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Central Bank Meetings In Focus

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Market Overview:

This week should prove to be interesting as the market digests the results from the weekend’s Italian election, the final make-up of the German government after 5 months in limbo and the apparent enthusiasm for a trade war by the US President. There are also interest rate decisions by Central banks for Australia, Canada, Japan and Europe as well as a raft of economic data for the US culminating in the crucial Non-farm payroll data on Friday night. President Trump initiated the stage for a trade war last week by slapping tariffs on steel and aluminum imports, daring other countries to retaliate which led the European Union head Juncker, to warn that it would target iconic American brands of Harley Davidson motorbikes, Levi Strauss & Co. jeans and bourbon whiskey from the U.S. In retaliation, the U.S. president put the European auto industry in his cross hairs. Juncker’s threat heightened the prospects of a global free-for-all, as the World Trade Organization said the potential of escalating tensions “is real” and the International Monetary Fund warned the restrictions had potential to cause damage to the U.S. and global economy. With little likelihood of exemptions for US allies, if the tariff net spreads across to soft/agricultural commodities, Australian (AUD) and New Zealand (NZD) stand to be affected. Market concern that this issue may escalate saw US equities and the US dollar lower. This afternoon will see the RBA rate decision, no change is widely expected, then Wednesday will see the Bank of Canada decision, with the ECB on Thursday and the Bank of Japan on Friday. Look for a choppy week in both equity and currency markets.

Australia (AUD)

The Australian Dollar (AUD) recovered late in the week trading back at 0.7760 levels against the USD. Trump earlier sank the Australian Dollar when he announced he would introduce tariffs to the imports of steel and aluminum, the low of 0.7712 for the week against the greenback the lowest level seen since late 2017. Against its other rivals (GBP, EUR, NZD, JPY) the Australian Dollar (AUD) feared rather poorly, hit hard by investors as they sold the Aussie. This afternoon sees the keenly awaited RBA announcement and statement, no change to the record low of 1.5% is expected.

New Zealand (NZD)

The New Zealand Dollar (NZD) lost further value last week falling to a low of 0.7180 against the greenback. As risk off markets continue, business confidence looks shaky and this may have an impact over ongoing growth and employment. Recent data has been solid with ANZ commodity prices printing at 2.8%, stronger than the prior 0.7% in early February. The Global Dairy Index is Wednesday night, the results of which will be important after results of 8th Feb were poor. Markets are optimistic the results should be back on track after 3 consecutive increases earlier in the year. US Non- Farm Payroll releases at the end of the week.

United States (USD)

US Equities regained lost ground early this week, the Nasdaq back over 7300 and the DOW also trading up 1% to 24786 Tuesday after Trump tweeted overnight that tariffs would not be necessary if trade agreements ie NAFTA were satisfactorily re-negotiated. Tariffs on steel and aluminum will only come off if new fair NAFTA agreement is signed. He also signalled that his announcements regarding these tariffs were a little hasty and may not be implemented at all. The US Dollar (USD) remains in a position of strength the US Dollar Index trades at 90.03. Non-Farm Payroll is released later this week and should offer further indications on the recovery of the economic situation in the US

Europe (EUR)

Large swings over the previous few days, in fact last couple of weeks, has seen the EURO (EUR) trade to all corners, perhaps we may see some much needed stability this week although I doubt it with the Italian Election results a major concern. No party or Bloc appears to have won enough votes from the Italian election to cease control of the country’s legislature, but markets remain nervous as the Five Star Movement look set to become the largest single party with 32% of the vote with most of the districts declared. The EUR miraculously seems to be holding its own against the greenback trading around the Monday open of 1.2330 after taking a short lived dive back to 1.2260 in early trading. If the political situation doesn’t improve in a hurry though markets may make a play for the safe haven currencies and exit the EUR. Angela Merkel secured her fourth term in power after the Social Democratic party (SPD) agreed to back another coalition deal.

United Kingdom (GBP)

The British Pound (GBP) has lost ground over the last few days against its closest rivals amid further Brexit talks. Markets remain nervous around –where to from here. Theresa May gave her much awaited speech on her vision for the future between the United Kingdom and the European Union. The Brexit agreement should rest on “five Foundations” – Reciprocal binding commitments to ensure fair competition. A complete independent arbitration mechanism to resolve disputes. An ongoing dialogue with the EU. An agreement for data protection and measures to maintain links between people. She was mocked during the delivery of her speech after what was described as a bizarre backdrop of fake bricks. Punters calling it Bricksit. Manufacturing Production is published at the end of the week with 0.2% expected.

Japan (JPY)

The Japanese Yen (JPY) continued its bullish run against the USD Dollar (USD) closing the week at 105.50 levels. Japanese Market Services PMI for February was expected at 52.0 from the previous 51.9, the pair pushing to its lowest level since November 2016 before regaining some lost ground early Monday. The continued sell off in USDJPY comes with a risk averse market triggered by Trump’s comments regarding tariffs. BOJ Kuroda made comment that if inflation keeps rising at the current pace it should reach the BOJ’s fiscal target of 1.4% in 2019. Friday sees the Bank of Japan Interest rate review along with the Monetary Policy Statement, markets are expecting a hawkish tone, if so we could see USD/JPY to be trading back towards the 105.00 area.

Canada (CAD)

The Canadian dollar pushed to its weakest level since June last year against the US Dollar (USD) at 1.3000. Opening last week around 1.2620 it has continued to suffer against its closest rivals. The economy slowed in January after GDP posted a weaker expectation. Not only did Trump talk of import steel and aluminum tariffs but the CAD suffered a double blow after NAFTA negotiations remain unclear. Canadian policy makers continue to look for positives after the Trump administration continues to rain down on Canadian progress. I suspect the headache may continue for a while let’s not forget that 80% of exported products end up in the USA. Its thin air through to 1.3800 for the US Dollar the previous top of April 2017. Oil trades off its low of 62.45 to 62.61 per barrel.

Major Announcements last week:

.• US GDP 2.5% as expected
• Australian Private Capital Expenditure -0.2% vs 1.0% expected
• UK Manufacturing PMI 60.8 vs 58.7 expected
• UK Construction PMI 51.4 vs 50.5 expected
• Canadian GDP 0.1% as expected
• UK Services PMI 54.5 vs 53.3 expected
• US ISM Manufacturing PMI 59.5 vs 58.9 expected

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