Canadian Dollar Buoyed by Surprise Inflation Surge

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Headlines

  • RBA Governor Lowe Maintained Cautiously Optimistic Outlook – AUD exchange rates benefit from easing US-China tensions
  • Brexit Nerves Weighed Down Sterling – Investors discouraged as odds of no deal Brexit remain high
  • Higher Eurozone Inflation Boosted EUR Exchange Rates – Single currency benefits as inflation exceeds ECB target
  • Surprise Surge in Inflation Encouraged Canadian Dollar Gains – Odds of BOC interest rate hike rise


Australian Dollar

As Reserve Bank of Australia (RBA) Governor Philip Lowe maintained a cautiously optimistic outlook on the domestic economy this offered support to the Australian Dollar. However, as Lowe still sees interest rates remaining on hold for some time yet, thanks to soft inflationary pressures, the upside potential of AUD exchange rates was limited. News that Chinese officials will return to Washington for trade talks in the coming week also benefitted the ‘Aussie’.

With data thin on the ground at the start of the week AUD exchange rates look vulnerable to any fresh increase in global market jitters.

Sterling

Fresh worries over Brexit helped to weigh down Sterling ahead of the weekend, with markets still concerned by the prospect of the UK departing the EU without a deal. Comments from Danish finance minister Kristian Jensen did not encourage any particular sense of investor confidence. As Jensen agreed that the odds of a no deal Brexit currently stand at 50-50 this prompted GBP exchange rates to weaken once again.

Unless markets see signs that the two sides are moving towards an agreement the appeal of the Pound is likely to remain muted.

Euro

Demand for the single currency picked up on Friday thanks to confirmation that the headline Eurozone consumer price index had strengthened to 2.1% in July. As this takes the inflation rate above the European Central Bank’s (ECB) target rate the result encouraged investors to pile into the Euro. While the chances of any imminent policy action from the central bank remain limited EUR exchange rates were still buoyed by the uptick.

However, if the German producer price index fails to strengthen in July this could undermine confidence in the Euro today.

US Dollar

An unexpected decline in August’s University of Michigan sentiment index put the US Dollar under pressure heading into the weekend. As the index slumped from 97.9 to 95.3 this suggested that confidence within the US economy is rather weaker than markets hoped. With market risk appetite strengthening in response to positive developments in US-China trade relations and the Turkish financial crisis easing there was limited incentive to favour the US Dollar on Friday.

Without the support of safe-haven demand USD exchange rates could shed further ground over the course of the day.

Canadian Dollar

The Canadian Dollar surged higher during Friday’s European session as July’s Canadian consumer price index data bettered forecast. Investors were pleasantly surprised to find that the headline inflation rate had leapt from 2.5% to 3.0% on the year, hitting the top of the Bank of Canada’s (BOC) target range. This naturally encouraged speculation that the BOC will be prompted to raise interest rates again in the near future, boosting CAD exchange rates.

Any softening of the oil market could well put pressure on the Canadian Dollar, however.

New Zealand Dollar

NZD exchange rates found a boost as the second quarter New Zealand producer price index figures showed a solid improvement. This indicates that price pressures within the domestic economy are building, giving investors cause for optimism. While this is unlikely to be enough to alter the policy outlook of the Reserve Bank of New Zealand (RBNZ) this still helped to buoy the New Zealand Dollar.

Even so, if risk aversion picks up again this may reverse the gains of NZD exchange rates.


Data Released

August 20th 16:00 EUR German Producer Price Index (YoY) (JUL) 2.6%

Post by TorFX

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