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Risk Appetite in Energy and Commodities Moves the Dollar Index Lower

By OFX

The US Dollar marginally retreated in overnight trading, slowly unwinding from its position of strength for much of the week. The US Dollar Index fell 0.04% against a basket of currencies as risk appetite slightly returned to the market.

It was a mostly quiet day in FX markets as no new news on the trade dispute came to light. The market mostly gyrated within a tight range as the pall of Trump's trade tariffs weighed on market sentiment. Uncertainty about what’s next in the China-US trade dispute, as well as its implications on global growth also left the majors trading within familiar levels. Nevertheless, there were some small movements as marginal improvements in risk appetite led to a modest appreciation in some risk-aligned currencies.

The Greenback sees little support from PPI data released this morning with both monthly and annualized missing expectations figures showed -0.1% and 2.8% respectively. PPI monthly and annualized excluding the more volatile items of food and energy also missed.

The Canadian Dollar extended its recovery through trade on Tuesday pushing comfortably beyond 0.76 and 0.7650. An uptick in oil prices fueled by US sanctions and Iranian exports coupled with a slowdown in US crude production for 2019 helped drive the oil led unit higher.

Having touched intraday highs at 0.7665, the loonie found renewed support amid NAFTA optimism as talks between US trade delegates and Canadian Foreign Minister Chrystia Freeland were reportedly “constructive and productive.”

Capacity Utilization for the second quarter did little to support the loonie further as expectations were for 86.9% and the data printed at 85.5%. The loonie will continue to find direction in ongoing trade developments. NAFTA remains crucial for the broader CAD outlook with approximately 75% of Canadian exports bound for the States. A failure in trilateral and bilateral trade talks could significantly damage the medium and long-term economic outlook.

EUR/USD bounced around the 1.16 levels again overnight and despite optimistic Eurozone data the common currency failed to hold above resistance levels. The monthly German ZEW Economic Sentiment showed a rise to a negative 10.6 this month from minus 13.7 in August. This was compared to the consensus forecast for a reading of minus 14.0. Meanwhile, for the Eurozone, the sentiment index increased to minus 7.2 in September from minus 11.1 a month earlier. Markets expected the index to improve to just minus 10.9.

EU Industrial Production for the whole euro-zone was published after the both monthly and annualized miss consensus sand previous.

On the technical side of things, there is a support line forming around 1.1565 followed by 1.1525. On the upside, resistance at 1.1625 and 1.1655 which was last week’s high.

The pound edged lower against the U.S. dollar on Tuesday as optimism for prospects of a Brexit trade deal with the European Union faded, again. This came not too long after GBP/USD hit its highest level since early August. With less than seven months to go before Britain is due to leave the European Union, markets should be prepared for even more volatility ahead.

On the local data front yesterday, we saw the release of UK Jobless Rate which remained at 4%, the lowest since the winter of 1974-75. Unemployment continued to fall with 55K fewer people out of work in the three months to July. UK wage growth was also better than expected, rising by 2.9% in the three months to July. Today the macroeconomic calendar is empty with no scheduled releases. Traders will likely have half an eye on tomorrow’s Bank of England statement.

The Australian Dollar continued its bearish trend to break US 71 cents for the first time since February 2016 as traders continue to sell off the local currency. Opening the morning at 0.7125, the Aussie moved initially lower to 0.7095 following the release of NAB Business confidence which dropped to two-year lows.

The central theme is a gloomy outlook by Australian companies & uncertainty over political leadership changes in August despite an overall positivity on many key indicators.

Gains were seen into the close of the domestic trade with an intraday high of 0.7125 before falling overnight to new lows of 0.7085. Oscillating in a forty-point range for the day, the AUD/USD eventually settled higher as a bout of increased risk appetite on no further tariff news.

One of the worst G10 performers on the day, the NZD remained under pressure on Tuesday as it continued its downward trend; depreciating 0.3% against the world’s base currency and 0.2% against its rival across the pond. NZD/USD fell from 0.6540 to 0.6501 which represents a 2 and a half year low against the greenback and faired marginally better against the Aussie as the AUD/NZD cross ticked up to 1.0914 from 1.0890.

The Kiwi seemingly suffered at the hands of the greenback as strong second tier data out of the US saw yields tick up and equities rise. Widening interest rate differentials and the threat of potential escalations in the Trump-China trade war will continue to weigh on the NZD in the near term.

Downside support remains at the key 0.65 level with any moves through this handle expected to meet further support around the 0.6470. On the flip side, any upside recoveries are likely to meet resistance at 0.6540.