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US Fed and RBNZ rate decisions to look forward to this week

Market Overview:

This week kicked off with Asian equities lower, as stocks in Hong Kong fell with U.S. equity futures and the Australian dollar after China withdrew from planned trade talks with U.S. officials, potentially triggering an escalation in the protracted tariff war between the world’s two-biggest economies, as additional trade tariffs came into force on Monday. The escalation in U.S.-China trade tensions will test two strong weeks of gains for Asian equities that lifted stocks off this year’s lows in part due to optimism that economies can weather the hit from trade restrictions. Investment bank JPMorgan Chase & Co commented that it was factoring into its strategy, a growing potential for a “Phase III” of the trade war next year affecting all Chinese imports, which would lead to weaker Chinese growth and hit U.S. stocks. Also of main note this week is the Fed rate decision at Wednesday’s FOMC meeting, where the Fed is expected to increase interest rates by 0.25% for the third time this year, with the market increasingly pricing in a fourth rate hike in December given the solid economic results still flowing from the US. On currency markets, look for the stronger USD trend to continue and the EUR to remain under pressured with the stronger USD and Brexit issues. The GBP continues to swing at the mercy of Brexit headlines and now the wildcard of a snap UK election (in our view unlikely) with any upside severely limited. The Australian and New Zealand dollars will very much remain driven by offshore sentiment although the RBNZ rate decision on Thursday may provide a local diversion (no rate change expected but forward projections will be closely watched). Read more

market updates

FX Update

Australia

The Australian dollar has put in a solid performance over the last few days making new highs for September at 0.7291 overnight against the US dollar, mainly on the back of stronger US equities and an increase in risk appetite. Also underpinning AUD strength were increase in base metal prices and supportive comments on Wednesday, from Chinese premier Li Keqiang, who said that the country will accelerate its process of opening up, cheering globalization moving forward. He added that the country will not devalue its currency to stimulate exports, ruling out currency manipulation as a tool to fight the US tariffs.  There is potential for the AUD/USD to extend its advance to the 0.7361 level , the August high, but this would only be possible with further sustained USD weakness which in the short term looks unlikely.

New Zealand

The New Zealand Dollar pumped higher yesterday as Q2 GDP data came in substantially higher than expected at 1% against expectations of 0.5-0.8%, and last quarter’s 0.5% figure.

This was not only a much better than expected but the details were more encouraging for the economy’s growth prospects going forward. Particularly positive, was that growth was widespread over the June quarter, with only one major industry (mining) reporting a decline. The strongest performers included agriculture (up 4.1%, with milk production up and forestry rebounding from a sharp drop last quarter), electricity generation (up 3.7%), retail trade (up 1.5%), transport (up 1.8%) and recreational and other services (up 3.5%). This result is significant for the Reserve Bank’s OCR decision next Thursday. The RBNZ has said that if economic growth doesn’t accelerate in the way that it expects, it is likely to move towards OCR cuts. However, with its forecast for the Q2 data at 0.5% and this result double their expectations, any potential cuts in OCR levels look firmly off the table for now. The NZD rallied strongly after the release of the GDP data jumping 50 pips to a high of 0.6652 and remained around this elevated level for the rest of the day. With continued strength in offshore equity markets, the appetite for global risk remains strong and this has underpinned further NZD strength overnight, with the NZD/USD at 0.6691 high, the highest level since 30th August. However, we remain wary of the sustainability of continued NZD strength, given that US economic data continues to be solid and the US Fed is on track for another rate hike at next Wednesday’s meeting. Read more

Trade War Escalates with Further Trump Tariffs

Market Overview:

In breaking news- President Trump has delivered remarks to impose 10% tariffs on 200 Billion worth of Chinese imported products, these duties will rise to 25% at the end of the year. Trump said the rise to 25% would come into play on the 19th of January 2019 if China retaliates. He would also instigate “phase three” which would be to pursue tariffs on approx 267 Billion of additional products. Markets have turned risk averse on the news with the New Zealand Dollar and Australian Dollar both sharply trading lower.

