Trade-war concerns, political risk in Europe and divergence in monetary policy across the globe remain, some of the ongoing key themes to worry investors. This month looks to be overshadowed by the twin thrust of both politics and trade. Trade tariffs have kicked on, with Canada imposts becoming active with threats from the European Union and the US over the fallout of any car tariffs. This strained situation continues to fill financial markets with unease. The US President travels to Europe for a NATO meeting in Brussels to be held on 11–12 July. Tensions raised at the last G-7 meeting between the allied governments remain high, and NATO observers are asking whether the meeting in Brussels will be marred by calamities similar to those at the G7 meeting in Canada. Uncertainty around whether President Trump will stick to agreements or denounce them leaves his allies nervously in limbo. All of these uncertainties have the potential to make this month volatile for both currency and equity markets as they try and balance conflicting trade and political winds to prevent a more severe market dislocation. This week’s US 4th of July holiday, is likely to see lower trading volumes from today onwards until the all important US Non-Farm Payroll is released. On the local front New Zealand business confidence continues to slip with technical indicators and markets suggesting that the Australian dollar may be set to rebound from a first-half 2018 loss against its New Zealand partner. The spread that Australia’s two-year bonds enjoy over New Zealand’s has now more than doubled to 20 basis points from the start of the year to the widest since 2013. The NZDAUD pair’s (MACD) moving average convergence divergence, a key momentum indicator has risen above a crucial area suggesting a bullish trend for the Australian Dollar. Read more
The Australian Dollar (AUD) has taken the week off with no significant data published. It has broadly drifted lower on a lack of support with risk sentiment over the week down with investors preferring to hold US Dollar. The royal commission investigation into Australian banks is heating up, the RBA noted that there could be some further tightening of lending standards which could have an effect on the banks ability to loan out money. If this happens it will have an adverse effect on the economy forming a credit crunch of sorts and ultimately added pressure on the Aussie. Tuesday we have the RBA cash rate statement announcement and statement which is due to remain at 1.50%. We think the chances of a hike in rates won’t happen until 2020 if comment is made to suggest this we think the Australian Dollar could weaken off further to 0.7200 against the greenback.
The RBNZ left rates on hold Thursday at 1.75%. The following monetary policy statement showed a slight bias towards bearish sentiment. Responses from a couple of banks have suggested the next rate announcement could be a cut based on weaker GDP with more risk to the downside in the global economic outlook. We feel the statement was generally neutral with Adrian Orr suggesting May’s monetary policy statement remains intact. Employment is within sustainable levels and consumer price inflation remains below the 2% target. Adrian Orr highlighted the OCR would remain at these levels for some time. ANZ Business confidence published earlier in the week and showed a negative figure of -39.0 the lowest in some years showing a very pessimistic view of the things to come in the business sector. Read more
Markets eased into the weekend on low trade volumes with a lack of economic data making for an uneventful close to the week. Over the weekend the OPEC meeting was held in Vienna attended by the wealthiest oil producing nations. The organisation has agreed to increase oil production and by 1M barrels per day starting in July. At this point they are unsure exactly which countries will be boosting their current production. Markets have countered the 1M production indicating this could be more like 600M to 800M barrels per day. The news boosted oil prices from mid 66.00 to over 68.00 per barrel. President Trump has directly blamed OPEC’s production cuts for higher prices recently. He urged OPEC to keep prices down, ironically even though the hiked prices in crude have come about since his decision to sanction Iran which has had a major impact. Markets Monday are already lower, the safe haven JPY has benefited 40 points since the open. China is holding its ground in the face of further threats by Trump but China’s option could be limited as they seek to avoid an all out war. The Chinese government doesn’t want to show any weakness as they come under further pressure but we have seen a lot of media coming out of China to suggest they will fight any trade war to the bitter end. President Trump after all is unravelling 30 years of globalised trade systems and agreements. The S&P is trading at 2754, DOW 24580, Nasdaq 7687, Gold 1,270.95 and the US Dollar index is at 94.16 a 5-day low. Equities and Commodity markets may struggle to trade higher over the coming days as trade tensions continue to dampen market sentiment. RBNZ cash rate announcement publishes Thursday with the benchmark rate expecting to remain unchanged at 1.75%, but with weaker fundamental data releasing recently the monetary statement will be key to any moves higher. The biggest economic release on the US docket this week is quarterly GDP which prints Friday with expectations of around 2.2% down from March’s figure of 2.9%. In early news this morning the EU have responded from the US tariffs on European steel and Aluminum by raising tariffs on US made motorcycles from 6% to 31%. This will have a huge effect on Harley Davidson who will now focus on shifting some of its production overseas to avoid the tariffs. This will cost them 90-100M this year alone. The additional tariffs on their motorcycles equates to an average of USD 2,200 on each retail cost of a bike. Read more
The RBA minutes has signaled that interest rates will remain at record lows for some time. The general tone of the minutes was not unexpected with the target band of 2-3% still a way off with higher wages and inflation required. Australia have held interest rates on hold at 1.5% since mid-2016 however the RBA is facing challenges with falling house prices with a possible credit crunch not out of the question. They are bucking the trend of other central banks lifting the benchmark rates as they dial back stimulus. The Australian Dollar (AUD) has been battled recently as markets have chosen other safe haven investments. Against the US Dollar it is trading just off its current low of 0.7370 Friday.
