Latest US Trade Threats Drag US Dollar Lower

Less Dovish RBA Offers Australian Dollar Boost

As the Reserve Bank of Australia (RBA) left interest rates on hold at its final policy meeting of 2019, in line with market expectations, the mood towards the Australian Dollar improved. Governor Philip Lowe noted that the economy has reached a ‘gentle turning point’, suggesting that the central bank sees greater cause for optimism. While markets still expect to see interest rates cut in 2020 this less dovish message still offered AUD exchange rates a leg up.

With forecasts pointing towards an uptick in the headline third quarter gross domestic product the Australian Dollar could see further gains over the course of the day.

Pound Shrugs off Construction Sector Weakness

Even though the UK construction PMI remained deep within contraction territory in November this was not enough to drag the Pound down yesterday. The impact of the index was ultimately limited thanks to the earlier release of an initial estimate, blunting the reaction to the finalised data. As the latest poll suggested that the Conservatives are maintaining their lead in the run up to the general election this gave GBP exchange rates a boost.

With no change expected from the finalised services PMI, however, the potential for further Pound gains appears limited in the near term.

Eurozone Producer Price Decline Drags Down Euro

Another sharp contraction in the Eurozone producer price index limited the appeal of the Euro as signs continue to point towards weaker inflationary pressure. As the index slumped -1.9% on the year in October this encouraged bets that inflation within the currency union remains lacking. The prospect of fresh US tariffs on French produce equally weighed on the single currency, given existing worries over the underlying strength of the economy.

Confirmation that the Eurozone services PMI weakened last month would leave the Euro exposed to further selling pressure.

Trump Trade Threats Weigh Heavily on US Dollar

While November’s ISM New York index showed a surprise recovery on the month, bouncing back from 47.7 to 50.4, this failed to shore up the US Dollar overnight. As the Trump administration doubled down on its threat to impose a fresh swathe of tariffs on French produce this prompted renewed anxiety over the global trade outlook. Although the US also indicated a lack of urgency over agreeing a trade deal with China this failed to benefit the US Dollar, with markets increasingly concerned by the future of the US economy.

Without a strong performance from the ISM non-manufacturing composite index USD exchange rates look vulnerable to further softness.

Canadian Dollar Struggles amid Global Trade Tensions

With global trade tensions mounting once again the Canadian Dollar struggled to find any support against its rivals. A fresh bout of weakness within the oil market weighed heavily on CAD exchange rates, given the diminishing likelihood of any imminent breakthrough in US-China trade relations. Anticipation ahead of tonight’s Bank of Canada (BOC) rate decision also put a dampener on the Canadian Dollar.

As long as the BOC signals a willingness to leave interest rates on hold in the coming months CAD exchange rates are likely to find a rallying point tonight.

Weak Dairy Trade Index Limits New Zealand Dollar Support

A disappointing Global Dairy Trade index limited the support of the New Zealand Dollar overnight, with prices taking a -0.5% fall on the fortnight. With global trade tensions continuing to mount in the wake of the latest signals from the White House this cast something of a shadow over the domestic economic outlook. Even so, the weakness of the US Dollar still helped NZD exchange rates to make some gains.

Unless market risk appetite can hold up in the face of the latest US tariff threats, though, the New Zealand Dollar looks set to soften today.

Data Releases

December 4th 10:30 AUD Gross Domestic Product (YoY) (3Q) 1.6%
December 4th 19:00 EUR Eurozone Services PMI (NOV F) 51.5
December 4th 19:30 GBP Services PMI (NOV F) 48.6
December 5th 01:00 CAD Bank of Canada Rate Decision 1.75%
December 5th 01:00 USD ISM Non-Manufacturing Composite (NOV) 54.5

Louisa Heath