Investors who started the week long US Dollar have needed to reconsider their risk exposure. Over the week the big dollar appreciated then lost momentum when US inflation data and producer prices both fall short of expectations. Retail Sales also came in poor surprising markets with a reading of 0.1 versus the 0.5% expected. Data shows this was the worse reading since March this year citing lower household spending was the culprit. Equity markets have continued to surge higher over the week but retraced off highs midweek when risk sentiment started to waiver. The S & P is trading at 2904 just shy of its all time high 2908, a scary level when we look back at the speed of the moves to where it trades now. Crude oil backed off lower from its weekly high of 71.25 to trade around the 68.00 area after experiencing massive interest stemming from hurricane buying as Hurricane Florence barrelled down on Carolina. President Trump’s economic trade agenda is due to ramp up this week after implementation of tariffs totalling 200 Billion on Chinese products after the President gave word to his officials to continue forward with his China tariff plan. This week things are due to escalate further with US and China coming up with new ways of retaliating. We have seen threats from both sides recently with markets hoping something may be sorted this week after Steve Mnuchin and a Chinese top official have arranged to meet in Washington. If President Trump announces fresh tariff plans early this week this could derail the meeting sending negotiations back to first base. The New Zealand Dollar closed the week in slightly positive territory across the board but looks to be under a fair amount of pressure. Fridays Manufacturing data showed a sluggish sector for the third consecutive month. Trade concerns could weigh on the kiwi over the week along with other risk currencies such as the Australian Dollar, both seem stuck in long term bearish cycles with the kiwi trading just off its low of 0.6550 against the US Dollar at January 2016 levels. We have another quiet week of economic news with quarterly GDP to print. Read more

International Trade

FX Update

Australia

The Australian Dollar has held its own over the course of the week. Against the US Dollar it has lifted from the low of 0.7090 to 0.7175 after worse than expected US data weakened the greenback. Australian Business confidence published down on expectations showing an increasing alarming trend in Australian company pessimism. The fall also pulled the indicator below the long term average although most of the recent economic data published over the past couple of months has been positive. Employment data showed a stable unemployment rate of 5.3% with the change in the number of employed people jumping to 44,000 from 16,500 expected. The Aussie rallied across the board and through 0.7200 versus the US Dollar. Markets could view this release as a pivotal benchmark for further Aussie support over the following few days.

New Zealand

The New Zealand Dollar has been under performed this week, with a lack of local data to publish it has drifted lower across the board. US Producer Price Index released weaker than markets were expecting putting pressure on the US Dollar as sellers of the greenback pushed crosses higher. The kiwi is currently trading around 0.6550, up half a cent after reaching a low of 0.6500 versus the big Dollar. Word is we should expect further headlines regarding Trump’s ongoing trade talks with US officials reaching out to China for further meetings to resolve current differences. NZ Business confidence Friday the only local news this week shouldn’t have to much impact on the kiwi. Next week we look forward to quarterly GDP, expected to not more from the current 0.5% Read more

Trump plans extra 267B tariffs on China

Major Equity markets ended the week’s session weaker after The US employment report showed higher expected earnings and job growth with a surge in the average hourly earnings spiking 2.9% from a year ago. US Non farm Payroll came in at a healthy 201,000 higher than the expected 191,000 markets were expecting. US unemployment followed showing a slight increase to the unemployment que rising from 3.8% to 3.9%. The US Dollar traded higher across the board with the US Index jumping to 95.43. President Trump said Friday he was willing to slap additional tariffs on 267B worth of Chinese products entering the US at short notice, this is on top of the other 200B he is already considering. The current post NAFTA deal being negotiated between the Trump administration and Canadian officials is still on the go with differences in milk providing a barrier to an agreement being done. Currently US Milk products entering Canada are taxed at 270% in an attempt by Canada to protect their local industry. President Trump and Kudlow want the tariff removed to “give our farmers a break”. Trade discussions with Trump and Japan have also struggled to be reached with President Trump saying “if we don’t make a deal, Japan knows it’s a big problem”. Japan’s prime Minister Shinzo has tried hard to form a good relationship but so far his efforts haven’t helped derail any exemptions from the current metal tariffs bought in several months back. Locally the New Zealand Dollar continues to trade at fresh lows, down to 0.6515 against the greenback. This week we struggle to see any topside action with a good chance risk products could be sold off for safer style products and currencies such as the JPY if any trade discussions turn ugly. The NZ Trade Weighted Index (TWI) is down to 71.20 its lowest level since October 2016. This week’s economic docket sees the main prints being Australian Employment and Bank of England – Official Cash Rate Thursday along with US monthly CPI Friday. Read more