New Zealand’s Current Account for the quarter ending March 2018 showed a deficit of 3 Billion. This is the largest deficit since the 2008 global financial crisis and was due to a drop in exports and higher imports. The most notable aspect of this number was that its 2.8% of the Gross Domestic Product (GDP) compared to the 7.8% figure from 2008. The United States and Australia have deficits of 2.6% and 2.3% of GDP highlighting our spending with the rest of the developing countries is similar. The one country which comes to mind is China who have a (BOP) Balance of Payments surplus. The Global Dairy Auctions were held Wednesday with the overall figure dropping 1.2% with whole Milk also down 1%. NZ first quarter GDP has published bang on expectations of 0.5% slightly lower than the March figure but more importantly down from 2.7% year on year from 2.9%. The New Zealand Dollar was unmoved over the news. Prime Minister Jacinda Ardern has given birth to a girl. Read more
Markets closed the week out weaker with currencies all down against the US Dollar with equities and commodities also depreciating. The US Dollar Index climbed to 94.89 with risk shifting to negative sentiment. The Trump administration announced its China tariffs stipulating a 25% charge on up to $50 Billion in Chinese products. Based on the news the DOW fall over 200 points and the S&P shed 0.4%. Donald Trump said the measures would affect products “that contain industrially significant technologies” but did not specify which products, this has come after Trump made the comment “in light of China theft of intellectual property and technology and its unfair trade practices”. Trump also said he would impose further tariffs on Chinese goods if they retaliated with their own set of duties on American made products. Over the weekend China, as expected, retaliated taking aim at US goods such as soybean and corn with further progress being made to tax coal, crude oil, gasoline and medical equipment. Sounds like this is a full-blown trade was to me. Back in April President Trump initially announced tariffs of 100B with China, perhaps we may see this figure come to the foreground yet if President Trump does not get what he wants? The New Zealand Dollar remains on the back foot from the decline from 0.7050 with further downside expected. There is little to speak of on the Australian Calendar this week, but we will see monetary policy minutes to shape the Aussie week with the pair trading perilously close to support of 0.7440 – a 15 month low against the greenback. The Bank of England (BoE) releases their monetary policy Thursday, we expect rates to remain on hold with the vote being 7-2 in favour and shy away from recent speak of hiking interest rates with terrible first quarter 2018 being a temporary blip. A hike in August is possible. If Trade talks remain in the headlines currencies should remain offered and drift lower over the week. Read more
The RBA governor Lowe spoke during the week on issues relating to the Australian Economy. The same rhetoric of the past few months was on offer with Lowe suggesting any changes to the current cash rate of 1.5% would not be forthcoming until wage growth moves towards 3%. With wage growth falling behind the cost of living this represents a significant strain on household debt to income. The Aussie Dollar dived below 0.7600 to 0.7560 against the US Dollar (USD) but then back to 0.7600. Employment figures have come in a tad worse than the expected 18,800 with just 12,000 fresh individuals entering the workforce. The Australian Unemployment was a surprise however with the unemployment rate clicking lower to 5.4% from 5.5%. The Australian Dollar was relatively unmoved on the news. USD strength overnight has seen the AUD move to fresh lows.
