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FX Update : Global political uncertainty abounds

Written by Ian Dobbs on July 5th, 2016.      0 comments

Australia has joined the ranks of those countries with a fragile political environment after this weekend’s Australian election. The prospect of a hung parliament and a significant period of political uncertainty based around a minority government and unmanageable Senate could reduce the ease of passing legislation and potentially delay the return of a budget surplus. In the UK the political landscape continues to deteriorate after the UKIP leader Nigel Farage (a prominent Brexit campaigner) yesterday joined the ranks of those wanting to step back from the UK EU exit backlash. Meanwhile a group of UK businesses are reportedly preparing a legal challenge to force the government to delay negotiations with the EU until an act of parliament is in place in a move which is aimed squarely at the majority of MPs which were in favour of the UK remaining in the EU. Things look little better across the English channel after a recent Ipsos-MORI survey found that almost half the voters in eight big EU countries wish for their own referendum on EU membership.

The political landscape is dominating the headlines in Australia this week after the weekend’s Federal election. The result currently points to the strong prospect of a hung parliament when all the votes are counted, with both the ruling Liberal/National Coalition (LNP) looking likely to be unable to govern alone. The prospect of a period of political uncertainty and a Senate which includes a number of minor political parties and independents is likely to weigh on market confidence if key legislation becomes more difficult to pass. The deadlock has already seen key rating agencies move to warn of a credit rating downgrade on the back of the difficulty that a minority government may have in returning the country to a budget surplus. The result saw the AUD open lower initially this week although the fall proved short lived as investors chased yield and ex-Europe currency exposures. Last week’s data had no impact on the markets. The releases included a fall in HIA new home sales and a smaller than expected rise in fresh credit issued to consumers and businesses. In focus this week is today’s RBA meeting where economists expect no move in rates despite Australia’s uncertain political future and the fallout from Britain’s vote to leave the EU. Numbers on trade and retail come three hours earlier in what will be the busiest day this week.

New Zealand
Improving sentiment brought about by a rebound in global equities and a move into currencies with a reduced exposure to the turmoil in the UK/Europe has helped lift the New Zealand dollar in recent trade. Local data events last week took a back seat to the improved sentiment which tracked the course of stronger global equity markets. Trade data for May improved from the month prior, although building permits (for May) issued fell sharply from the month prior. Business confidence for the same month lifted to six-month highs on the back of strength in the construction and tourism sectors. The latest quarterly NZIER  business confidence survey released this morning also reflected an improving outlook amongst respondents with a net 19% expecting an improvement over the next quarter. Other data this week includes the next in the GDT dairy price series due for release tonight, although once again look to offshore for direction overall.

United States
Holiday trade has meant a quiet start for the USD this week. External events dominated last week as focus remained squarely on the UK and Europe as the heightened uncertainty saw the market price out the prospects of Fed rate hikes until 2018. Data last week from the US was mixed and included misses in the services PMI, Dallas Fed and pending home sales numbers, amongst others. Positive reads included an upwards revision in the Q1 GDP data, consumer confidence- which lifted to eight month highs and strong prints from both the Chicago PMI and manufacturing ISM report. The highlight this week is the employment data on Friday where a strong rebound from last month’s weak number is expected (190k exp.). The minutes of the June Fed meeting feature on Thursday and will be examined for key issues (although will reflect a view prior to the UK EU vote).

United Kingdom
Politics of the Brexit vote continue to dominate focus in the UK this week. The latest news comes as Nigel Farage, leader of the UK Independence Party and a prominent campaigner for a UK exit announced his resignation yesterday. The move follows that of PM Cameron (resigning) and ex London mayor Boris Johnson, who both moved to dodge poll positions in the UK EU negotiations as the fallout from the vote continues to intensify. Despite the political turmoil the UK share market rebounded last week to trade at its highest level for the year as the market reacted to a falling pound and prospects of fresh BoE easing. Data released during the week included the final read on Q1 GDP which matched the prior estimate and credit numbers which saw a rise in mortgage approvals and mortgage lending (May). Data released yesterday showed the construction PMI tumbling in June as forward order books plunged. The survey which was 80% completed prior to the UK EU vote intensifies the concern over how much the construction sector will be impacted by the Brexit vote. In focus this week is today’s BoE Financial Stability report and Governor Carney’s speech. Data releases include the services PMI (today) and numbers on manufacturing and industrial production on Thursday.

