Unexpectedly Cautious RBA Commentary Leaves Australian Dollar in Decline

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  • Australian Dollar Softens as RBA Governor Raises Prospect of Interest Rate Cut – Weak Construction PMI likely to extend losses
  • German Factory Orders Contraction Adds to Euro Bearishness – Odds of German recession increase
  • Narrowed Trade Deficit Boosts US Dollar Demand – Trade worries fail to dent USD exchange rates
  • NZD Exchange Rates Trend Lower in spite of Extended Dairy Price Rally – Rising unemployment rate set to drag New Zealand Dollar down

Cautious RBA Commentary Prompts Australian Dollar Slump

AUD exchange rates plunged sharply yesterday in the wake of comments from Reserve Bank of Australia (RBA) Governor Philip Lowe. Markets were caught off guard as Lowe adopted a more cautious stance on interest rates, indicating that the next move could be either up or down. The increasing risk of an interest rate cut saw the Australian Dollar slump across the board as investors adjusted their pricing of future RBA monetary policy.

Unless the Australian construction PMI shows a significant improvement on the month AUD exchange rates look set to remain under pressure this morning.

Pound Recovers Ground Ahead of BoE Decision

After Tuesday’s losses the Pound was able to recover some of its ground yesterday, even in the absence of any fresh domestic data. While markets continue to weigh up the odds of a no-deal Brexit GBP exchange rates still saw a modest improvement as the impact of the disappointing services PMI faded. Even though Theresa May still appears a long way from achieving a consensus on the Irish border issue this was not enough to keep the Pound on a downtrend in the short term.

Tonight’s Bank of England (BoE) policy announcement could see GBP exchange rates slump once again, however, if policymakers adopt an increasingly cautious outlook.

Euro Softens as Weak German Factory Orders Fuel Recession Fears

A sharp contraction in December’s German factory orders data increased the pressure on the Euro overnight. As orders slumped -7% on the year this exacerbated worries over the outlook of the Eurozone’s powerhouse economy. Coupled with an underwhelming construction PMI this raised fears that Germany could fall into a state of recession this year, adding to the bearish outlook of EUR exchange rates.

If the latest German industrial production figures also show a weaker performance this could see the Euro shedding further ground this evening.

US Dollar Strengthens on Narrowed Trade Deficit

As the US trade deficit narrowed further than forecast in November this encouraged USD exchange rates to remain on a positive footing. Even so, as the large drop in imports was accompanied by a decline in exports the positive implications of the data were limited. Hopes of a potential resolution to the US-China trade spat also lent support to the US Dollar overnight, however.

Another solid week of US jobless claims could give USD exchange rates a fresh boost tonight, provided that the labour market continues to show signs of tightening.

Surge in Building Permits Not Enough to Boost Canadian Dollar

Although Canadian building permits saw a surprise surge of 6% in December this failed to boost the Canadian Dollar against its rivals. Focus instead fell on the disappointing nature of the latest Ivey PMI, which dipped from 59.7 to 54.7. This decline suggests that business confidence within the Canadian economy is continuing to deteriorate, leaving CAD exchange rates on the back foot.

As anticipation builds ahead of January’s unemployment data the mood towards the Canadian Dollar is unlikely to see any material improvement.

Strong Dairy Prices Fail to Benefit New Zealand Dollar

Another solid increase in prices at the latest Global Dairy Trade auction was not enough to shore up the New Zealand Dollar. While dairy prices strengthened 6.7% on the fortnight, continuing to reverse the prolonged downtrend seen in 2018, NZD exchange rates remained under pressure. The relative strength of the US Dollar and limited market risk appetite both limited the potential for New Zealand Dollar gains yesterday.

Further losses could be in store this morning if the fourth quarter unemployment rate picks up from 3.9% to 4.1% as forecast.

Data Releases

February 7th 08:30    AUD    Construction PMI (JAN)    
February 7th 08:45    NZD    Unemployment Rate (4Q)    -4.1%
February 7th 18:00    EUR    German Industrial Production (YoY) (DEC)    -3.3%
February 7th 23:00    GBP    Bank of England Rate Decision    0.75%
February 8th 00:30    USD    Initial Jobless Claims    223,000

Post by TorFX

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