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Tuesday AM: Safe-Havens and GBP in Demand, Aussie Sold on RBA Surprise

US Dollar in demand in risk-off environment

Image © Robert Cicchetti, Adobe Stock

Global Overview: Trade Tensions

Trade war tensions have escalated overnight after President Trump late on Monday threatened to impose new tariffs on another $200bn of Chinese imports.

Shortly after the US Senate passed a bill with an amendment that would kill Trump’s rescue of Chinese telecom firm ZTE, Trump directed the US Trade Representative to identify $200bn of Chinese goods for additional 10% tariffs.

"Markets have reacted with ‘risk-off’ moves. Asia stocks are down, following a weak start to the week in both US and Europe. Safe havens like the yen and treasuries are strengthening," says Marit Øwre-Johnsen at DNB Markets.

On currency markets, it should come as no surprise that safe-havens the Yen, Dollar and Franc are outperforming.

 

British Pound: Good Start, But Political Tensions Loom

Sterling is actually one of the better performers at the time of writing, and is down only against the safe-haven currencies such as the Yen, Franc and Dollar.

However, we note domestic developments overnight are unhelpful for the currency.

The House of Lords has once again defeated the Government on their key Brexit legislation, meaning the legislation is back in the House of Commons for debated mid-week.

This once again creates a danger point for the Prime Minister Theresa May who must now muster up enough support to push through either her rejection of the Lords' proposed amendment, or muster enough support for her subsequent amendment.

If she fails her government could ultimately be brought down and the ensuing uncertainty will almost certainly hammer the Pound.

 

Australian, Canadian and New Zealand Dollars: Risk-off

The commodity Dollars, which include the New Zealand, Australian and Canadian Dollars are all seen to be underperforming in the current risk-off sentiment being adopted by investors.

"AUD was particularly hard hit, for two reasons: first off, it’s often traded as a more free-floating proxy for CNY, and secondly, Australia’s economy would be hardest hit by a slowdown in the Chinese economy," says Marshall Gittler, an analyst with ACLS Global.

Therefore, global drivers are likely to be in control of this posse and we await to hear what moves China will announce.

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Australian Dollar: Interesting Developments at the RBA

More on the Aussie Dollar, this time from the domestic front where it looks like the all-important issue of future interest rate levels at the RBA are in focus once more.

Overnight the RBA released the minutes to their June policy meeting and it appears there was a little surprise.

Joanne Masters at ANZ Research explains:

"We don’t routinely comment on the RBA Board Minutes as there is often little new information, particularly when – as in this case – the national accounts are released the day after the board meets

"However, we think it noteworthy that the June minutes omitted the statement that had been in the previous two minutes that 'members agreed that it was more likely that the next move in the cash rate would be up, rather than down.'

"We think this is an interesting development. Although RBA Governor Lowe, when he addressed the Australian Industry Group last week, repeated that 'it is likely that the next move in interest rates will be up, not down'. On balance, it appears that the RBA has increased uncertainty around how the economy will evolve."

The Australian Dollar is lower as markets now bet the next interest rate rise at the RBA has been pushed back further. The currency is 0.3% lower against the Pound and half a percent lower against the Dollar.

 

Euro: Sintra

ECB Governor Mario Draghi is likely to hammer home the message delivered at last week's ECB policy event as he is due to speak at a ECB conference in Sintra: Eurozone interest rates are not likely to rise in the foreseeable future. The message proved negative for the Euro.

"We expect no new signals from Draghi, who instead is expected to underline the signals from the meeting last week that rates will remain on hold “at least through the summer of 2019 or longer if necessary,” says Marit Øwre-Johnsen at DNB Markets.

That said, we have heard from one analyst that Draghi might be concerned currency markets may have overreacted to his message from the previous week, and he might offer up a message which might trigger a corrective rebound.

More details on this story here.

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