AUD and NZD - More Weakness Ahead?

The biggest story in the FX market today was the sharp reversal and big declines in the Australian and New Zealand dollars. These moves were driven entirely by the market's appetite for AUD because there was no NZD data or news. At first, A$ traders were positively surprised by the labor market data that showed solid hiring at the start of the year. More than 39K jobs were created in January with full time work rising by the strongest amount in nearly 2 years. The unemployment rate held at a 7 year low of 5%. Unfortunately shortly thereafter Westpac said the Reserve Bank could cut interest rates twice this year. They felt that a lower growth profile and higher unemployment rate will require a response by the RBA in August and November. While there's no doubt the RBA will leave rates unchanged this year, it is too early to tell if one, let alone two rounds of easing is needed because a trade deal between the US and China would go a long way in supporting Australian growth.

Instead what really killed the rally in A$ was China's decision to ban imports of Australian coal into their northern port of Dalian. Not only is this a big hit (2% of all Australian coal imports are destined for Dalian) for the industry but China is also getting tough on Australia after they banned Huawei from their 5G network last year. AUD/USD lost more than a cent today on the back of these developments and with the pair trading back below all of major moving averages, the next stop could be a move to and below 70 cents. RBA Governor Lowe is speaking this afternoon and its unlikely that he'll say anything to help the currency. The New Zealand dollar has fallen in sympathy with A$ and could slide down to .6740.

USD/CAD rebounded for the first time in 5 trading days on the back of lower oil prices and the slide in stocks. The Canadian dollar will be in focus tomorrow with retail sales numbers scheduled for release. Between strong job growth last month and the increase in wholesale sales, we are looking for a recovery in December. Although US stocks traded lower, the greenback was unfazed by softer US data. Manufacturing activity in the Philadelphia region contracted for the first time since May 2016, durable goods rose less than expected and existing home sales fell -1.2% against a forecasted rise of 0.2%. Its no surprise that these second tier reports did not have a significant impact on the dollar and with no major economic data on tomorrow's calendar, risk appetite will drive dollar flows.

The euro also retreated but the losses were limited in comparison to AUD and NZD because the Eurozone composite PMI index increased for the first time in 6 months.While the improvement was driven primarily by the service sectors in France and Germany, this uptick along with stronger investor expectations suggest there's light at the end of the tunnel for the Eurozone. The German IFO is due for release on Friday and we also expect this report to be mixed. Having tested and rejected the 20-day SMA three days in a row, EUR/USD is vulnerable to a dip below 1.12.

Sterling remains the most resilient currency even though the EU said there was no breakthrough in the talks between EU President Juncker and UK Prime Minister. As a possible sign of May's stubbornness, Juncker said he's not optimistic as they cannot rule out a no deal Brexit. A UK government spokesman doesn't think an agreement can be reached by next week. The tight timeline and the lack of progress in Brexit talks prompted Fitch to put the UK's AA rating on negative watch. All of this should push GBP lower but the currency continues to extend its gains on the hope that cooler heads will prevail and an extension will be requested before the March deadline.