Currency Update - Thursday 1st August 2019

AUD

The AUD has taken another hit down to its previous support levels of 0.6832 after a surprisingly optimistic US Fed threw a curveball at the markets. Up till now the commonly held view was that this cut was the first in a series of cuts. The US Fed turned this interpretation on its head by signaling that this could very well be a one and done cut. This sent the AUD spiraling as the markets took stock of this less dovish tone and determined the USD to be undervalued and repriced accordingly. The AUD’s historical support levels at 0.6830 could be tested today with US weekly jobless claims, July ISM manufacturing and June construction spending out today. Time will tell whether this data could act as a source of strength for the AUD or if it will send the AUD into uncharted territory below 0.68.

USD

The USD saw rallies across the board as Powell’s less dovish tone was digested by the markets. Equity markets reacted poorly with the S&P 500 dropping 1.3% as US 2 year yields gained 2 bps and the Euro fell almost 1%. Powell took the stage focused on the strength of the US labor market, the uptick in retail sales and the general resilience of the US economy. Up till now markets had fully accounted for a 0.25% cut and evidently had been anticipating either a larger cut or some indication from the US Fed that additional cuts might be necessary. This less dovish reversal gave an injection of strength to the USD. Powell continued with comments that today’s cut was about boosting inflation and insuring against downside risk because despite concerns over the cooling global economy, the Fed’s outlook on the US economy is favourable.

EUR

Following the surprise move out of the Fed the EUR fell almost 1% against the greenback though some positive European data has acted as support with German retail sales smashed the forecast with a 3.5% gain vs the 0.5% expectation. EUR has been otherwise quiet despite the busy data front at least in respect to the AUD. 

GBP

Boris unsurprisingly makes the headlines today with another rattle of the sabre over a no-deal Brexit. The new Tory government has now allocated £2.1 billion pounds to the prospect of a no deal Brexit in a move that surely signals to the EU that they are fully prepared to see Britain out the door, deal or no deal. Whether this is the actual opinion of the UK prime minister or just an attempt to strong arm the EU, time will tell. Meanwhile Pound Sterling has advanced on a struggling Euro and even the USD after speculation is brewing that the Democratic Unionist Party of Northern Ireland could compromise on its demands so long as the Republic of Ireland shows some willingness to break the Brexit deadlock. Tonight the BoE meet to decide on interest rates - markets expect no change to the current cash rate of 0.75%, however such a result could still yield volatility if the accompanying commentary goes against market expectations as we saw with the Fed last night. 

NZD

The NZD has suffered the same fate as most other currencies as it fell to 0.6543 against the USD. Adding to the woes was an ANZ business survey yesterday  – the worst reading since August 2018. This could signal that the Reserve Bank of NZ may have to make further interest rates this year and undermining the strength of the NZD.

Today’s data

AUD:

  • AIG Manufacturing Index, Import Prices q/q, Commodity Prices y/y

USD:

  • ISM Manufacturing PMI

EUR:

  • Spanish/Italian/French/German/Final Manufacturing PMIs

GBP:

  • Manufacturing PMI, BoE Official Bank Rate, BoE Gov Carney Speaks

NZD:

  • No Data

CNY:

  • Caixin Manufacturing PMI

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