Overview
Geopolitical risks continue to abate as concerns over North Korea take a back seat to the latest spate of terrorist attacks in Spain which have a more localised effect on financial markets. The markets although still on edge, with South Korean/US war games beginning Monday, ended last week with a more risk-on tone and have begun the week with commodity currencies holding onto last week’s gains. U.S. stocks rallied on Friday from session lows — though they still ended the day down — after the White House released a statement that Steve Bannon would be leaving his job as chief strategist, capping a tumultuous week for the Trump administration. The rally that started after Trump’s election, the S&P 500 is still up 14% since early November — was launched on the belief that the president would cut regulations and lower taxes, boosting profits. But the embrace of Trump by investors and, until recently, CEOs, has always flown in the face of some of his other commerce-averse tendencies.
However given that corporate earnings have increased nearly 18% in the first quarter, (according to information service Bloomberg’s adjusted numbers), the biggest jump in profits for S&P 500 companies in years, and continued in the second quarter, albeit at a slower pace. That has led some to believe that even if Trump doesn’t come through with a tax cut, the stock market’s recent run-up is justified. We are not so sure and expect earnings growth to retreat back into single digits if no tax-cut is forthcoming. Central bankers will gather at their annual “talkfest” at Jackson Hole Wyoming, this week, which will be this week’s main economic event. The main theme is reportedly “Fostering a Dynamic Global Economy”. But with Yellen and Draghi both due to speak (the former on financial stability), markets will be sensitive to any discussion on upcoming policy withdrawal and what it could mean for the global liquidity cycle. More dovish language and inflation misses have already seen markets pare back expectations for ongoing Fed hikes this year.
Australia
The Australian Dollar opens the week holding and building on last week’s resurgence, it is now trading at 0.7324 against the USD. The recovery in AUD/USD gained extra legs, after a risk-off induced rally in the safe-haven gold bolstered the sentiment around the resource-linked AUD, while higher copper and oil prices also added to the Aussie gains. Next stop for the AUD is resistance around the 0.7950/55 level just below the 0.79620 two week high, seen last week. There is very little in the way of data releases for Australia this week and we look for the AUD to trade around the influences from offshore events and movements in commodity prices. Of course any change to a more risk adverse tone would likely see the AUD back testing the 0.7900 level.
New Zealand
The New Zealand dollar opens the week holding building on gains made at last week’s end and is holding comfortably over 0.7300 against the USD, at 0.7325 this morning, although to be fair some of this move is down to a softer open for the USD as political uncertainty has an effect. There are few major data releases for New Zealand this week, but the economy remains positive although the housing markets statistics continue to point to a softening in prices….at least this will keep the RBNZ happy..!! The pace of electioneering is now heating up with and it looks as if the two main party’s, National and Labour, will fight it out as the smaller party’s continue to poll at the edges. With a strong showing for the new Labour leader, there is now a real chance that we may see change, but economically this should have little effect as Labour continues to support an independent Reserve Bank and their policies are normally fiscally expansive. The break of the NZD below support at 0.7250 now looks to have been a false break and we expect the NZD to consolidate around current levels with a push to 0.7350 possible if the USD remains soft.
United States
Generally US stock markets opened the week higher, while the US dollar softened against most of its trading partners on growing concerns around persistent low inflation and ahead of Central Bank speeches from the gathering at Jackson Hole beginning Thursday. Central banks in advanced economies continue to grapple with ending years of unprecedented monetary easing, even as stubbornly tepid inflation clouds the outlook. Optimism continues to fade over the US President Trump’s pro-growth economic agenda, and this coupled with growing market consensus that the Fed might refrain from raising interest rates further in 2017 kept the US dollar on the back-foot. Another concern that will attract major focus in Sept/Oct once US lawmakers are back in Washington, is when two separate albeit interrelated issues converge – a need to raise the ever contentious US debt ceiling as well as pass a resolution to fund government operations and avert a shutdown from Oct 1st. Failure to raise the statutory debt limit will leave the US at risk of technical default. The closer to technical default, the more severe the market reaction, which would see risk assets such as equities take a big hit. The USD after consolidating for most of Monday weakened at the close of the US session with EUR/USD retaking its weekly high at 1.1828, it has backed off from this level and is now around 1.1812 but with weaker US data expected look for a push to 1.1840/45 which if broken would target 1.1905.
United Kingdom
The UK Pound opened the week extending its recovery from the 5 week low of 1.2830 against the USD seen on Friday and has moved back over the 1.2900 level to trade at a high of 1.2915. Now back around 1.2898 most of the rise can be attributed to the weaker USD, however the GBP received an additional boost from comments by PM May, that a clear structure was now in place for the Brexit negotiations and that the government was confident in making progress on Brexit talks by October. The task of sustaining and building on gains above 1.2900 is not easy after the recent dovish stance from the BoE which may limit future upside moves. Any break below 1.2840 is likely to extend to 1.2800 then target 1.2770, while advances to 1.2920/30 will attract selling interest, but for the moment the 1.2915 level looks to be the immediate resistance level.
Europe
Tonight economic sentiment for both the Eurozone and Germany will be released, both of which are expected to move lower. However, investors will probably refrain from taking large EUR positions ahead of the ECB President Draghi’s and Fed Chair Yellen’s addresses at Jackson Hole later in the week. With another ECB policy meeting scheduled for Sept 7th, Draghi knows that any positive comment regarding the Eurozone’s economy would boost the ECB hawks going into this meeting. He needs to contain the euro-bulls’ enthusiasm if he wants to avoid the stronger euro’s detrimental impact on inflation, which in turn, would hold him back from proceeding with the policy normalisation at the desired speed. Speculation of QE tapering should keep the euro bulls on top of the game.
Japan
Japanese yen levels remain elevated across most its trading partners as demand for the unit’s safe haven status continues amid uncertainty stemming from the political crisis surrounding Trump and any potential conflict between North Korea and the US. Also helping the Japanese yen has been some solid data with the All Industries Activity Index in Japan increasing by 0.4% in July after declining by 0.8% in the previous month. Later this week on Friday we have national and Tokyo July CPI this should show the annual core reading rising modestly from 0% to 0.1%, suggesting a bottoming out of disinflation dynamics. But, with inflation still substantially below the 2% target, this is unlikely to prompt any Bank of Japan policy repricing. The USD/JPY is currently sitting over 109.00 at 109.25 above last week’s 4 month low of 108.59. The next resistance level is up at 109.50 but we doubt whether the USD can hold over the 109.00 for long and favour a move back to test support at 108.60 which if broken would target 108.12, so far the low for the year.
Canada
The Canadian dollar opens the week stronger against the US unit with the USD/CAD rate falling below the 1.2600 level to trade now at 1.2558 on the softer USD tone and firmer commodity prices. Canadian inflation data at the end of last week came in bang on expectation at 0.0%, while last night’s Wholesale Sales data disappointed printing at -0.5%. Tonight we have retail sales figures to digest. With support at 1.2560/65 now broken look for a slide down to the 1.2500 region with immediate support around 1.2520/25. Investors will be a little wary of pushing the CAD too high given that a round of talks on the NAFTA trade agreement are about to start. We expect it to hold around l 1.2500-1.2550 range over the next few days.
Major Announcements
• US Retail Sales 0.6% vs 0.3% expected
• UK Average Earnings Index 2.1% vs 1.8% expected
• NZ PPI 1.4% vs 0.9% expected
• Australian Employment Change 27.9k vs 19.8k expected
• Australian Unemployment Rate 5.6% as expected
• UK Retail Sales 0.3% vs 0.2% expected
• Canadian Inflation 0.0% as expected.