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ECONOMIC REPORTS AND EARNINGS DRIVE U.S. EQUITY PERFORMANCE
U.S. indices have been climbing steadily higher, driven by an increasingly rosy picture for the U.S. economy, and solid corporate earnings thus far for the second quarter of 2018. Federal Reserve chairman Jerome Powell helped underscore the economic growth in the U.S. on Tuesday and Wednesday, testifying on Capitol Hill and reinforcing both the strong U.S. economic growth, and the notion that interest rates would continue a steady march higher every three months. The Fed chairman’s words got confirmation on Wednesday as the Beige Book pointed anecdotally to solid growth in 11 of the 12 Federal Reserve districts. Only St. Louis reported slight growth, while the other districts reported growth that was moderate or better. Adding to the optimism over the economy has been corporate earnings results so far this quarter. Although earnings season is just getting started, so far data shows that 90% of the companies who have reported have beaten expectations for revenues and profits. There are some clouds on the horizon however, with the Beige Book also noting that the U.S. economy could have trouble making its next leg higher due to a lack of skilled workers and rising raw materials prices.
Any troubles are likely far off, with the Fed chair seeing no signs of an impending recession, and with Larry Kudlow, economic advisor to President Trump, saying Wednesday at a CNBC event that more pro-growth measures could be imminent.
Australia: Domestic and international factors guiding the economy
Australia, last week we saw the RBA minutes of their July meeting which emphasised that policy remains firmly on hold, although they did contain a detailed discussion of household debt dynamics
“Again, the RBA said the next move “would more likely be an increase than a decrease”, although they re-introduced the notion that a stable cash rate would be a source of stability and confidence.”
“However the key data release last week was very strong employment data for the month of June. Australian employment increased by 51k in June, well above expectations, with full time jobs contributing most of the gains.”
“Although the unemployment rate held at 5.4% as the participation rate rose as workers were pulled into the workforce. This responsiveness of labour supply does show why wages have been slow to respond to this employment strength. And while a strong result, momentum is still slowing from the peak in employment growth seen in 2017.”
“This week brings a number of important events globally and locally. On the international front we see US Q2 GDP which is shaping up as a cracker given current consensus forecasts of 4%. We also see Flash PMIs on Tuesday, as well as the ECB on Thursday who at their last meeting emphasised a commitment to keep rates steady until at least summer of 2019.”
“Domestically, the highlight will be June’s CPI print. Our economics team is expecting another benign print, and it is worth noting that for the last 18 months consensus forecasts have overestimated inflation outcomes and inflation remains far from threatening the RBA outlook.”
“The potential for further tweets from Trump, heightened risks around trade wars and thin liquidity conditions given northern hemisphere summer holidays all adds to the near term uncertainty for FX markets. However, if the Yuan continues stabilising below 6.80, the AUD should remain close to 74c.”
US President Trump threatens another government shutdown - Reuters
As was reported earlier, US President Donald Trump has again threatened a government shutdown in an effort to force Congress to provide funding for his long-promised border wall with Mexico. Reporting from Reuters gave further details on Trump's difficulties in getting majority support for his border control choices.
"U.S. President Donald Trump said on Sunday he would allow the federal government to shut down if Democrats do not fund his border wall and back immigration law changes, betting that maintaining a hard line will work in Republicans’ favor in November congressional elections. However, a disruption in federal government operations could backfire on Trump if voters blame Republicans, who control Congress, for the interruption in services.
“I would be willing to ‘shut down’ government if the Democrats do not give us the votes for Border Security, which includes the Wall! Must get rid of Lottery, Catch & Release etc. and finally go to system of Immigration based on MERIT! We need great people coming into our Country!” Trump said on Twitter.
Americans are divided along party lines on immigration, and 81 percent of Republicans approved Trump’s handling of the issue, according to a Reuters/Ipsos poll released this month. The Republican president has threatened a shutdown several times since taking office in 2017 in a bid to get immigration priorities in congressional spending bills, especially funding for a wall along the southern U.S. border. Trump has asked for $25 billion to build the wall.
“I don’t think it would be helpful, so let’s try to avoid it,” Republican Senator Ron Johnson, chairman of the Senate Homeland Security Committee, said on CBS’ “Face the Nation.”
Congress must agree on a spending measure to fund the government by a Sept. 30 deadline. Although Republicans control both the U.S. Senate and House of Representatives, disagreements between moderates and conservatives in the party have impeded a speedy legislative fix."
US jobs data in focus with trade “noise” making a comeback
The US jobs report for July is due on Friday at 1230 GMT, with the release widely viewed as the most important monthly print out of the world’s largest economy since the global financial crisis. Overall, a relatively healthy labor market is anticipated by analysts, with wage growth data again attracting the lion’s share of attention.
According to economic forecasters, the US economy added 190k positions during July, something which may on the one hand point to weakening jobs growth compared to June’s 213k, but on the other hand still constitutes a robust number. Meanwhile, the unemployment rate is projected to tick down to 3.9% – not far above May’s 3.8% which matched a low last recorded in April 2000 – after climbing to 4.0% in June. It should be kept in mind though, that June’s uptick was owed to a rise in the participation rate to 62.9%, as individuals reentered the labor force. For the record, the participation rate has not been above 63.0% since early 2014.