Trade in the Euro continues to take its lead from discussion and headlines on the Brexit issue this week. Stresses on the Italian banking sector and Portugal’s budget deficit are garnering increased attention as investors contemplate the fallout on Europe from the UK’s vote and look to weak links in the Eurozone. The possibility of a complete EU break-up remains of concern and comes as a survey suggests that almost half the voters in eight large EU countries want their own referendum on membership. Data last week understandably had little bearing on proceedings. German retail sales was seen beating expectations, whilst inflation across the Eurozone was seen coming in slightly higher than the consensus. Manufacturing PMI data released on Friday managed to edge the consensus in both Germany and across the wider euro area whilst sentix investor confidence released yesterday fell well short of expectations. Events this week to watch include a speech from ECB president Draghi tomorrow and indicators on the composite and services PMI today.

Sentiment shown towards the Yen remains firm in trade this week in the wake of the UK’s EU exit vote. There have been few fresh leads since Friday with the US on holiday yesterday and the local data wrap lacking. Last week was a busy one for Japanese data although none of the releases caused any stir. Retail sales and the first read on industrial production both slumped from the month prior, although positive surprises came from the housing starts and construction numbers. Vehicle sales posted a moderating rise from that seen a month earlier. Consumer confidence which beat expectations, posted a gain from that seen in May. National inflation data for the same month saw prices fall 0.4% y/y which was a touch smaller than the decline expected. The BOJ Q2 Tankan survey revealed large manufacturers generally slightly more positive than expected, although a large number of the participants had responded prior to the UK’s vote on EU membership. Look to international markets for moves in the Yen this week once again. Data releases include numbers on bank lending and the May current account, which are both due on Friday.

The Canadian dollar has edged higher in quiet trade this week which has started with the release of the BoC Business Outlook Survey and RBC Manufacturing PMI for June. The latter came in slightly lower than last month’s print, whilst the BoC survey revealed participants who expected generally soft business activity ahead with flat sales as company export sales and labour-market slack remained key features in the economy. A large divergence was noted between the oil and services sector as the former maintained tight capital spending plans and noted dim prospects ahead. Data releases from last week included the April GDP report which failed to fire after it matched expectations whilst raw materials prices for May were seen expanding by more than the market forecast. Looking out to later in the week we have trade data on Wednesday, building permits and the Ivey PMI on Thursday which come prior to the arrival of the latest employment figures on Friday.

Economic Events (Tuesdays only)
  • US Markit PMI Composite, 51.2 vs. 50.9 exp. (June)
  • US Q1 GDP, 1.1% vs. 1.0% exp.
  • Australian HIA New Home Sales, -4.4% m/m vs. -4.7% prior (May)
  • NZ Building Permits s.a., -0.9% m/m vs. 6.8% prior (May)
  • Japanese Industrial Production, -2.3% m/m vs. -0.1% exp. (May)
  • NZ ANZ Business Confidence, 20.2 vs. 11.3 prior (May).
  • Australian Private Sector Credit, 0.4% m/m vs. 0.5% prior (May).
  • UK Q1 GDP, 0.4% on exp.
  • EU Core Inflation, 0.9% y/y vs. 0.8% exp. (June)
  • Canadian GDP, 0.1% m/m on exp. (Apr.)
  • US Chicago PMI, 56.8 vs. 50.7 exp. (June)
  • US ISM Manufacturing PMI, 53.2 vs. 51,5 exp. (June)