US Dollar Recovers Further Despite Widening Trade Deficit

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Headlines

  • RBA Sounded Cautious Note on Inflation – Australian Dollar lacks support as domestic data underwhelms
  • Fed Rate Hike Bets Continued to Fuel USD Bullishness – Market risk aversion benefits US Dollar
  • Jump in Dairy Prices Shored up New Zealand Dollar – Volatility likely on fourth quarter jobs data
  • Euro Faltered After Muted Eurozone Retail PMIs – Upside potential limited given ECB caution

Australian Dollar

The Reserve Bank of Australia (RBA) did not take an overly positive tone at its February policy meeting, maintaining that inflation’s return to target will likely be ‘gradual’. Naturally this diminished the prospect of any imminent shift in monetary policy, encouraging investors to sell out of the Australian Dollar yesterday. Confidence in AUD exchange rates was further shaken by underwhelming December trade balance and retail sales figures, undermining optimism in the domestic outlook.

Even so, an uptick in the Australian construction PMI this morning could set the ‘Aussie’ on a stronger footing.

Sterling

Investors saw little particular cause for confidence in Sterling on Tuesday, with Brexit worries continuing to dominate the economic outlook. With the Conservative government still in a clear state of disunity on the subject of Brexit, and just what the UK wants its future relationship with the EU to look like, the appeal of the Pound remained muted. As clarity over the ultimate outcome of negotiations remains distinctly lacking GBP exchange rates failed to find any particular support.

This sense of political uncertainty looks set to keep Sterling under some degree of pressure in the near term.

Euro

A series of misses from January’s raft of Eurozone retail PMIs weighed on EUR exchange rates, even though the sector remained within expansion territory. Demand for the Euro was generally weakened in the wake of the latest commentary from European Central Bank (ECB) President Mario Draghi, given renewed warnings on the subject of inflation. With the central bank still looking to be some way from tightening monetary policy the Euro was unable to hold onto its recent gains.

However, a solid reading from December’s German industrial production data could help to boost EUR exchange rates this afternoon.

US Dollar

Although the US trade deficit widened further than forecast in December the US Dollar was able to hold onto a stronger footing overnight. As markets continue to price in the prospect of a fourth 2018 interest rate hike USD exchange rates have remained on a generally bullish run, benefitting from a decline in global stock markets. While there are concerns that increased government borrowing could act as a dampener on economic growth in the months ahead this was not enough to dent the US Dollar at this stage.

Any hawkish commentary from Federal Reserve policymakers tonight could see USD exchange rates extending their gains further.

Canadian Dollar

Despite a wider-than-expected Canadian trade deficit figure the Canadian Dollar managed to hold its ground against some of its softer rivals on Tuesday. Even so, this disappointing showing does not encourage particular optimism in the outlook of the domestic economy. With Brent crude still trending lower there looks to be little in the way of support for CAD exchange rates for the time being.

With a modest rebound forecast for December building permits, though, the downside potential of the Canadian Dollar may be somewhat limited tonight.

New Zealand Dollar

In the absence of any fresh domestic data the New Zealand Dollar was able to capitalise on the relative weakness of other risk-sensitive currencies. NZD exchange rate gains were also fuelled by a fresh uptick in the Global Dairy Trade index, with prices jumping 5.9% on the fortnight. Even with the general sense of market risk appetite weakened this kept the ‘Kiwi’ on a solid uptrend.

This morning’s fourth quarter unemployment rate and wage growth data could puncture the bullish mood of the New Zealand Dollar, however, with forecasts pointing towards a loosening of the labour market.

 

Data Released

February 7th 07:45 NZD Unemployment Rate (4Q) 4.7%
February 7th 08:30 AUD Construction PMI (JAN) 54
February 7th 17:00 EUR German Industrial Production (YoY) (DEC) 6.8%
February 7th 23:30 CAD Building Permits (MoM) (DEC) 2.0%

Post by TorFX

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