Turning to average earnings, which are again expected to be in the spotlight, they are projected to expand by 0.3% m/m – above June’s 0.2% –, something which would maintain the year-over-year pace of growth at 2.7% for the third straight month.
Canadian dollar rises on NAFTA hopes, yen hits 10-1/2-month low
The dollar dipped against the Canadian dollar on Monday ahead of a looming deadline in Canada-U.S. talks over reworking the North American Free Trade Agreement, while hitting a more than 10-month high against the yen.
Canadian and U.S. negotiators were racing against a midnight Sunday deadline (0400 GMT Monday) to reach a deal to revamp NAFTA, but had not yet settled issues such as American tariffs and access to Canada's dairy market, an official and sources said.
U.S. President Donald Trump's administration has said Canada must sign on to the text of the updated North American Free Trade Agreement before Monday local time or face exclusion from the pact. Washington has already reached a side deal with Mexico, the third NAFTA member.
"Even Trump does not want to break this deal, so there is room for compromise from the U.S. side," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.
"If there is no deal with Canada at the end of September, I don't think it's the end of the world."
The Canadian dollar rose to a four-month high at 1.2837 per U.S. dollar before giving up some gains. It last traded about 0.4 percent higher at $1.2852.
The loonie added to the previous session's gains of more than one percent.
Canada's ambassador to Washington, David MacNaughton, told reporters that both sides had made lots of progress, but were not there yet, saying: "we still have a couple of tough issues, so we're doing our best."
One Ottawa source directly familiar with the talks said the two sides were very close, while another said they were close, but added they were not there yet.
"The removal of the uncertainty of the NAFTA deal is a good thing, but it will not last long," Mizuho's Yamamoto said.
The yen weakened to 113.85 per dollar, reaching its lowest since the middle of November last year before giving up some gains.
The greenback has risen four straight weeks against the Japanese currency, including a nearly one percent gain booked last week.
The yen last traded 0.05 percent higher at 113.77 yen.
The dollar index, which measures the greenback against a basket of six currencies, was nearly flat at 95.137, not far off a more than two-week high of 95.366 reached on Friday.
For the third quarter, which ended Friday, the dollar index posted its second consecutive quarterly gain, rising more than half a percent.
The euro traded flat with worries about a rise in Italy's deficit weighing on the single currency after the Italian government agreed to set a higher than expected budget deficit target.
The euro last changed hands at $1.1610, not far off a more than two-week low of $1.1569 touched on Friday.
It gave up nearly 1.2 percent last week.
Dollar slips vs yen as Canada trade deal's boost to risk appetites fades
The dollar retained gains against a basket of currencies on Tuesday while slipping off a more than 10-month peak against the yen as the boost to risk appetites from the U.S.-Canada trade deal to replace the North American Free Trade Agreement faded.
Traders awaited the outcome of a Reserve Bank of Australia monetary policy meeting. The RBA is expected to stretch its record spell of rates at 1.5 percent well into next year, according to a Reuters poll, with a 25 basis-point hike not expected before end-2019.
The dollar index, which measures the greenback against a basket of six peers, edged higher to 95.322, trading near a three-week high of 95.373 reached the previous session.
While fears about international trade conflicts between the United States and major trading partners including China have lifted the dollar 3.4 percent this year, an increasingly confident U.S. Federal Reserve has also boosted the greenback.
The newly minted United States-Mexico-Canada Agreement, announced on Sunday, preserves a $1.2 trillion open-trade zone that was on the brink of collapse after nearly a quarter century.
Ayako Sera, market economist at Sumitomo Mitsui Trust Bank, said the U.S trade representative "was occupied solving the problem in relation to NAFTA up until now".
"Japan and the United States can really kick off their trade negotiations now that has ended," she said.
U.S. President Donald Trump and Japanese Prime Minister Shinzo Abe agreed on Sept. 27 to start fresh trade talks.
Against the Japanese yen, the dollar rose 0.06 percent to 113.92 yen on Tuesday.
Following the U.S.-Canada trade deal, the yen fell as low as 114.06 per dollar, its weakest since November 2017.
The greenback is now up just over 1 percent against the yen this year. It strengthened 2.3 percent against the Japanese currency in September.
"If we close this week above 114, that's going to be a significant milestone," said Bart Wakabayashi, Tokyo branch manager at State Street Bank.
The Australian dollar, meanwhile, was 0.05 percent higher at $0.7228 shortly before the RBA's policy decision.
Elsewhere, the Canadian traded at C$1.2804 per dollar, holding onto most of its 0.7 percent gains the previous day.
The euro was down 0.06 percent against the greenback at $1.1573 on renewed concerns about Italy's budget deficit.
Italian Deputy Prime Minister Luigi Di Maio accused European Union officials of deliberately upsetting financial markets with negative comments about Italy's budget plans.
He was taking aim at European Economic Affairs Commissioner Pierre Moscovici, who earlier said that Rome's plans were "obviously" deviating from EU rules on fiscal discipline.