FX Update

Australia

It’s been an interesting week for the Australian economy, and by extension, the Australian dollar. Earlier in the week we had softer than forecast Retail Sales and Current Account data, but releases turned positive on Thursday when GDP printed at 0.9% vs 0.7% expected. This was then followed by a better than expected Trade Balance figures yesterday. The RBA rate statement that hit the wires on Tuesday was pretty neutral with little changed in terms of wording from their prior statement. They continue to see further gradual progress reducing unemployment and inflation moving toward target. The Central bank may be a long way off raising the official cash rate but that doesn’t mean Australia hasn’t seen some monetary tightening recently. 3 of the 4 big Australian retail banks have all raised mortgage rates in the past week, two of them did it yesterday. The banks are blaming higher funding costs for the rise in mortgage rates. Higher mortgage rates mean less disposable income for consumers and therefore less consumer spending. The Australian dollar lost a little ground on the back of this quasi tightening.

New Zealand

There has been little in the way of key data released from New Zealand this week. We did have another dairy auction on Tuesday night which saw the overall price index drop 0.7%.  Dairy prices have actually dropped nearly 8% over the past few months. It was probably no surprise then when ANZ Commodity Export Prices came in down 1.1% for the month. Earlier this morning we had a speech from RBNZ Governor Orr entitled “Geopolitics, New Zealand and the winds of change”. It failed to have any significant market impact. There is little on the calendar for next week, so the NZD will be driven by offshore events. Read more

A quiet start to an otherwise busy week

Market Overview:

This week has started off quietly thanks to the US holiday on Monday, with currencies relatively range bound over the past 24 hours. The calm is unlikely to last for long however as a number of undercurrents currently in play could see volatility return at any stage. The British Pound (GBP) has shown its sensitivity to Brexit negotiations over the past week, seeing periods of both strength and weakness on the back of headlines. Broader trade tensions continue to remain front and centre as the US looks to renegotiate its trading relationships with many key partners. Commodity currencies like the NZD and AUD are particularly vulnerable to bouts of risk aversion during periods of rising trade tensions. Added to all this we have a number of emerging market currencies flashing warning signs of major trouble ahead. The Turkish lira and the Argentine peso have both seen extreme weakness recently and their economies remain in serious trouble. The South African rand and Brazilian real are also feeling pressure, as is the Indonesian rupiah that has slipped to its lowest level since the Asian financial crisis of 1998. With the US on track to continue to raise interest rates, and global trade tensions unlikely to be eased in the near term, the outlook is for more emerging market pain. The best we can hope for is that it remains contained to emerging markets only, but that far from certain at this stage. The coming months could well see significant volatility in FX markets, and while this is a risk for those with exposure, it will also provide many good opportunities for those prepared to take advantage of them. Read more

FX Update

Australia

Australia has a new Prime Minister in Scott Morrison. He has won the vote 45-40 to lead the Liberal Party which automatically puts him in the top job. The New Treasurer is Josh Frydenburg who has inherited the job from the outgoing new PM Scott Morrison. The Australian Dollar has had a rocky week starting with political uncertainties then worse than expected Building Approvals and Private Capital Expenditure all impacting on price. Building Approvals printed down at -5.2% after markets were expecting -2.2% along with quarterly Capital Expenditure down at -2.5% from 0.6%, sending the Aussie Dollar weaker across the board. Against the US Dollar the struggling currency reaching a low of 0.7270 post releases.

