Commodity currencies outperformed on Friday while the USD was the weakest of the majors, supported by a more positive outlook for US-China trade tensions. The rates market was little changed.
The NZD closed the week on a strong note, at its high for the session and for the week around 0.6635. Following on from the news on Thursday that the US had invited a Chinese delegation to talk about trade, the WSJ published a report suggesting that Chinese and US negotiators were mapping out talks to try to end their trade standoff ahead of planned meetings between President Trump and Xi Jinping at multilateral summits in November. The US Treasury was said to be working on a more refined list of demands that might be more acceptable to China.
The USD was already on the back foot before the article was published late in the session and it weakened further into the close, seeing the USD fall across all the key majors and down 0.5-0.6% for the day. Commodity currencies headed the leaderboard, with the NZD, AUD and CAD all up about 0.7% for the day. The Turkish lira came under pressure again, but unlike at the beginning of the week, there was little contagion effect on Friday. After more analysis, markets have accepted that Turkey is a basket case with limited likely spillover effects for global markets.
US tariffs on an extra $16bn of Chinese imports come into effect this Thursday, which China will match dollar-for-dollar, and there’s still the decision Trump will have to make next month on whether or not to proceed with tariffs on another $200bn of goods. Politically, this still probably appeals to Trump ahead of the early-November mid-term elections, but once they are out of the way, there is some hope that further tariff impositions can be avoided and the ones imposed eventually reversed. This sets the scene for potentially chopping trading conditions for the NZD – and markets in general – for the rest of the year.
CAD’s performance was supported after Canada CPI inflation was much higher than expected at 3.0%, to reach the top end of the 1-3% target range. The average of the three core measures followed was unchanged at 2.0%. The probability of further Bank of Canada rate hikes increased further, and it looks increasingly likely that the Bank will hike for a fifth time this tightening cycle. The market sees more chance of this at the October than September meeting though.
In other economic news, the University of Michigan US consumer sentiment index unexpectedly fell to its lowest level in almost a year, driven by the “current conditions” component, with the “expectations” index unchanged.
The broad weakness in the USD saw EUR recover all of its losses seen earlier in the week, closing around 1.1440. GBP continues to underperform as attention focuses more on the possibility of a no-deal Brexit, seeing an unconvincing rise to 1.2750.
The bond market was quiet, with the US 10-year rate trading in a 3bp range and ending the session flat at 2.86%. NZ rates barely budged on Friday either.
The week ahead is fairly quiet, with mostly only second tier economic releases. The annual central bank conference at Jackson Hole, Wyoming kicks off late in the week where Fed Chair Powell will be speaking.
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