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FX Update: A quiet start to the week

Market Overview:

Markets closed the week on a more positive note, continuing to shrug off Trade war fears. This week begins on a mixed note and with Japan closed for a public holiday and as such equity volumes in Asian markets were lighter. Trade tensions have eased somewhat as officials in Beijing appeared to moderate their response to President Donald Trump’s tariff threats amid a slowing economy, falling stock market and weakening currency. Data released yesterday, showed China’s economic expansion slowed slightly from the previous quarter, with industrial output in June below estimates at 6% v’s 6.5%. However, China May GDP saw an increase of 1.8%, above the forecasted 1.6%. Also, with the earnings season ramping up, investors may get a greater understanding of how the start of the trade war is impacting corporate profitability. This week will see profit reports due from a raft of market heavyweights; Bank of America, Goldman Sachs, Morgan Stanley, American Express, Netflix, Microsoft, Taiwan Semiconductor Manufacturing, Unilever, Johnson & Johnson and IBM. After a bumpy NATO meeting and UK visit by the US President, markets will also be keeping a weather eye on developments from the first summit between U.S. President Trump and Russian President Vladimir Putin. This afternoon will see the release of RBA minutes from the last meeting and later tonight US Fed Chairman Powell delivers the semi-annual Monetary Policy Report to the Senate Banking Committee and answers lawmakers’ questions.

Australia

This week will be dominated by the RBA minutes release this afternoon and employment data on Thursday. Market heavy weights BHP and Rio Tinto will report this week which will give an indication of the ongoing health of the mining industry. Overnight Chinese data was underwhelming with GDP coming in at 6.7% for the 3 months to June the slowest rate of GDP growth since Q3 2016, China Retail Sales grew 9.0% in June, in line with market forecasts while May Industrial Production posted a 6.0% increase, missing expectations of 6.5%. Expectations of this afternoon’s RBA minutes are to show a more dovish stance, given that the statement from that meeting removed warnings about the strength of the local currency, and for a second consecutive meeting, skipped the line indicating that the next move will rather be up than down. The RBA  also expressed  concerns about the affect global trade woes could have on local economic growth. Currently the AUD/USD is around 0.7420 and has appeared directionless trading in a 20/30 point range. The risk is to the downside with a break of 0.7400 testing 0.7370 then 0.7330, in this environment upside at 0.7450 will be tough to mount.

New Zealand

Major event this week was today’s CPI data which printed softer than forecast at 0.4% vs expectations for an increase of 0.5%. The slightly weaker result shouldn’t worry the RBNZ given that the effects of the higher petrol prices and lower NZD have yet to filter through fully to wider sections of the economy yet. As such we wouldn’t be surprised to see inflation higher later this year. Chinese GDP data disappointed to the downside coming in at 6.7% for the 3 months to June, the slowest increase since Q3 2016, another negative influencer for the Antipodean currencies. Tonight we also have a Global Dairy Trade auction to digest. The NZD remains around the 0.9125 level well within the 0.6720-0.6860 range. Immediate support is at 0.6750 a break of which would test 0.6720 in short order.

United States

Tariff news and the Trump European road show tended to dominate the news for the US as the week begins. The softer than expected stance form the Chinese (although we believe this will not last) saw the US equity markets close last week on an upbeat note. This week brings a raft of corporate profitability reports which will be looked at carefully to see if trade niggles have begun to show, probably a little early at this stage. Mainly the larger banks and financial institutions of Goldman Sachs, Bank of America, Sachs, Morgan Stanley, American Express, but also other market heavyweights such as Netflix, Microsoft, Unilever, Johnson & Johnson and IBM. Overnight US equity markets were mixed with the S&P500 fluctuating around the 2,800 support level, as losses in energy shares offset gains in financials from the likes of American Express. With little new on a trade war escalation and then fallout from President Trump’s summit with Vladimir Putin, investors will likely remain occupied by a slew of numbers coming over the next few days, including economic data and company earnings. Later this week, Federal Reserve Chairman Jerome Powell is expected to lay the groundwork for continuing the tightening cycle. Overnight data saw the US retail sales figures for June up by 0.5% (as expected) but Mays figures were revised upwards to 1.3% from the previous 0.8%. The EUR/USD pair tested a daily high of 1.1725 in European trading, holding between such high and the 1.1700 for the rest of the day. Currently it is trading around 1.1715 with immediate resistance at 1.1755 and support at 1.1700 then 1.1660…upside is favoured.

