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FX Update: Geopolitical concerns draw focus

Written by Howard Wilcox on April 11th, 2017.      0 comments

The current main market theme continues to centre around a more risk averse sentiment, as tensions remain heightened around the Korean peninsula and Syrian situations. Last week’s missile strike against Syria saw a spike in the gold price and a flight to safe-haven assets and although these values remain higher, markets have now switched to a more reflective mood as they try to look at the longer term ramifications. The Tump/Xi summit appears to have gone well with no major immediate problems around the trade issue and with agreement to start cabinet-level talks between the two countries with an aim to reach a trade agreement in 100 days. We suspect that most of the talk centred around North Korea and how this could be diffused by more action by China and with a Chinese envoy heading to Korea this week this action may already be underway. Perhaps of more concern is the hardening of attitude over Russia and its continuing support of the Assad regime in Syria. With the US Secretary of State heading to Russia later this week and confusing signals coming from the US over its objectives on Syria, expect markets to remain volatile with sentiment favouring risk-off trades. The major economic news last week was the release of the US March Non-farm payroll data. This was lower than expected at 98,000 new jobs for March, but what was encouraging was a drop in the unemployment rate from 4.7% to 4.5% the lowest level in 10 years. The Fed won’t react to one month’s data, but next month’s NFP will be important as it will give a pointer to whether or not a rate rise is likely for June. The current market view is that there will be two more rate increases by year end.

Australian data continues to disappoint with the AIG performance of construction index easing to 51.2 in March from previous 53.1. This combined with a slide in base metals causing the AUD/USD slide from 0.7550 at the end of last week to its current level around 0.7505. The jobs data due on Thursday could add to the RBA’s problems if it continues to show a weakness in the labour market. With the housing market still on fire and calls for rates to at least stay on hold while ASIC and APRA try to cool housing demand, if data shows rising underemployment and weak wages growth the RBA will be in a dilemma. Continued weak employment data will also weigh on consumer confidence over the next few months and allied to any moderation in housing prices will adversely affect consumer confidence making the RBA’s job even more complex. We remain negative on the AUD and expect support at 0.7500 to break opening the way for a move to the 0.7450 level followed then by 0.7410. A move and hold over 0.7530 would negate this view but we consider this unlikely over the short term.

New Zealand
The New Zealand dollar closed lower last week down 80 points on the open to 0.6930 levels. Non- farm payrolls promised a “risk off” market when figures were disappointing at 98k dropping the value of the New Zealand dollar and sending it comfortably through support at 0.6950 to a low of 0.6930. This week we have seen a softening in retail sales figures falling 0.3% which has raised concerns locally with the slowdown in the housing market and pressure going on for higher interest rates. Support seen at 0.6900 and 0.6850 as the bearish trend continues from the high of 0.7360 7th February. Movement later in the week for the New Zealand dollar will be largely stipulated by offshore news.

United States
US data continues to be solid, underpinning the slow but steady economic recovery. The delay of the Trump tax reform and infrastructure spending policies appears to have been largely digested by the market as the current emphasis has switched to foreign policy, given the tensions in Syria and North Korea. Demand for safe haven assets has eased as financial markets attempt to shrug off Friday’s disappointing U.S. employment figures, however the ratcheting up of geopolitical tensions and Europe’s looming test of populism (French elections) curtailed any extension of optimism. Release of corporate results may provide the next fresh catalyst, with heavyweights JPMorgan Chase & Co, Tesco Plc and Prada SpA due to release earnings reports this week. At an address for the University of Michigan, Fed Chair Yellen said that inflation is still slight below the 2% target and added that it would be appropriate to gradually raise rates if the economy continues to perform well. On the other hand, she also reiterated that she doesn't want to have to raise rates rapidly. "We think a gradual path of rate hikes will get fed to neutral policy stance", Yellen stated. "We can't wait too long to tighten", she added. We look for continuing strength for the USD as the Fed interest rate divergence from that of other central banks continues.

United Kingdom
An increase in exports and strong demand from households have been highlighted as crucial factors driving the UK forward, and now the Organisation for Economic Co-operation and Development believes there are “tentative signs of growth gaining momentum, although uncertainty related to Brexit remains”. Also adding to the more positive tone was a survey of economists which saw an increase in 2017 growth forecasts on the basis that exports would continue to rise on the combination of a weaker GBP and a strengthening global economy. Data for CPI and PPI will be released tonight. Consumer inflation in the UK has risen above the 2% mark for the first time in more than three years in February amid the weakening GBP since Brexit. Bank of England officials have been voicing their concerns over the rising inflation, and a higher reading could provide the pair with some fresh upside momentum as the markets could start expecting a tighter monetary policy from the BoE. Despite a pullback from an overnight high at 1.2430, the GBP/USD pair continues be resilient, holding onto its daily gains above the 1.24 level. Currently the pair is at 1.2415 with immediate resistance is at 1.2460 before 1.25 (psychological level) and 1.2560 (Mar. 31 high). To the downside, supports are aligned at 1.2400 (psychological level), then 1.2360. Given the failure to break lower last week look for consolidation at current levels with a grind higher over the week.

Concerns over the French Presidential election are still to the fore, with the first round to commence on 24th April. If Marine Le Pen’s achieves support higher than 30%, we expect financial markets to be more concerned ahead of the second round. The market currently expects Emmanuel Macron and Ms Le Pen to make the final runoff, but polls may shift considerably in the final two weeks. So there is a chance of a scenario, where one of the two favourites does not make it into the final runoff. After the first round, endorsements for the two candidates from the remaining candidates may be market moving if they are for Ms Le Pen. Later this week will see Eurozone industrial production and German CPI data. Currently the EUR/USD is trading around 1.0596 vs the USD after making a new 1 month low at 1.0570 overnight. It appears to be having a tough time holding above 1.0600. The tone is weak and only if the EUR can hold above 1.0620/25 would a more sustained recovery look more likely. We favour consolidation around the 1.0570-1.0600 range, with any break of 1.0570 targeting 1.0520/25.

The Japanese Yen traded as high as 111.45 Friday despite a poor Non-Farm Employment numbers out of the US. As tensions increase in Syria after an airbase was bombed by the US we have seen the USD taper off on the lack of risk appetite to drop back to fresh lows of 110.70 Tuesday. Reports of US aircraft moving closer to the Korean peninsula have increased the nervousness through the markets. Support is now 110.30 and 110.15 with long term support still 108.30 No significant Japanese Yen news announcements this week.

Weaker than expected non-farm payroll figures printed Friday sent the Canadian Dollar to 1.3340 and back to 1.3420 closing out the week higher. Canadian House starts for March came in 253k versus 215 adding further fuel to the already inflated housing market. The Canadian dollar has been supported with higher crude oil prices trading up 1.5% early this week to 53.15 a barrel. Higher risk appetite could see the Canadian Dollar trade to 1.3300 with a break below these levels opening up prospects of further downside to 1.3180 support. Monthly manufacturing figures print Thursday.

Major Announcements (Tuesday only)
•    Canadian Trade Balance -1.0b vs 0.7b expected
•    Global Dairy Trade Price Index +1.6%
•    US ISM Non-Manufacturing PMI 55.2 vs 57.0 expected
•    UK Manufacturing Production -0.1% vs +0.3% expected
•    Canadian Employment Change 19.4k vs 5.7k expected
•    US Non-Farm Payrolls Change 98k vs 174k expected
•    US Unemployment Rate 4.5% vs 4.7% expected