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FX Update

Australia

The Australian dollar saw a little upside momentum earlier in the week but lost support after Equity markets plummeted sending the Aussie back towards recent lows. Experts are expecting further declines in the Aussie dollar towards 0.6500 against the big dollar. With falling Aussie Housing Sentiment clearly making its mark I’m not convinced any drops will be this significant. The Mining downturn since 2011 could be coming to an end with the RBA expecting the industry to bottom out in the following quarters with the large LNG (gas) expansion projects are wrapped up. Housing market sentiment has dropped to its weakest in two years with confidence in the residential sector the lowest since 2012. The outlook for construction has deteriorated with tighter credit conditions and funding issues to blame with foreign buyers demand also dropping. No further significant local data for the rest of the week on the docket, movement will be based on risk perception.  

New Zealand

Heightened risk aversion saw the kiwi trade lower from its recent splurge north this week, and while it’s made some further gains overnight, we fear downside action will resume. US Equities have fallen heavy in line with an uncomfortable feeling in markets around the rise of the 10 year US Treasury prices going to a staggering 3.261%. The DOW and S&P are both down over 4.0% along with the Nasdaq which has fallen a whopping 4.5% in the last two days. Over the following few days Stocks will be key to further currency market momentum especially with the kiwi being risk associated, we could easily see further weakness develop. The IMF (International Monetary Fund) released a report projecting the world’s economy will grow by 3.7%. This is slightly lower than the July estimated figures showing a small slow down from 3.9% – they are blaming President Trump’s trade policies as part of the reason. 2019 world growth has also been revised down with the recently announced trade tariffs placed on US imports from China. The local economic calendar is light this week with nothing on the radar to impact the kiwi.

United States

President Trump took a swipe early in the week against the Federal Reserve raising their benchmark cash rates to quickly saying they have “gone crazy”. The Fed has raised rates 3 times this year with another one set for December.  A selloff in US Equities the DOW and S&P down over 4.00%, the Nasdaq over 4.5% was sparked by the 10 Year Govt Bond price lifting further to 3.261% the highest level since 2011 which comes as a direct link to the US Govt raising the cash rates to tighten policy. Trump said he doesn’t want to meddle in the affairs of the FED and has not spoken directly to Jerome Powell the Fed Chair, I suspect he has said enough already. We spoke about pivot point of around 3% on the balance of US Bonds and Equity prices. Perhaps a correction has already begun in the Equity space, if equities drop further we could see the Fed rapidly change their stance on monetary tightening and not raise rates in December – this would have a huge impact on long term currency movement. US CPI published a bit weaker than forecast at 0.1% m/m against expectations of 0.2%. Despite a white hot economy and the lowest unemployment in nearly 50 years, inflation remains very tame in the US for the time being.

United Kingdom

UK Manufacturing missed its mark Wednesday printing at -.2% after 0.1% was expected, also monthly GDP was lower than expectations at 0.0% from market forecasted 0.1%. The pound held its ground when positive Brexit news released. The chief EU negotiator Barnier said 85% of Brexit has been agreed, and a deal is within reach by next Wednesday. Markets are starting to price in this outcome with the Pound trading above 1.3200 against the greenback. This aside, Theresa May’s Brexit still poses a significant threat to the unity of the UK with Northern Ireland border issues still to be resolved and the overwhelming 62% of Scotland who voted “stay”. The Bank of England’s Carney spoke last night warning cabinet that a no deal Brexit could crash house prices and send further shocks through financial economies. House prices based on recent “stress tests” have highlighted that a shock to markets on a no Brexit deal could send prices as low as 35% with mortgage rates spiralling out of control and the Pound would also suffer a massive drop.

Europe

The EU’s is close to doing a deal with UK negotiators after their chief negotiator Barnier said they were 85% there with an expected deal to be finalised by next Wednesday. European Indices closed lower down over 2% with financial conditions posing nervous markets. The Euro pulled back after the early week selloff against the US Dollar. Softer than forecast US inflation data last night then helped the EUR make some further gains. Rome are still defiant in the lead up to the Italian Budget submissions date of October 15 with current plans still in place for the country’s budget to grow to 2.4% of GDP. Tensions will remain as more headlines come through from Europe and the ECB making for a choppy Euro.  

Japan

The Japanese Yen reversed last week’s performances against the major currency pairs to be the strongest performer since Monday. Risk markets turned to the Japanese Yen amid concerns with falls in Equity markets around the world. The US 10 year treasury bond is trading higher still over 3.15% and spooked investors to exit equity positions. The Japanese 30 year bond is also higher to 0.90% its highest level since February 2017. Crucial key US indicators have disappointed with CPI and jobless reports missing the mark. US Equities have been the talk of the week with all 3 indices the DOW, Nasdaq and S&P all down over 4% since Wednesday the Japanese Yen the beneficiary gaining over 1.9%. The IMF released its global growth forecasts at 3.7% through to 2019 down from the original 3.5% in April, however Japan’s economy received a better report with growth forecasts of 1.1% compared to the 1.0% forecasted in April.

Canada

The Canadian Dollar had been the weeks worse performer of the main currency pairs relenting over one cent against the greenback and also the New Zealand Dollar. Crude Oil prices have come down off the recent high of 75.50 to trade around the 71.00 zone, one of Canada’s major exports doing the Loonie (CAD) no favors. As equity markets fall in the US Oil energy traders were already spooked based on the shrinking supply from Iran due to US sanctions. Canadian Building permits rose for August by 0.4% from July figures after a drop in the revised 1.5% in the prior month. The Canadian 10 Year Bond reached its highest level in nearly 5 years at 2.615% increasing the chances of the Bank of Canada raising rates on October 25th.   

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