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FX Update: A quiet start to the week

Market Overview:

Markets closed the week on a more positive note, continuing to shrug off Trade war fears. This week begins on a mixed note and with Japan closed for a public holiday and as such equity volumes in Asian markets were lighter. Trade tensions have eased somewhat as officials in Beijing appeared to moderate their response to President Donald Trump’s tariff threats amid a slowing economy, falling stock market and weakening currency. Data released yesterday, showed China’s economic expansion slowed slightly from the previous quarter, with industrial output in June below estimates at 6% v’s 6.5%. However, China May GDP saw an increase of 1.8%, above the forecasted 1.6%. Also, with the earnings season ramping up, investors may get a greater understanding of how the start of the trade war is impacting corporate profitability. This week will see profit reports due from a raft of market heavyweights; Bank of America, Goldman Sachs, Morgan Stanley, American Express, Netflix, Microsoft, Taiwan Semiconductor Manufacturing, Unilever, Johnson & Johnson and IBM. After a bumpy NATO meeting and UK visit by the US President, markets will also be keeping a weather eye on developments from the first summit between U.S. President Trump and Russian President Vladimir Putin. This afternoon will see the release of RBA minutes from the last meeting and later tonight US Fed Chairman Powell delivers the semi-annual Monetary Policy Report to the Senate Banking Committee and answers lawmakers’ questions. Read more

Brexit

Trade War/Brexit Overshadows Economic Data

Market Overview:

Markets saw last week out on a positive note as the June US Non-Farm Payrolls figure came in ahead of estimates at 213K with an upward revision of May data to 244K. The Unemployment Rate was modestly higher due to an increase in the participation rate, up from the 3.8% level previous, to 4%.
There was little negative market reaction on Friday to the news that the US introduced tariffs on $34bn of Chinese goods, or that China had immediately retaliated by imposing a similar 25% tariff on 545 US products – also worth a total of $34bn. Global equity markets along with risk-linked currencies actually pushed higher on the announcement, another example of sell the rumour buy the fact.
This week brings more political events with US President on a trip to Europe meeting with other European leaders at the NATO summit at towards the end of the week and then a meeting with Russian president Putin on Sunday….given past events over  Trump’s discussions at last month’s G-7, markets are bracing for further volatility. There was more positive news around Brexit over the weekend with UK PM May, gaining cabinet support for a pro-business plan which includes a free trade area for industrial and agricultural goods, based on a “common rule book” and a “combined customs territory” saw the UK pound gap higher on the open yesterday.
Also this week are several central bank speeches which may be helpful pointers for future direction, BOJ Governor Kuroda, ECB President Draghi and BOE Governor Carney all address an audience at some point this week. The Bank of Canada will hand down their rate decision on Thursday; and the ECB release their monetary policy minutes. New Zealand and Australian markets opened the week on a more positive note with both currencies higher on a softer US dollar and taking advantage of a higher appetite for risk. Read more

FX Update:

Australia

The Australian Dollar (AUD) has been quiet this week with US Independence Day celebrations. Retail Sales boosted the Aussie off its lows Tuesday but has since gone nowhere quick. It continues to be influenced by the Chinese Yuan especially with lower trading volumes this week. Markets look towards Non- Farm Payroll Friday for some much needed excitement.

New Zealand

The New Zealand Dollar continues to underperform against a basket of currencies. The Trade Weighted Index (TWI) is still struggling to hold 72.00 from the 75.50 levels of mid May 2018. Chinese tariffs on US products kick in on the 7th of July which include dairy and other agricultural products. This should turn out positive for NZ dairy prices with increased tariffs on US products this will make NZ dairy cheaper and more attractive to consumers. The Chinese should also increase the demand over time for NZ made dairy products.  Markets look towards Non- Farm Payroll Friday for some much needed movement. We remain sellers of NZD.  Read more

FX Update

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

FX Update

FX Update

Australia

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.

New Zealand

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

International Trade

International Trade Spats Roll On

Market Overview:

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

FX update

FX Update

Australia

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

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

US Trade War

US Trade War Threatens

Market Overview:

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

FX News

FX Update

Australia

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.

 

New Zealand

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

Market overview

Kim Jong-un and Donald Trump Meet in Singapore

Market Overview:

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