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The US dollar loses some of its gains after lower than expected producer prices

By OFX

The US dollar index fell as risk pared its losses, and following Janet Yellen’s comment that it is possible we have seen the last of Fed rate hikes for this cycle. There is some analysis from investment banks, which shows that hedge funds have been selling the US dollar over the last four weeks, mostly against the EUR, GBP & AUD, and have been buying emerging market FX in all regions, albeit in small amounts.

The immediate key drivers of the US dollar and risk appetite for this week are the earning seasons in the US, Prime Minister May’s Brexit deal (which is expected to be voted down in Parliament later today), and the G20 Finance Ministers and Central Bank Governors’ meeting from January 16-18th.

On the release side, the Producer Price Index (PPI) final demand month to month for December came in at -0.2 percent, while the forecast was -0.1 percent. The PPI year to year was in line with the forecast at 2.5 percent. The PPI ex-food, energy, and trade month to month came in at 0 percent versus 0.2 percent however. These results are pushing the US dollar lower again this morning.

 

 

 

The USD/CAD pair continued its consolidation in yesterday’s trading session, touching an intraday high of 1.3298 after crude oil WTI fell almost 2 percent in a soft “risk-off” environment in North America. This morning, the USD/CAD pair is falling 0.31 percent (stronger Loonie) amid a stronger US dollar index. It started its quiet reversal on January 10th, but it might not last.

The Canadian Dollar is a commodity-linked currency and it's linked to fluctuations in global risk appetite, which in turn is impacted by China’s economic situation. It is less impacted than currencies such as the Australian dollar however.

Canadian home sales activity softened in November, where national home sales fell 2.3. On the release side, the weakening continued with today’s data and Canadian home sales activity fell again. The actual number came in at -2.5 percent versus -1.0 percent from November to December. The Loonie is shrugging about this miss, and it continues its appreciation.

Ongoing political and economic concern continues to weigh on the Euro. France has ongoing political woes with its “gilets jaune” protests testing French President Emmanuel Macrons mettle. Economically, it’s looking like Germany and Italy will be shown to have slipped into technical recessions for the second half of 2018, when Q4 GDP numbers are published early next month. Both countries have been affected by the ongoing US/China trade dispute, with output slipping as demand from China begins to wane. With this weighing over the bloc, all member countries will be hoping an agreement between the US and China can be found sooner rather than later to reinvigorate confidence within the Euro Zone. European Central Bank chief, Mario Draghi is due to speak later today in Strasbourg, so any comments he has on the health of the Eurozone and monetary policy should move the euro.

The EUR/USD pair is falling 0.23 percent this morning.

UK Prime Minister, Theresa May’s, Brexit withdrawal deal finally heads to the House of Commons to be voted on. The first vote was postponed because May was set for a heavy defeat. Fast forward a month and May is still set for a massive defeat, however the UK are now even closer to leaving the Eurozone (March 29th), and the limited time to get a deal in place is now pressing heavily on MPs. The spread of defeat is what will move Sterling this afternoon at 2:00 pm EST. A loss of around 200 votes could see Sterling wobble, but something closer to 100 could be supportive of the Pound, and could lead to May heading back to Brussels to get further assurances from the EU and get it done at the second time of asking. At the same time, we are likely to get a vote of no confidence in the government from Labour leader Jeremy Corbyn, which would need to be contested. We may also see amendments voted on, which give more power to backbench MPs over Brexit, as well as an amendment tabled ensuring the UK doesn’t leave without a deal. Given the myriad permutations,it seems increasingly likely that Article 50 will be delayed, which should add support to the Pound in the short to medium term.

The GBP/USD is trading at 1.2830 at the time of writing with all eyes focused on the vote.

With a more risk-on feel permeating global markets, the AUD/USD has reclaimed the 0.7200 handle during the European and Asian session; however, it is slipping back towards the significant number. Earlier today, China confirmed another half-percent cut to banks reserve ratio requirements (the amount of cash they have to keep on their balance sheet), freeing up liquidity for the domestic economy. The People's Bank of China confirmed another half percent reduction is due soon, which has helped stocks and therefore the Aussie push higher. Tonight, we see the latest Westpac Consumer Sentiment survey with holders of the Aussie hoping for an improvement in last month’s 0.1 percent uptick in the index.

The AUD/USD trades at 0.7198 at the time of this writing.

The NZD/USD has risen then fallen away from 0.6850 overnight. It is back down to 0.6825 at present with the risk on environment starting to moderate a little as we begin the North American session. There is little news from New Zealand this week, so US/China/trade and Brexit will likely move risk assets such as the Kiwi.

The NZD/USD sits at 0.6827 at the time of this writing.