The New Zealand Dollar (NZD) has had a quiet week with nothing local of note on the calendar. Markets have focused on the Singapore Summit between President Trump and Kim Jong-un. The Federal Reserve raised the cash rate to 2.00% from 1.75% as widely predicted and suggested they would possibly hike two further times in 2018 if growth continued to improve. Interestingly the US Dollar Index was down after the release to 93.51 from 93.72 yesterday, which is not a large move but it shows an odd almost distaste for any appetite to buy US Dollars. Business Manufacturing confidence has released showing a positive result coming in at 54.5 but has not advanced the kiwi. Next week we have quarterly GDP figures with expectations we should see better numbers than the 0.6% weaker number in March. Read more
The G7 meeting took centre stage over the weekend which included Canada, France, Germany, Italy, Japan, UK and USA. The event was expected to be a shambles and it lived up to the hype with the event turning out to be confrontational and tense. It was unclear if President Trump would be signing the joint agreement which all G7 members agree on based on policy and initiative. The president signalling earlier that he was happy to go their own way if the issue of steel and aluminum tariffs didn’t turn out on his terms. President Trump was initially behind signing the agreement but was upset with Trudeau. After Trump left the event early the Canadian Prime minister gave a press conference saying, “Canadians are polite and reasonable but we will not be pushed around”. He said retaliatory tariffs on US products would push ahead on the 1st of July. The news was nothing new to media as the Canadians have made it clear previously that new tariffs would come into play if the US government continued with their tough line. President Trump tweeted on route to Singapore from Air Force one that he would instruct his officials “not to endorse the communique as we look to tariffs on automobiles”. The President also tweeted saying “PM Justin Trudeau of Canada acted so “meek and mild” calling him “very dishonest & week”. The French President Emmanuel Macron said “international co-operation cannot be dictated by fits of anger and throwaway remarks”. Trade war talks will dominate headlines over the week and is likely to continue for some time before amicable fair trade is agreed. The more excessive retaliations we see the more likely a global trade war could develop. The FOMC will no doubt hike rates this week on the 14th with markets already pricing in a shift higher of 0.25%. We have seen strong US data over the year and think the Fed will continue with their forecasted path. History will be made today when President Trump meets with North Korea’s Kim Jong-un at 1pm NZ time and nobody can predict what will happen or what outcomes will be agreed. US policy makers have been trying to get a number of items agreed in advance as i’m sure Un will also be prepared in advance on what to expect. Either way the results could have global implications and possibly pave the way for a end to the Korean war with a truce which was started in 1953. Later tonight the UK will vote on the withdrawal bill. The bill mirrors all existing EU legislation into UK law, ahead of Brexit taking place. All and all a fairly big week for markets with plenty happening, volatility is expected to give us a wild ride. Read more
The Australian Dollar has been the best performing currency over the week. With markets stale the Aussie has risen 100 points to 0.7670 against the American Dollar (USD). The RBA cash rate was announced Tuesday and was unchanged at 1.50% which was expected by markets. Growth is expected to pick up to just above 3% over 2018-2019 with unemployment expected to edge lower. First quarter GDP was expected to release at 0.9% but has come in at 1.0%, which translated is 2.8% y/y from 2.4%. These figures rallied the Aussie across the board.
Geopolitical woes of the past few weeks have taken a breather this week globally. Coupled with a light number of data releases internationally and locally the New Zealand Dollar has been fairly unmoved over the last 72 hours. The Global Dairy Trade Auction (GDT) provided weaker numbers with the Index falling 1.3% to US 3.487 a tonne with whole Milk also down 1.1% to US3,205 per tonne. The demand for skim milk powder rose to 0.3% to US 2,051 per tonne, the next auction is on the 19th of June. US Unemployment claims may give markets a boost creating a little volatility, but I wouldn’t bet on it.
A very quiet week for the US Dollar. ISM manufacturing printed better than the expected 57.9 releasing at 58.6 raising the US Dollar slightly higher. This release signals a 100 month streak of expansion in the manufacturing sector with a run over 50.0 highlighting continued growth. Crude oil supplies were sharply higher rising to 2.1M barrels for the week ending 1 June, markets were expecting a decline of 1.3M barrels. Crude oil is down on the news over 1.3% to trade currently at 64.87. The G7 meeting takes place today where all hell could break out with ongoing tariff talks. President Trump has been aggressive so far to good effect, but now this approach could unwind as China retaliates threatening to take back concessions. Other countries such as the EU Mexico and Canada have also announced retaliations. Trump will be pressured to “scale down” his approach.
The pound steadied earlier in the week around 1.3300 after losing ground from 1.3400 levels. Construction PMI and Services PMI printed better than expected boosting the Pound across the board. Services PMI figures have not painted the real picture with issues stemming from struggling retailers with the 4th decline in new orders over the last 5 months. The pound has continued its momentum leading into the last few hours of trading for the week but we expect some downside to follow. With recent UK data releasing well lately we have seen the GBP come off the low of 1.3200 in late May, but with Brexit talks on the horizon we may see markets focus on Brexit unfavorably and the Pound lose support. June 28-29th is when the European Council summit meet next to discuss all aspects of Brexit negotiations.
