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RBA rates unchanged, Brexit deal "very close" and the new NAFTA comes to fruition


In what was considered well overdue by most traders, last week has seen a NAFTA framework deal agreed upon by the United States, Canada and Mexico, which finally revamps the free trade agreement after a year or so of negotiations. The market reacted positively to the new and improved deal, which is due for completion by the Sept 30th deadline.

Elsewhere, on the data front, last week saw the release of the ISM Manufacturing PMI, which came in at 59.8 vs 60.1 expectations and was slightly lower than the previous month of 61.3. The US dollar was also bolstered by commentary from Fed Chair Jerome Powell, who suggested the U.S economy was continuing to grow at a rapid pace and signs were “remarkably positive,” intimating the Fed will continue to raise interest rates as planned.

This hawkish commentary combined with continued strong domestic growth paint a positive picture moving through the latter half of 2018 and onward into 2019 for the USD, a stark contrast to broader global uncertainty and measured macroeconomic policy outlooks. While an argument can be made for a widespread USD correction, the strains of emerging markets should continue to fuel demand for the greenback while the potential burgeoning gap in central bank interest rates ensures the dollar remains an attractive carry option.

Canadian and US trade negotiators finally came to a consensus last week as a trade agreement between the United States, Mexico and Canada has officially been formed. The agreement, to be renamed the US-Mexico-Canada Agreement (USMCA) is little changed from the existing NAFTA framework with the key differences being increased access to the Canadian Dairy supply for US farmers. Canada also ensured that the existing dispute resolution system was kept and that there would be no auto tariffs on existing production levels. Overall the USMCA’s main difference is that it removes a significant downside risk in the region.

The new deal is just in time for the outgoing Mexican president Enrique Pen Nieto to sign before he leaves office at the end of November. The US Congress is expected to approve the new version up until next year ahead of US elections.

The euro came under further pressure against the US dollar during last weeks opening sessions and fell under the 1.1600 handle. Having initially opened during the Asian trade at 1.1617 the euro was sold in the lead up to Eurozone PMI data, in particular Italy’s, which dropped to 50.00, a 25-month low. Data showed that Eurozone manufacturing shifted down another gear at the end of the third quarter, too.

Meanwhile, Italy remains in focus, as the war of words between Italy and the wider European community continues to escalate. Last week saw comments from a senior Italian lawmaker suggest Italian debt issues could be resolved should it roll back the Euro and adopt a national currency. The 19 nation combined unit declined on this news, as the comments compounded concerns surrounding the unity of the wider Eurozone and ensured headline risk remains a driving force governing broader Euro direction. However, the euro found support later on following Prime Minister Conte’s denouncement of the comments and confirmation that the euro was “un-renounceable”.

The pound gained early support last week, off the back of the UK manufacturing PMI print, which came in slightly better than expectations. The pound was also bolstered by a report that PM May was working on a backstop deal for the Irish border. The report from Bloomberg stated that “U.K. Prime Minister Theresa May is preparing to make a significant new Brexit offer to the European Union in an attempt to open the door to a deal, according to a senior British government official”. GBP/USD wasn’t able to hold on to its gains, however, and fell back into the London fix.

Elsewhere, the markets have reacted to the generally positive Brexit news circulating, as reports suggest a Brexit deal is “very close”. There aren’t many other details than that, but it’s good for the pound nonetheless, which closed out the week rallying against most major currencies, breaking GBP/USD 1.3050.

Despite improvements in global risk sentiment and gains in key commodities, the Australian dollar remained under pressure during last weeks opening sessions, as traders focused on Tuesday's interest rate decision.

As expected, the monetary policy meeting did nothing to surprise to markets with the central bank opting to keep rates on hold for the 24th consecutive meeting. The accompanying language was largely unchanged from the September meeting with growth projections still locked in at a touch over 3% and expectations that we will begin to see an uptick in inflation in 2019 and 2020. The RBA also remained upbeat on employment, noting that the unemployment rate is trending lower and has fallen to an almost 6-year low at 5.3%. In terms of future monetary policy direction into the future, markets are now pricing a 40% probability of a rate hike by the end of 2019.

Closing out the week, the Aussie dollar was amongst the worst performing currencies, as global equities fell sharply and rumors of Chinese industrial espionage ensured trade tensions remained front of mind for investors.

The Kiwi came under significant pressure last week on the back of NZIER Business confidence which reported a drop in the third quarter to its lowest level in nine years. The survey showed 30% of firms surveyed expected dire business conditions in NZ over the next year. The survey shows firms are worried about Government policy, labour costs and availability of labour operating margins, showing these factors were key considerations for businesses when it came to assessing general economic conditions.

Elsewhere. the latest Global Dairy Trade (GDT) auction revealed the downtrend continues concluding with the GDT Price Index down 1.9% on the previous sale. The average price was US$2,901 a tonne, compared with US$2,934 a tonne two weeks ago. Some 41,981 tonnes of product was sold, up from 39,143 tonnes two weeks ago. Whole milk powder fell 1.2 % to US$2,753 a tonne.

The New Zealand Dollar has now fallen to its lowest level in more than two years against the Greenback on the backdrop of hawkish comments from Fed Chairman Jerome Powell bolstering expectations of an interest rate hike in December.