Geo-politics Leaves the EUR in Focus, with the USD in Trump’s Hands

Earlier in the Day:

Following a busy start to the week, economic data scheduled for release through the Asian session was on the lighter side, with key stats limited to 2^nd quarter NZIER Business Confidence numbers out of New Zealand and building approval figures out of Australia. For the Aussie Dollar, while the stats were on the lighter side, the RBA’s July interest rate decision and, more importantly, release of the rate statement was also expected to be of influence through the session.

For the Kiwi Dollar, business confidence deteriorated further in the second quarter, with the NZIER 2^nd quarter business confidence survey showing that a net 20% of firms expected business conditions to worsen, following a net 11% in the 1^st quarter.

The NZIER reported that the deterioration in business sentiment was attributed to weak profitability across most sectors, with the building sector reporting intense cost pressures, adversely impacting profitability, with the sector no longer optimistic about a rebound, a net 14% expecting profitability to deteriorate further in the next quarter.

In the retail sector, things were worse, with business confidence sliding to its lowest level since March 2009, profitability seeing a material decline as retailers struggle to pass on cost increases.

Attributing to the profitability issue, off the back of rising costs for materials, was the lift in minimum wage, particularly for the retail sector.

The weakness in business confidence is expected to weigh on business investment in the coming quarter, with 4% of firms surveyed planning to reduce investment in new buildings in the coming quarter, which will hit the construction sector further.

The Kiwi Dollar moved from $0.67135 to $0.67070 upon release of the figures, before rising to $0.6715 at the time of writing, down 0.01% for the session, the 7-year low in business confidence adding more pressure on an already pressured Kiwi Dollar, following the dovish RBNZ last week and the risk off sentiment across the global financial markets. 

For the Aussie Dollar, building approvals fell by 3.2% in May, which was far worse than a forecasted 1% gain, following April’s downwardly revised 5.6% slide.

The ABS reported that the decline was attributed to an 8.6% slide in approvals for private sector houses, while approvals for private sector dwellings excluding houses rose by 4.3% on seasonally adjusted basis.

The Aussie Dollar moved from $0.73325 to $0.73178 upon release of the figures, the stats coming out ahead of the RBA interest rate decision and release of the Rate Statement and it was yet more bad news for the construction sector that the RBA has been fretting about of late.

The RBA held interest rates unchanged at 1.5% this morning, which was in line with market expectations, with the rate statement providing very few surprises. Concerns over the housing sector, the combination of tepid wage growth and high household debt and a lack of inflationary pressure being key areas of concern for the RBA.

Members of the RBA continued to note that a reduction in capacity and a pickup in inflation towards target would likely be gradual, supporting the continued hold in policy, which will likely leave interest rates unchanged through to at least the 1^st quarter of next year.

The Aussie Dollar showed little response to the decision and rate statement, moving from $0.73392 to $0.73370 upon release of the statement, before rising to $0.7369 at the time of writing, up 0.40% for the session.

Elsewhere, the Japanese Yen was down 0.06% to ¥111 against the Dollar, at the time of writing, the anticipated impact of a trade war on the world’s largest economies continuing to provide some support to the safe haven, in spite of overnight manufacturing data out of the U.S impressing.

In the equity markets, the ASX200 bucked the trend, rallying to end the day with a 0.52% gain, while the Nikkei slipped 0.12% by the close. For the Hang Seng, it was catch up mode, following Monday’s holiday, down 1.85% at the time of writing, with the CSI300 down 0.04% following Monday’s 2.93% slide.

The Day Ahead:

For the EUR, key stats through the morning are on the lighter side, with Spain’s unemployment change and the Eurozone’s retail sales figures scheduled for release through the morning.

Following particularly disappointing retail sales figures out of Germany last week, a rebound in French consumer spending may not be enough to offset Germany’s 2.1% slide in sales back in May, which could place further pressure on the EUR through the morning, with Spain’s unemployment change figures unlikely to have a material impact.

Outside the data, the issue of immigration was back in the spotlight, with Chancellor Merkel back in hot water again, as disagreements over migration policy surfaced with the German coalition government, following last week’s EU Summit.

While the Italian coalition government appear to be aligned on immigration, the German coalition government appeared to be at odds, with the risk of fresh elections, in the event of an interior minister Seehofer resignation, having weighed on the EUR, Seehofer and Merkel poles apart on migration policy.

A reported overnight agreement between Seehofer and Chancellor Merkel on migration policy, which also saw Seehofer state that he would remain in his position as interior minister, should provide some support to the EUR, though the threat of a trade war with the EU and Chancellor Merkel’s now apparently weak position at the helm of the German coalition likely to be concerns for the markets near-term.

Every time there is a disagreement within the German coalition, a threat of resignation could see Merkel on scramble alert over the next few years and that’s never a good thing for the global financial markets, the EUR and the Eurozone economy.

At the time of writing, the EUR was up 0.08% to $1.1648, with today’s stats, political chatter out of Germany and any trade chatter from both sides of the Atlantic being factors to consider through the day.

For the Pound, economic data scheduled for release out of the UK is limited to June’s construction PMI. Following the uptick manufacturing PMI number on Monday, the Pound could find some much needed support, though we would expect market sentiment towards Brexit to continue to be the key driver near-term, the BoE unlikely to be making any moves on policy until there is some progress from a UK government perspective on Brexit negotiations.

At the time of writing, the Pound was down 0.08% to $1.3154, with Brexit and PMI numbers the key drivers through the day.

Across the Pond, it’s a half day for the U.S markets, which will see volumes on the lighter side through the U.S session. Stats through the afternoon are limited to May factory order and the less influential Redbook, the data likely to provide some further direction for the Dollar following the impressive manufacturing PMI numbers on Monday.

Outside of the data, the Oval Office will have its influence through the day, the markets yet free from the prospects of a trade war, with both China and the U.S heading for another roll out of tariffs on 6^th July.

At the time of writing, the Dollar Spot Index was down 0.06% to $94.812, with the Oval Office and today’s stats in focus through the day, Independence Day certainly an opportunistic time for Trump to ramp up his nationalistic policies.

For the Loonie, it’s a quiet start to the week, with no material stats scheduled for release until Friday’s trade, Ivey PMI and employment numbers. Following the introduction of tariffs on U.S goods on Sunday, the Loonie remains at the mercy of Trump’s Tweeter account, with any retaliation by the U.S likely to heat things up further, which could offset the upbeat sentiment towards monetary policy that has provided the much needed support to the Loonie of late.

At the time of writing, the Loonie was up 0.06% to C$1.3178, with trade war chatter the key driver through the day.