 1.2890 while now any upward push will likely meet resistance around 1.2950.

The Australian Dollar continued its freefall lower on Friday after opening the day clawing onto the 72 US cent handle. Whipsawing for the majority of last week between 0.7160 and 0.72, the Australian dollar dropped through support levels during the domestic session on Friday as it continued to trade in a risk-off environment. With levels now testing Feb ’16 lows, it is possible the US 70 cent mark is now firmly on the horizon for investors as we head into the new week. Direction for the Australian dollar will be determined by the release of Chinese inflation figures this morning as the AUD/USD opens at 0.7118.

Shedding nearly 1.5% for the day from its high on open, the Aussie closed to a new yearly low of US 71 cents following the news that President Donald Trump was looking to hit China with further tariffs on $US267 billion of Chinese goods on top of the already announced tariffs of US $200bn of goods. Non-Farm Employment Change figures were positive for the United States on Friday evening, only supporting further interest rates hikes by the Federal Reserve and putting potential further pressure on the local currency for the foreseeable future.

With levels now testing Feb ’16 lows, it is possible the US 70 cent mark is now firmly on the horizon for investors as we head into the new week. Direction for the Australian dollar will be determined by the release of Chinese inflation figures this morning as the AUD/USD opens at 0.7118.

The trade linked Kiwi was sold off on Friday to finish the US session as the second worst G10 performer. Stronger than expected US wage growth in tandem with the news that President Trump was threatening to impose tariffs on all Chinese imports forced the NZD lower. The NZD/USD fell from 0.6585 to 0.6528 – representing the lowest level since February 2016.

Traders were watching Q2 manufacturing activity which was out at 8:45 Sydney time data missed expectations of 1.4% printing a -1.2%. An essential input for GDP forecasts is closely watched as a guide to positioning ahead of the next GDP read on 20th September.

Considering recent moves, NZD/USD technical supports can now be seen at 0.6527 and 0.6500 handles on the downside with any topside moves expected to meet resistance at levels nearer to 0.6545.