Europe

Some sobering comments out around Germany with Bundesbank head and ECB board member Jens Weidmann warning the German cabinet to prepare for harder times to come, with a potential economic downturn beginning to firm up into a reality. He noted that the ECB now has little room to act on monetary policy, as the central bank’s normalization has been too slow. The Bundesbank recently cut its GDP forecast for 2018 from 2.5% to 2% as Germany’s own central bank prepares for a downturn, with much of the concern focused on trade and political tensions. The EUR/USD closed the last week around 1.1685, up from a low of 1.1612 on Friday as a softer-than-expected US consumer confidence headline exacerbated profit-taking ahead of the weekend. The EUR/USD is current at the 1.1720 mark with USD upside favoured, 1.1720 remains initial resistance but barring any more upsets over the Trump/Putin summit fallout look for another test of support at the 1.1620 level then 1.1585.

United Kingdom

Little in the way to calm UK minutes after US President Trump swept into the UK making comments that appeared to weaken PM May’s standing further. The future of the “White- paper” on the Brexit continues to be hotly debated with little clear direction as to whether the guidelines outlined for a “soft” Brexit will be acceptable to the UK Parliament or in fact more conservative government resignations will force PM May to step down. The ongoing Brexit situation has seen the opposition Labour party open up its biggest lead since the last election, sparking warnings that backing the PM’s controversial Brexit plan would l install opposition leader, Jeremy Corbyn in No10 as PM. Support for the Conservatives has fallen sharply to 36%, 6 points lower than in June as the party remains gripped by chaos over its Brexit plans. In contrast, Labour have stayed on 40 % while Ukip – the Brexit backing party most commentators had written off – have surged to 8 %. A busy week for the UK with a series of June data releases having potential to influence pound sterling direction, UK labour data is due later tonight, UK Producer prices Wednesday, UK retail sales Thursday and UK Public finance figures on Friday. Price action for the GBP has been very choppy, after dropping to 1.3102 the GBP/USD staged an impressive bounce to the 1.3238 area after comments from the UK  PM,  that the US would negotiate a free trade agreement with the UK after Brexit. Currently the GBP/USD is around the 1.3236 level but further upside looks limited given ongoing Brexit uncertainty.

Japan

Not much out from Japan to start the week given yesterday’s Marine Day public holiday. We expect Japanese markets to remain quiet until release of trade data tomorrow which may provide some fresh direction, along with CPI figures on Thursday. Currently sitting around 112.30 trading has been flat and a break of 112.15 would see a retreat to 111.80 which becomes a crucial support level if deeper bear moves are to be avoided.

Canada

After a strong move higher last week on the back of the BoC rate rise there has been little in the way of economic news to support the CAD. Not helping the the commodity-sensitive CAD struggling to gather strength was the sharp drop in crude oil prices recording sharp losses yesterday. A barrel of West Texas Intermediate lost more than 4% and touched its lowest level in more than three weeks below $67 on Mondayas concerns over supply disruptions continued to ease. This has seen the USD/CAD now back at 1.3130, support is at 1.3080 with resistance up at 1.3180 we expect these levels  to hold over the next couple of days.

Major Announcements last week:

  • Bank of Canada hikes 0.25% to 1.50%
  • US CPI 0.1% vs 0.2% expected
  • Chinese GDP 6.7% as expected
  • US Retail Sales 0.4% as expected
  • NZ CPI 0.4% vs 0.5% expected
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