Euro Falls Out of Favour as Italian Budget Conflict Deepens

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  • RBA Maintains Upbeat Message on Inflation – Australian Dollar unconvinced as odds of interest rate hike remain low
  • Brexit Worries Keep Pound Under Pressure – GBP exchange rates look to services PMI for support
  • Italian Official Suggests Return to Independent Italian Currency – Euro slumps as row over Italian budget continues
  • Prospect of Higher Oil Prices Supports Canadian Dollar – Increased US crude oil output could weigh on market

Upbeat RBA Fails to Boost Australian Dollar

While Reserve Bank of Australia (RBA) Governor Philip Lowe indicated that inflation is likely to rise markets still expect interest rates to remain on hold for some time to come. This limited the appeal of the Australian Dollar, which trended lower across the board yesterday. As improvement in the ANZ Roy Morgan weekly consumer confidence index was not enough to support the ‘Aussie’ either as market risk appetite generally eased.

An uptick from this morning’s services PMI could offer the Australian Dollar a rallying point, however, as this would boost confidence in the underlying health of the domestic economy.

Brexit Uncertainty Continues to Drag on Pound and UK Outlook

September’s UK construction PMI did not inspire much demand for the Pound yesterday, with the index slowing from 52.9 to 52.1. While the sector remains in a solid state of expansion business optimism declined to its second lowest level since the start of 2013. This suggests that Brexit-based uncertainty is continuing to hamper domestic growth, to the detriment of GBP exchange rates. The latest signs of division at the Conservative Party conference added to the bearish mood of Sterling.

A similarly disappointing showing from the corresponding services PMI is likely to extend the losses of GBP exchange rates further.

Markets Spooked as Italian Official Suggests Separate Italian Currency

Mounting tensions over the Italian budget proposal weighed heavily on the Euro, with officials remaining at odds with the EU’s budget rules. Comments from a senior League official spooked investors further as he noted that Italy could fix its problems if it had its own currency. Although a government spokesperson later indicated that a departure from the single currency is not part of the coalition’s plan this threat kept EUR exchange rates biased to the downside.

Solid Eurozone retail sales data may offer the Euro a rallying point this evening, though, if political tensions ease.

Risk Aversion Supports US Dollar Recovery

As the previous day’s sense of market risk appetite faded the US Dollar returned to a stronger footing overnight. With investors prompted to pile out of risk-sensitive assets in response to fears of a fresh Eurozone crisis USD exchange rates trended higher across the board. The weakness of the Euro also offered a leg up to the US Dollar thanks to the negative correlation of the EUR/USD exchange rate.

Tonight’s ISM non-manufacturing composite index could see USD exchange rates falter once again, though, as forecasts point towards a slight loss of momentum on the month.

CAD Exchange Rates Benefit as Oil Approaches US$85

The Canadian Dollar continued to benefit from market relief over the US-Canada trade deal, unwinding trade-based weakness seen in previous weeks. With Brent crude trending close to the US$85 per barrel mark overnight this gave the commodity-correlated Canadian Dollar further support. Speculation suggests that oil prices could head back towards US$100 per barrel, a prospect that could deliver further CAD exchange rates gains.

If US stockpiles show a greater build-up on the week, however, this is likely to leave the Canadian Dollar on a weaker footing.

Lacklustre Dairy Prices Limit New Zealand Dollar

Another sharp contraction in prices at the Global Dairy Trade auction limited the appeal of the New Zealand Dollar overnight. Markets were not impressed to find that dairy prices had extended their decline for another fortnight, highlighting persistent weakness within the sector. Even so, NZD exchange rates still saw some modest gains thanks to the relative softness of some of the other majors.

This morning’s ANZ commodity price index may drag the New Zealand Dollar down if it shows another month of decline.

Data Released

October 3rd 08:30 AUD Services PMI (SEP) 53.8
October 3rd 10:00 NZD ANZ Commodity Price Index (SEP) 
October 3rd 18:30 GBP Services PMI (SEP) 54
October 3rd 19:00 EUR Eurozone Retail Sales (YoY) (AUG) 1.7%
October 4th 00:00 USD ISM Non-Manufacturing Composite (SEP) 58

Post by TorFX

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