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Tensions escalate leading into G20 Summit

By OFX

Last week the S&P500 recorded its biggest one-day rise since March after Jay Powell signalled that the US central bank was becoming more cautious about further interest rate hikes. Mr Powell said that rates were ‘just below the broad range of estimates of the level that would be neutral for the economy’, USD was slightly higher on Friday even tough US rates and Oil were lower.

The US and China have agreed to a temporary 90-day ceasefire, much to the delight of risk assets. CNH is rallying in early trading hours, igniting a risk on tone to the start of the trading week in APAC with AUD and NZD spiking and “safe haven” currencies such as JPY and CHF sliding.

On Thursday the USD/CAD touched a new 5-month high at 1.3360 pushed by a weak crude; however, the Fed chairman, Jerome Powell in the US sent dovish comments about their economy, helping the Loonie to erase early losses. The Loonie rallied to an intraday low of 1.3242. In general, the Loonie has not had a significant change this week following Powell’s comments and initial weak crude prices.

So far the Loonie is highly influenced by crude, which was trading below $ 50 on Thursday morning. However, oil recovered from earlier losses to move above $ 50 after reports that Russian officials are signaling the likelihood of a production cut in tandem with Organization of the Petroleum Exporting Countries. The reports came ahead of a planned meeting between Russian President Vladimir Putin and the Saudi Crown Prince Mohammad Bin Salman at the Group of 20 Nations Summit in Buenos Aires this weekend.

European equity markets rallied over 1% on the day on Monday, driven largely by a 3% rise in the Italian index, this following conciliatory comments from the Italian government regarding their 2019 budget targets. The government has been warring with the European Commission over their deficit targets for the 2019 budget over the last few months and so news that the Italian government was willing to adjust these targets was welcomed by markets, forcing Italian bond yields sharply lower; the 10-year fell almost 15 basis points on the news.

The pound got off to a good start on Monday morning as London traders reacted to the news that the EU had agreed to May’s Brexit proposal. Global risk sentiment was generally positive too, supported in part by news that Italy was showing signs of making progress on its budget discussions with the EC, or at least becoming more conciliatory in its tone. European stocks made solid gains and Cable crept higher through the London Monday morning and early New York session to trade to a high of 1.2860.

Brexit quietened a touch compared to recent weeks. Headlines were made instead by a pair of reports about the potential impact the UK secession from the EU could have on the UK economy. The first publication was based on government analysis which gave estimates on future growth resulting from a no-deal scenario or Prime Minister, Theresa Mays exit plan.

After 15 years the economy would be 3.9% smaller under Mays plan however exiting without a deal would result in a 9.3% loss the authors said. Later in the day we had the Bank of England’s own forecasts made public which laid out a more serious picture of how no-deal would impact the UK economy. A disorderly exit from the EU could lead to recession resulting in an 8% dip in GDP, houses prices dropping a third and sterling’s value falling by a quarter it stated. Despite the gloomy prognosis GBP/USD held above its opening level of 1.2745 throughout the day with traders likely remembering the Bank of England’s doom and gloom predictions of what would happen to the UK economy if it voted to leave the EU, which never materialised. GBP/USD in fact rallied at the end of the day on news from the States. GBP/USD currently trades at 1.2775 after trading above 1.28 throughout the Asian session.

The Australian Dollar jumped sharply through trade on Wednesday pushing back through 0.73 to touch intraday and week-long highs at 0.7320. Having maintained a largely modest trading band through much of the domestic session the Aussie enjoyed strong support in the wake of commentary from Fed Chair Jerome Powell. While largely hawkish when assessing the broader economic outlook markets focused on a single/central theme, Powell’s shift in rhetoric to suggest the FOMC was nearing neutral rate estimates. This assessment offers a stark contrast to the Fed outlook in October where Powell suggested “we are a long way from neutral at this point”. This shift in commentary implies oil price pressures, slowing global growth, a decline in corporate earnings and ongoing trade tensions are perhaps weighing on the Fed’s growth outlook and possibly tempering the pace of additional rate hikes.

Trade remains a critical marker guiding broader AUD direction and conflicting reports have forced investors to the sidelines keenly attuned to any signal the escalating trade war may be drawing to a close. Having held onto moves above 0.73 the AUD is now poised to make another upward push and a break in trade hostilities could well be the catalyst that drives the AUD through resistance at 0.7330.

The Kiwi opened initially weaker on Wednesday dipping thirty points lower to an intraday low 0.6755 as disappointing trade balance figures were released to market.

Both exports (6.6%) and imports (14%) rose as the monthly trade deficit of $1.3 billion hit 27% of exports. The import number was the highest import value since reporting data as petroleum and machinery and equipment was the main catalyst for the rise.