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As we await Powell’s speech before the Senate Banking Committee, the USD continues its slow drop

By OFX

There was a point during yesterday’s trading session we saw the US dollar index fall around 0.2 percent. Increased optimism over a US-China trade deal saw commodity currencies, such as the Aussie dollar, outperform the US dollar dramatically as the global equity rally continues.

Federal Reserve Chairman Jerome Powell will be speaking before the Senate Banking Committee shortly, and it will be a significant mover of the US dollar today. Powell is expected to repeat the Fed’s mantra of “patience,” but in light of Friday’s dovish Monetary Policy Forum, the market will be looking for more details to end the balance sheet runoff and any sign that he too is endorsing a possible change to the inflation target.

On the release side, housing starts came in at -11.2 percent versus -0.1 percent, and building permit month to month in December came in at 0.3 percent versus the -2.6 percent expected. This mixed data is not helping the US dollar this morning, which is falling 0.15 percent at the time of this writing.

The Loonie weakened during yesterday’s trading session, right after President Trump tweeted his opposition to high oil prices on Monday. This put into focus the problematic situation of the OPEC. Crude oil has recovered recently, as supply cuts have suppressed fears about surging production from the US, but the OPEC now faces a familiar choice. Adding back more supply now will negatively impact the equity market, but maintaining output cuts to keep prices up will mean facing the displeasure of the US president.

Technically speaking, the USD/CAD pair bounced from around a solid support of 1.3125, as mentioned yesterday. Additionally, the “risk-off” environment in North American equity has returned to some extent in today’s trading session. This is creating pressure on the Loonie this morning. However, at the time of this writing, the USD/CAD pair is increasing 0.34 percent (weaker Loonie) and it has just tested a critical resistance level of around 1.3235. If it continues with pressure to the upside, it might test around the 1.3268 level. The first support for today is 1.3184 and, of course, the psychological level is the 1.3200 handle.

On the release side, the consumer price index will be released tomorrow. There might not be much volatility in the USD/CAD pair this morning.

The Euro initially rose against the Greenback in yesterday’s trading session as Finance minister Olaf Sholz proclaimed that he expected the German economy to escape a recession. Markets interpreted this as a possible indication of an upward trend in European economic growth after a bleak few quarters. At the time of this writing, the EUR/USD is trading at 1.1362. There are no major European data releases due today.

The British Pound jumped overnight on hopes that Theresa May was considering delaying the March 29th Brexit deadline. The Cabinet is discussing this at a meeting this morning and the PM is due to give a speech after midday today, so we’ll find out for sure then. Meanwhile, Labour is pushing for a second referendum, but it’s a little unclear as to what form this will take. The threat may at least be enough to push any hard-line Brexiteers in to supporting a Conservative deal. The GBP/USD is up 0.63 percent, trading at 1.3179 at the time of this writing.

The Australian dollar pushed higher yesterday as President Trump extended the pause on higher tariffs for Chinese imports, in turn supporting Chinese equities, the Chinese Renminbi and China proxies (the Kiwi and Aussie dollar).

Trump, via his favorite medium Twitter, also mentioned that “substantial progress” had been made on, “…important structural issues including intellectual property protection, technology transfer, agriculture, services, currency, and many other issues.” Trump also raised the idea of a signing summit with President Xi, adding that, “…we are getting very very close.” According to reports, one of the final issues is the enforcement mechanism with Chinese media, suggesting the negotiations only get more difficult from here.

Despite this news, the AUD/USD pair trades lower this morning at 0.7152.

The New Zealand dollar climbed higher through trade on Monday, buoyed by reports Trump has extended the March 1st deadline for higher Chinese import tariffs. After a 90-day détente, US tariffs on Chinese imports were scheduled to increase from 10 percent to 25 percent this Friday, but recent optimism surrounding trade talks has bolstered expectations that a new trade plan will be struck, and an increase in trade taxes will be avoided. The uptick in trade optimism has bolstered risk appetite and has fueled rallies across the CNY, AUD, and NZD. The NZD jumped five-tenths of a percent to touch an intraday high of 0.6902, before profit-taking forced a consolidation at around 0.6870.

Markets have largely shrugged aside rumors the RBNZ will introduce new measures to sure up the banking system, possibly forcing a shift to looser monetary policy later this year. Having suffered a knee jerk reaction to comments from deputy governor Bascand on Friday, the NZD has found support in heightened demand for risk.

Having traded toward the top end of recent ranges, our attention remains with global risk trends. The NZD/USD pair trades flat at 0.6879 this morning.