New Zealand

Our delightful Prime Minister tried her hand at persuading the business community midweek that business confidence was not that bad, siding with Westpac on the issue to reassure a rosy future and greener pastures and not to blame the current government. Certainly, the New Zealand Dollar has been a solid representation of confidence sliding a long way from pre-labour highs. The facts were evident yesterday, ANZ Business confidence published significantly lower than the -44.9 predicted to -50.3, bringing sellers of kiwi to the markets in droves. Dropping a further 5 points from previous figures this corresponds to a general consensus that business conditions over the next few months will deteriorate more. GDP growth figures to be released over the next few weeks should also show a softening outlook. The New Zealand Dollar fall 50 points to 0.6650 against the US Dollar post the announcement. Read more

Markets Dance to Trade Moves

Market Overview:

A relatively uneventful start to the week, with little in the way of major economic releases apart from Q2 US GDP data to be released on Wednesday.
On Friday, US Fed Chairman Jerome Powell, in his first speech as Fed chief at an annual conference in Jackson Hole, Wyoming, said there was “good reason” to expect the U.S. economy to sustain its recent strength and that the “gradual process of normalization remains appropriate,” however Mr Powell also noted that inflation which is currently sitting around the Fed’s 2% goal is not showing any signs of accelerating. US equity markets pushed higher following the speech, while simultaneously the USD slipped lower.
Over the coming week, look for more rumblings on the tariff war between the US and China as the world’s two largest economies yielded little visible progress last week toward a cease-fire. Looming instead are new tariffs that President Trump has threatened to impose on some $200 billion in annual imports from China, and Beijing’s already-promised retaliation……As the standoff continues with no satisfactory resolution in sight, we expect equity market advances to slow as markets find it harder to hold onto existing gains and trading currencies like the Australian and New Zealand dollar to remain under pressure.
Just how sensitive equity markets are to trade developments was illustrated overnight, with US equity markets surging higher as the Trump administration unveiled details of an agreement that they say will replace Nafta. Shares of carmakers and parts producers in the equity benchmark surged more than 3.5%. The Dow Jones Industrial Average rose above 26,000 for the first since February. The Mexican peso rallied, and Canada’s dollar strengthened on hopes that there will be an opening for that country to join the new agreement….This trade breakthrough while capturing investor attention came amid news of yet failure of U.S. and China trade talks.

Australia

The weekend bought some respite to the AUD which has consolidated at the lower level over the 0.7300 figure against the USD.
However last week’s political woes have taken a toll , with a poll out yesterday showing the opposition Labour party 12 points ahead of the government, further illustration if needed, that the voting public have no tolerance for internal party wrangling.
The new Treasurer is Josh Frydenburg who will inherit from the outgoing Treasurer and now new PM Scott Morrison, an economy on auto-pilot as high immigration and commodity exports underpin growth, but hoppled with weak wage growth that’s cribbing the spending power of heavily-indebted households.
After hitting a low of 0.7236 against the USD last week, the Australian dollar is back up trading around the 0.7350 level buoyed by the overnight positive moves on equity markets its tone remains mildly positive with support at 0.7300 and resistance up at 0.7390.

New Zealand

The New Zealand dollar opens the week on a firmer note trading a shade under the 0.6700 mark against the USD on an increase in risk sentiment bought on by better international equity market performance and some relief on the trade front.
Today sees PM Adern on a major charm offensive with NZ business, to try and correct the sliding business confidence figures that have been instrumental in the slide in the New Zealand dollar over the past few weeks….There is little in the way of major local data releases this week and we expect that NZD direction will take its cue from offshore moves…look for current levels against the USD to hold over the next few days but expect the NZD to test support at the 0.9090 level against the AUD over the next few days.

United States

News to start the week has be centered on the potential new trade agreement between Mexico and the US. This breakthrough on trade with Mexico captured investor attention in the midst of yet another failure for U.S. and China trade talks. American stocks added to records amid strong earnings and domestic expansion, while Federal Reserve Chairman Jerome Powell’s indication the U.S. will continue to follow a path of gradual tightening was interpreted as having a more dovish tone.
There is little economic data of note out for the US this week other than the Q2 GDP release on Wednesday, but this will be the calm before the storm with a big data week next week culminating in the Non-farm payroll figures next Friday.
The more dovish tone emanating from the Fed has seen the USD weaken against both the EUR and JPY…..with the EUR/USD trading back above the old resistance level of 1.1620 and is now around 1.1680 looking to probe resistance at the 1.1752 level..

