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The US dollar erases some of its losses helped by weak European data

By OFX

The US dollar index found a floor and increased 0.29 percent in yesterday’s trading session in another up day for a “risk on” environment (Dow +1.1 percent, SPX +0.97 percent, Nasdaq +1.08 percent) with Trump tweeting that trade talks with China were going “very well.” Additionally, despite the fact that the US and China are far from striking a deal, it came to public knowledge that their differences were narrowing, and talks would continue today.

Most of the US dollar bounce though came from a weakness in German industrial production which printed -4.7 percent year to year for November; the lowest since 2009. The Euro, by being the most critical component of the US dollar index (over 50 percent), pulled the Greenback to the upside.

While the recent sudden reversal of previous market expectations of imminent interest rate increases by the Federal Reserve should mean that upward pressure in the US dollar is minor this year, a surprise Fed hike could still push the Greenback to some positive returns. This morning the US dollar index is falling slightly (0.05 percent) and it is consolidating its losses from the last three weeks.

The Loonie had another astonishing rally assisted by the crude WTI 's bounce of over US$ 50 dollars for a seventh straight day. This makes the Bank of Canada’s job easier later today at 10 am EST. The consensus says that the BoC will remain on hold, but leave the door open to further hikes. The fall of the USD/CAD pair this year has been significant; this pair has fallen 443 pips (or - 3.24 percent) from the highest level on December 31st, or a fall of 441 pips in only one week.

Oil prices were buoyant in the overnight trading session with analysts citing hopes for rebounding Chinese demand. However, the USD/CAD will be affected later mostly from the tone used in the BoC’s statement, the press conference, as well as the Monetary Policy Report. The recent disruptions in the energy sector will be a fundamental issue to be considered by the BoC later as well.

Early today, housing starts were released, the actual number came in at 213 k versus the read of 207 k for December. Housing starts are a leading indicator of economic health. Does this positive number give us a hint of what the BoC’s decision will be later today?

More and more evidence is stacking up to suggest that the Euro Zone stumbled over the line at the end of last year. Eurozone confidence faltered to its lowest levels in 23 months yesterday, and this was followed by the slide in Germany’s industrial output in the morning. For Germany, it would appear that the writing could be on the wall for a technical recession as the automotive sector weakens alongside the headwinds presented by the global trade war. For the ECB (and the Euro), ministers could be feeling that they can’t catch a break. Having finally ended its asset purchase program in December and signaling that it could dip its toes into a tightening phase for monetary policy, things could be set on hold if the headwinds hitting Europe are significant enough.

This morning though the EUR/USD pair is trading at 1.1451, representing an increase of 0.11 percent. For now, the Euro has some headwinds such as ignoring Brexit, the Italy-EU budget farce, France’s yellow vest protests, and the Merkel succession. On the flip side, market technicians from important investment banks are showing that the Euro might have a bounce of over 1.1500 during this year.

Theresa May suffered a minor setback yesterday evening as the government lost a vote on an amendment to the Finance Bill limiting the scope to raise funds in the case of a ‘no deal’ Brexit, in particular, the ability to change taxes. Materially, this is an ‘inconvenience’ to the government because there are other avenues for the government to raise revenue, but it does signal that Parliament is not prepared to support a no deal Brexit. Twenty Tory MPs voted against the government as well adding to the pressure that a ‘no deal’ will not suffice.

The Pound’s reaction to the news yesterday was muted, but it has been only two days since MPs returned to Parliament and Brexit is already dominating headlines once again.

The GBP/USD is trading at 1.2734, representing an increase of 1.16 percent this morning.

The volatile Australian property market saw another violent swing overnight as building approvals for November came in at -9.1 percent. This was a miss on expectations and the lowest result since 2013, although the Aussie did manage to hold much of its ground against the USD due to renewed hope of a deal being struck between the US and China. In fact, the Aussie edged to its most robust levels in 4 weeks against the Aussie.

The AUS/USD pair is trading at 0.7168 representing an increase of 0.39 percent.

The New Zealand dollar is bouncing this morning off the back of progress between the US and China over trade talks. The NZD/USD pair is moving 0.88 percent higher this morning on renewed hope and further news out of Beijing or from Donald Trump.