Hawkish comments were spoken by ECB members as markets awaits next week’s ECB meeting. It was noted that inflation outlook is stable and a reasonable assumption this could signal the end of the QE program soon. The Euro jumped to 1.1840 on the news, this being a considerable rally from the weekly open of 1.1650 and the low of 1.1520 from last week. Wiping away earlier May losses it is showing a bullish breakout above key area of resistance of 1.1700. The US Dollar continues to weaken off after weeks of strong support, the question appears to be whether the Fed will raise rates a total of 3 times in 2018 or 4. The ECB rate is announced on Thursday and should remain unchanged.
The Japanese Yen (JPY) has largely been sold off against its main rivals. Against the US Dollar it currently trades at 110.00 after being at 110.26 Thursday. Japanese wages showed no growth in April highlighting consumer spending could be light for a while to come. With wage growth a topic of concern for the Bank of Japan (BoJ) the 2% inflation target may stay elusive for some time. With a downward revised 0.7% for March and 0.8% for May these figures will need to improve. Friday on the calendar we see the Current Account which is expected to print at 2.1T up on May’s result of 1.77T.
With a lack of any news locally or Internationally for the Canadian Dollar (CAD) it has traded predominantly sideways. Against the US Dollar (USD) we have seen it travel to 1.3050 and down to 1.2870 in thin markets before returning to the weekly open of 1.2950. It’s all a bit of a non-event to be honest. Crude Oil inventories were up as was the Crude oil price to 65.02 but generally it’s the quietest week we have seen for some time. With analysts forecasted volumes to be -1.3M barrels, crude supplies jumped to 2.1M barrels. Canadian Trade Balance published at -1.9B instead of the predicted -3.4B boosting the CAD to 1.2870 a monthly low. The G7 meeting is in full swing today where tariffs and NAFTA discussions will be debated.
The Australian Dollar (AUD) was sold off over the week in unfavourable risk conditions as markets took to the safe haven products due to the fallout in the Italian Elections. Against the US Dollar it has reached a two-week low of 0.7475. Risk returned to currencies Thursday with the easing of the Italian Election headlines and the Aussie was back in business appreciating across the board along with higher equities, Crude Oil prices and commodities. Quarterly Private Capital Expenditure printed lower than the predicted 0.8% at 0.4% and took the Aussie lower off its highs. The all-important US Non-Farm Payroll numbers print at the end of the week and will offer a further gauge on whether the Fed will hike rates on June 14. Chinese manufacturing figures for May have printed at 51.9 versus the 51.4 expected showing a solid result which will excite the Aussies.
The Reserve Bank Governor Adrian Orr spoke on Wednesday and commented he was pleased that credit growth has slowed, but not for long enough and the banking sector could withstand a relatively significant decline in house prices. NZ Financial Stability report which was published on Wednesday, and is released twice yearly, highlighted the economy is “sound and efficient” – dairy farms need to reduce debt levels, NZ banks should \reduce their international exposure to risk and the RBNZ Loan to value ratio restrictions are unchanged with household debt rising less than it has on previous years. ANZ business confidence dropped for May with a net 27% of businesses pessimistic about the year ahead, down 4 clicks from the April figures. Markets awaits US Non-Farm payroll at week end. Read more
Markets closed lower to end the week as investors took on less risk. Geopolitical issues affected currency markets with North Korea concerns rearing its ugly head once again. The on again off again June 12thmeeting between President Trump and Kim Jong seems to be back to track less than 24 hours after Trump’s decision to cancel it. The President initially upsetting Kim Jong Un after sending him a letter outlining his issues for cancelling. Kim Jong Un retaliated with a “nuclear to nuclear showdown” with the US. Trump released a statement saying “talks are very productive” and the summit could still take place on June 12. The minutes from the Fed meeting confirmed the broad view that they would be gradually increasing rates but reiterated growth in the economy would need to be a lot stronger to allow the Fed to hike faster than the prescribed current 0.25% per quarter. The US Dollar Index is trading at 94.00 just off the weekly high of 94.25 with equities stabilizing but they remain bullish. Crude oil has had a good run this year, but we think the downside is limited to around 67.00 which could be tested in the following weeks. With geopolitical problems such as Venezuela in play in a complete shambles, their production numbers will continue to decline over time. This will impact the associated currency the Canadian Dollar trading at levels around 1.3000 currently we may see further upside develop to 1.3600. The EURO gaped higher on the weekly open up 30 points to 1.1680 with the populist parties failing to form a government. Italy’s president Sergio Mattarella boycotted attempts to form western Europe’s first populist government so in time new elections may will be held. US monthly core durable goods released on Saturday NZ time at 0.9% well up on the expected 0.5% and last month’s 0.0% result pushing buyers into the greenback and showing a resilient demand for April. US Bank Holiday Monday kept markets quiet ahead of US Non-Farm Payroll figures later in the week. Locally we have ANZ Business confidence Wednesday and the G7 meeting taking place in British Columbia. Read more