Europe

European equity markets started the week on a firmer note, although with the UK on a bank holiday volumes were lighter….also helping was a rise in German IFO business confidence, the first rise in 9 months. With the US Fed indicating a steady but slower pace of rate hikes the EUR should head higher over the week with 1.1752 providing the first resistance level on the way to the 1.1790, a break of which would signal a return to a bullish EUR market…we expect current EUR/USD levels to hold over much of this week below the 1.1750 level, as the market gets ready for a raft of US economic data next week which may provide the breakout of previous ranges.

United Kingdom

The shambles that is the Brexit negotiations continues, with little clarity from either main party on which is arguably the most important issue facing the UK in the last 50 years.
However given that significant risks also attach to the EU given a “no-deal” outcome, there now appears to be emerging a hint of inherent willingness on both sides to find a Withdrawal Deal solution. This may serve as a backstop to the degree of no-deal Brexit risks priced into the currency. But with regard the GBP and political risks, it is far too early to signal the all clear; the biggest test for the pound will be the return of a divided UK parliament from their summer recess and the upcoming Party Conference Season. A murky UK political backdrop with PM May’s position remaining weak amongst her party, should continue to put a dampener on GBP in the near-term…risk-reward may no longer favour chasing the pound much lower from current levels (1.2785 -1.2890) and GBP/USD underpinned around 1.2700 would reflect a healthy chunk of Brexit negativity…..This week sees UK money supply data on Thursday and consumer confidence Friday.

Japan

The softer USD overnight after  Fed Chairman Jerome’s comments has seen the JPY track back above the 110.00 level against the USD as the trade war rhetoric continues to grind on…Japanese economic stability may get a boost along with the retention of the monetary easing policy, as  Prime Minister Shinzo Abe launched his bid for a historic third-straight term as ruling party president, attempting to put months of scandal behind him and become Japan’s longest-serving premier…..With little in the way of domestic economic data, Yen action will mainly stem from market sentiment and USD direction over this week.

Canada

The main news for Canada this week will be developments around the trade talks and what influence the new Mexico/US trade agreement will have on the US/Canada trade relationship….Reportedly the Trump administration want Canada to be in the new trade deal, but  the U.S. seems to expect Canada to agree to everything Mexico just negotiated — and to end its politically sensitive tariff exemptions as well….it is highly unlikely that this will happen…..given a continued trade stand-off, pressure is likely to remain on the Canadian dollar to the downside.

Major Announcements last week:

  • NZ Retail Sales prints 1.1% from 0.4% expected
  • Canadian Retail Sales down at -0.2% from -0.1%
  • Crude Oil Inventories at -5.8M sending CAD higher
  • Jackson Hole Symposium finished without a hitch
  • UK Bank Holiday Monday
  • NAFTA agreement with Mexico replaced by new trade agreement

FX Update

Australia

The Australian Dollar’s bid to reach 0.7400 against the US Dollar came to a halt Thursday after political woes hit the headlines once again. The focus has returned to Canberra with leadership challenger Peter Dutton claiming support from his parliamentary party is climbing. With a history over the past few years of leadership challenges the market will be well versed to gauge the direction of the Australian Dollar. The Australian Dollar is weaker by half a cent against the greenback and could drift lower over the remainder of the week if political uncertainties continue. The Fed minutes Thursday morning showed a dovish slant which has weighed on overall risk sentiment as well. We suspect unless positive headlines eventuate from the Jackson Hole Symposium a risk off market will dominate through to the close.

New Zealand

The New Zealand Dollar battled its way through to a 0.6720 high against the US Dollar and has been a consistent performer over the week. Even poor data from the fortnightly Global Dairy Auction wasn’t enough to dampen the mood. Prices in the auction were overall lower by a total of -3.6% with whole milk powder at -2.1%. As the trade war continues on between Trump and China we will see a marked difference in global demand develop. Dairy products entering China from the US will have tariffs attached and will affect price sensitive Chinese. Other markets like NZ may get the nod to supply more products eventuating in a plus for the NZ economy. On the other hand with the US market left with product they need to flog to other markets this could also impact. Retail Sales figures Wednesday gave the NZ Dollar a boost coming in at 1.1% from the 0.4% markets were expecting. Risk sentiment will be the key driver over the rest of the week, we have already seen a shift off highs for many cross currencies and potential for the kiwi to move lower. Read more