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Risk off as trade talks sour; are we really surprised?

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AUD – Australian Dollar

The Australian dollar extended its downward correction on Friday, falling as an overwhelming risk off environment enveloped broader financial markets. Investors looked to haven assets as trade talks between the US and China unravelled again. Chinese delegates cut short their latest visit, dissatisfied with the Trump’s unwavering push for a complete trade overhaul and rejection of partial trade packages in the interim. The break down in trade talks and subsequent risk off response forced the AUD toward 0.6750, consolidating moves below 0.68.

The AUD was one of the weeks worst performers, second only to the NZD, loosing 1.6% as markets reshaped expectations for trade and domestic monetary policy. The dovish RBA minutes proffered early in the week set the tone and Thursday’s uptick in unemployment compounded the AUD’s domestic issues. Analyst and investors have bought forward expectations for RBA monetary policy adjustments with 80% pricing in a rate cut on the first Tuesday in October with a fourth cut to follow in December and our attentions now turn to Commentary from RBA Governor Lowe’s on Tuesday as a critical marker for policy guidance moving into next week.

We’d expect some level of stability given the scale of last weeks sell off with initial support at 0.6750 and 0.6730. However should RBA governor Lowe give strong indications the bank will cut rates in the wake of last weeks dour unemployment print then we could see the AUD test decade lows at 0.6680.

Key Movers

Last week’s hawkish rate cut from the Federal reserve, disappointed markets and offered a stark contrast with the policies proffered by other major banks. The FOMC is alone its decision to cut rates as a means of maintaining robust economic growth. Its counterparts face a path of increasingly loose monetary policy as a means of stimulating stagnant economic conditions. These contrasting policy outlooks have helped add a floor below the USD when compared with major counterparts and we expect the EUR to maintain its slow march downward as markets begin to absorb the ECB latest policy offering, testing 1.10 and 1.0950, while Sterling’s fortunes remain squarely affixed to the Brexit process and the JPY continues to fluctuate on the back of broader risk trends.

Attentions this week turn to US inflation data, European Manufacturing and services data and commentary from ECB president Draghi and BoE head Mark Carney and an FOMC press conference; we expect broader ranges will remain unchanged.

Expected Ranges

AUD/USD: 0.6680 – 0.6830 ▼

AUD/EUR: 0.6080 – 0.6220 ▼

GBP/AUD: 1.8280 – 1.8530 ▲

AUD/NZD: 1.0720 -1.0820 ▲

AUD/CAD: 0.8920 -0.9040 ▼


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