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Investors warmed by US-China talks and Brexit. Not so fast.

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Australia

Australian Dollar performance last week was patchy in a market driven by risk sentiment. Through Thursday we saw a risk off mood change into “risk on” with renewed optimism of a China/US trade deal being done, at least partially. Key elements seem to be China’s commitment to purchase more US agricultural products as well as a promise on intellectual property rights as well as currency policy changes. Further talks will take place later in the year in November, until then Trump has ceased all forecasts to increase tariffs from 25% to 30% which were set to take effect this week. Consumer sentiment in Australia is at the lowest levels since July 2015. The index has dropped over 8.0% since the RBA started cutting rates in June. This drop in particularly relevant with the RBA cutting 75 points since May 7th 2019 with expectations that rate cuts are supposed to boost confidence on a personal, business and economic levels but have not. This week we have monetary policy minutes from the 1 October rate cut to 0.75% which shouldn’t present anything new.  Later in the week attention turns to Aussie Employment data Thursday with the unemployment rate expected to stay unchanged at 5.3%

New Zealand

The New Zealand Dollar traded in reasonably tight ranges over the week into Thursday when risk sentiment deteriorated sending the NZD lower across the board. This didn’t last long as news hit the wires that the US and China had agreed to a partial trade deal. Risk into Friday’s close remained positive buoyed by the “phase one’ trade deal sending the NZD off lows to post fresh highs. Against the US Dollar the kiwi traded 0.5% higher to 0.6350. The same can’t be said versus the Pound with positive Brexit headlines the NZD/GBP cross depreciated to 0.4995 an October 2018 low. On the economic docket this week is quarterly CPI Wednesday the only focus locally, 0.6% is forecast for the third quarter the same reading as the second quarter figures.

United States

The US and China have reached a “phase one” trade deal after two days of trade talks in Washington that included increasing agricultural products purchased by the Chinese and intellectual property concerns. Chinese negotiator Liu He said he was “happy” with the progress. The US was due to raise tariffs on Chinese products this week to 30% but US President Trump has delayed the increases for now. The two nations now look to “phase two” being negotiated over the coming months. These were the first negotiations to take place in over two months ending the long awaited market anticipation of outcomes with risk currencies all benefiting and the US Dollar index trading lower on renewed risk sentiment. Equity markets were over 1.0% higher into the weekly close. Fed members speak again throughout the week in between US Retail Sales m/m and Building permit figures.

Europe

The Euro climbed higher last week against most of its currency peers rising nearly 2.0% against the Japanese Yen as punters traded risk associated products and currencies after the US and China partially agreed a trade deal. The Euro rallied to a three-week high against the greenback to 1.1060 but opened lower Monday trading to 1.1020. With Mario Draghi pushing forward with more quantitative easing recently, it turns out that a number of governors from respective EU countries opposed the resumption of QE. Estonia, Germany, France and Austria were among the group. The French Governor Francois Villeroy de Galhau said Friday that the governing council is “turning the page”. With the Italian, German and Dutch all due to speak this week the argument may keep going for a while yet. Austria’s Holzmann said the stimulus package may have been a mistake. With Draghi due to leave the ECB at the end of this month when Lagarde takes over this conflict could end up tarnishing his departing reputation. This week on the economic docket only have German Economic Sentiment.

United Kingdom

The British Pound surged to 1.2700 against the US Dollar late last week from 1.2200 in what was seen as the biggest two day surge in a decade. Boris Johnson said they still have a way to go before 31 October but can see a way forward to reaching a deal with the European Union. Stalemate in negotiations eased after prime minister Leo Varadkar and BJ held talks late last week and agreed they could “see a pathway to a possible deal”. A lot needs to happen still to get ensure a ‘soft” Brexit is achieved with the UK parliament still needing to debate and agree on a solution. This week’s EU leaders summit held in Brussels will be held over two days from the 17th and is the last scheduled meeting to take place before the 31 October deadline. This Saturday is “D” day for Johnson to formally request an extension to the EU if no Brexit deal has been legally approved and they have not agreed to the UK leaving with no-deal. Brexit rhetoric will dominate Pound action this week with a little help from yearly CPI and Retail Sales to publish.

Japan

The Japanese had a holiday Monday in observance of Health-Sports Day. Along with a US holiday as well, it has been a very slow start to the week with currency volumes expectedly low. More than 6 Million people were forced to evacuate Tokyo as Typhoon Hagibis brought massive rain and wind to the region- the biggest winds to hit Tokyo in decades. Over 110,000 people have been deployed in search and rescue operations after the Typhoon weakened but left a trail of destruction in its wake. The Japanese Yen reversed all of its previous week’s gains against the US Dollar as risk markets were back buying the greenback with the Japanese Yen playing second fiddle to the risk correlated USD after a partial agreement has been agreed between China and US officials saw optimism improve. Bank of Japan’s Kuroda speaks tomorrow in Tokyo and should spark some volatility if rhetoric around monetary policy differs from previous rhetoric.

Canada

Increased support for the Canadian Dollar was evident Friday outperforming its closest rivals after a lacklustre few days leading up to Canadian Employment data. The unemployment rate in Canada surprised markets coming in lower at 5.5% from the expected 5.7% pushing buyers back into the Loonie. A rise to employment numbers by 53,700 also boosted the CAD driven by gains in mainly full-time workers. Oil prices came off recent lows of around 52.0 per barrel to trade to 54.50 Friday after earlier Crude inventories showed an increase of 2.9M barrels up from the 1.8M barrels predicted were held by commercial companies. The Loonie rallied 1.0% against the greenback into the weekly close. Canadian Thanksgiving holiday Monday will bring a slower than normal start to the week. Looking ahead on the calendar this week we only have monthly CPI figures Thursday holding market attention.

Major Announcements last week:

  • Brexit posativity a deal can be made boosts the Pound
  • US and China agree on a partial trade deal- nothing in writting yet
  • UK m/m GDP prints -0.1%
  • UK Manufacturing Production misses the mark at -0.7%
  • Canadian Employment surprises with new numbers of 53,700 entering the workforce in September
  • Canada Unemployment dips to 5.5% from 5.7%
  • US Bank Holiday Monday
  • Canadian Bank Holiday Monday
  • Japanese Bank Holiday Monday
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