Dollar reaches 11-month high against yen
The dollar reached an 11-month high against the yen and stood tall against other peers on Thursday, boosted by new upbeat U.S. data and comments from Federal Reserve Chairman Jerome Powell that were seen as hawkish.
The dollar stretched an overnight rally to touch 114.55 yen, its highest since early November 2017. A rise above 114.735 yen would take the U.S. currency to its highest level since mid-March 2017.
Adding to the bullish mood for the dollar, Fed Chairman Powell said on Wednesday that the central bank may raise interest rates above an estimated "neutral" setting as the "remarkably positive" U.S. economy continues to grow.
The upbeat mood was boosted by news the Institute for Supply Management's (ISM) non-manufacturing activity index jumped 3.1 points to 61.6 last month, the highest reading since August 1997.
The ADP National Employment Report also showed private payrolls jumped by 230,000 jobs in September, the largest gain since February.
"The dollar stands to outperform together with the rise in long-term Treasury yields ahead of Friday's non-farm jobs report, possibly reaching the 115.00 yen handle," said Masafumi Yamamoto, chief forex strategist at Mizuho Securities.
"The Trump administration could turn its attention to the dollar and check its rally. But any slowdown by the dollar is likely to be temporary, as the Trump administration has in effect allowed the currency to strengthen under its economic policies."
U.S. President Donald Trump has on several occasions expressed displeasure at the dollar's strength.
The dollar index against a basket of six major currencies stood at 96.065 after climbing to a six-week peak of 96.116 overnight.
U.S. Treasury yields jumped to multi-year peaks on Wednesday, with the 10-year yield reaching a seven-year high after Wednesday's robust data bolstered the case for the Fed to raise interest rates again in December and beyond.
The euro was flat at $1.1477 after slipping about 0.6 per cent on Wednesday.
Before caving into the dollar's broad surge, the single currency had climbed to $1.1594 earlier on Wednesday on reports that Italy plans to reduce its budget deficit over the next three years.
The pound was steady at $1.2941 following a dip overnight to a 3-1/2-week low of $1.2925.
The Australian dollar extended overnight losses, slipping to a three-week trough of $0.7096.
REFILE-EM ASIA FX-Asian currencies plunge as U.S. jobs data, Powell comments boost dollar
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* Chinese markets closed for the week
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Euro posts biggest drop in four weeks as Italian yields spike
The euro fell across the board on Monday, posting its biggest drop against the Swiss franc since early September as a spat between Rome and the European Union over Italy's budget plans forced a spike in Italian bond yields.
The single currency has been relatively impervious to such spikes in recent weeks as concern over Italy's budget has dominated headlines.
But a combination of a weakness in stock markets worldwide and the widening gap between core European and U.S. bond yields pushed investors who had bet on a fourth quarter euro rebound to dump the single currency.
"The Italian situation is an excuse for some investors who had been expecting a rebound in the last few weeks of the year as recent data out of Europe has hardly been supportive," State Street Global Markets head of macro strategy Timothy Graf said.
Adding to market concerns, Italian Deputy Prime Minister Matteo Salvini, speaking at a media conference with French far-right leader Marine Le Pen, denounced European Commission President Jean-Claude Juncker and Economics Commissioner Pierre Moscovici as enemies of Europe. The single currency fell nearly half a percent against the dollar to $1.1468 and not far from a more-than one-year low of $1.1355 hit in mid-August.
Against the Swiss franc, the euro plunged half a percent and it fell 0.7 percent against the Japanese yen.
Struggling European economic data, particularly on the inflation front, has stood in sharp contrast with data out of the U.S. in recent weeks, prompting hedge funds to whittle down their long positions on the euro to their lowest for nearly 1-1/2 years.
The euro's losses translated into gains for the dollar.
Against a basket of its rivals the greenback rose 0.4 percent to 95.99, edging towards a 14-month high of 96.991 hit in mid-August.
"The dollar has been supported by some strong data but with the market already long dollars at these levels, new data has to surprise investors by a bigger margin to push it higher," Credit Agricole FX strategist Manuel Oliveri said.
The dollar climbed half a percent last week, marking its second consecutive week of gains as hedge funds ramped up their dollar holdings by $3.4 billion to $28.7 billion, the largest rise since end-December 2016, according to latest data.
Moves were limited by a lack of liquidity with Japan and the U.S. bond market closed for a holiday. A sudden and steep rise in Treasury yields had underpinned the dollar for much of last week.
Yields on 10-year Treasuries hit a seven-year peak on Friday as data showed the unemployment rate falling to its lowest since 1969. The big focus for dollar bulls this week will be the release of U.S. CPI data on Thursday. Markets expect a 0.2 percent increase on a monthly basis in September, similar to last month and a bigger increase will bolster U.S. rate hike bets in 2019. Sterling fell 0.7 percent to $1.3034 , wiping out all of its gains last week, as markets focused on any substantial breakthrough in Brexit negotiations as Britain moves nearer to an exit deal with the European Union.
EU Brexit negotiators believe a deal with Britain on leaving the bloc is "very close", sources said, in a sign that a compromise on a major sticking point - the future Irish border - might be in the making.
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