Australian Dollar Defies Trade Balance Deterioration as Fed Rate Cut Odds Rise

Australian Dollar Gains Ground in Spite of Narrowed Trade Surplus

While August’s trade surplus narrowed further than forecast, clocking in at 5.9 billion, this failed to drag the Australian Dollar any lower against its rivals. After several days of weakness the downside potential of AUD exchange rates was limited, encouraging investors to buy back into the antipodean currency. A solid improvement in September’s composite PMI also offered support to the Australian Dollar, with the index picking up from 49.3 to 52.0 on the month.

A solid showing from the latest retail sales figures could help AUD exchange rates to recover further ground this morning.

Weak UK Services PMI Fails to Keep Pound Down

Even though EU officials rejected Boris Johnson’s proposal for the Irish border this was not enough to weigh GBP exchange rates down for long. Markets remain hopeful that the two sides could still find common ground ahead of the looming Brexit deadline, in spite of this latest setback. However, the UK economy continued to demonstrate signs of a slowdown as September’s services PMI unexpectedly fell into contraction territory.

Investors’ latest sense of optimism over Brexit could prove short-lived, though, if the two sides fail to show signs of progressing towards an agreement.

Euro Slides as Odds of German Recession Grow

Fears of a potential German recession picked up further last night as September’s composite PMI saw a surprise slide into contraction. With the index dipping from 51.7 to 48.5, as the service sector failed to counterbalance a sharp weakening in manufacturing, confidence in the outlook of the Eurozone’s powerhouse economy faded. As the US announced fresh tariffs on a number of EU exports the mood towards the Euro diminished further.

Any dovish signals from European Central Bank (ECB) policymakers could add to the weakness of EUR exchange rates in the days ahead.

Underwhelming Service Sector Performance Weakens US Dollar

September’s ISM non-manufacturing index fell short of forecast, slumping from 56.4 to 52.6 as the service sector came under increased pressure. This underwhelming performance added to anxiety over the outlook of the world’s largest economy, given recent signs of weakness within the US manufacturing sector. Another monthly decline in factory orders helped to fuel anxiety over the health of the US economy, dragging USD exchange rates down overnight.

If September’s non-farm payrolls report points towards a loosening of the labour market this could drive the US Dollar to shed additional ground.

Oil Price Slump Drags Down Canadian Dollar

With oil prices in a fresh slump the Canadian Dollar fell further out of favour during Thursday’s European session. As Brent crude dropped below US$60 per barrel, fuelled by anxiety over the prospect of another oversupply glut, this left the commodity-correlated CAD on the back foot. Increasing bets on the likelihood of another Federal Reserve interest rate cut put additional pressure on the Canadian Dollar.

Unless tonight’s trade data shows a narrowed deficit the appeal of the Canadian Dollar may remain limited.

New Zealand Dollar Strength Limited by Risk of Greater RBNZ Easing

The rising odds of the Federal Reserve cutting interest rates again before the end of the year weighed on demand for the New Zealand Dollar. If the Fed continues to loosen monetary policy the Reserve Bank of New Zealand (RBNZ) could be pressured into following suit. Even so, with many of the majors on the back foot NZD exchange rates were still able to find some support overnight.

Any fresh deterioration in market risk appetite could see the New Zealand Dollar trending lower ahead of the weekend.

Data Releases

October 4th 11:30 AUD Retail Sales (MoM) (AUG) 0.5%
October 4th 22:30 CAD Balance of Trade (AUG) -1 billion
October 4th 22:30 USD Change in Non-Farm Payrolls (SEP) 145,000

Louisa Heath