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US, Mexico and Canada shape new trade agreement- USMCA replacing NAFTA

US Dollar strength was the theme closing the week out on a high as markets retreated on risk sentiment. Equity markets were flat as the Italian Budget drama continues. Italy has defended its massive budget deficit with Italian equities trading down over 4% as the uneasiness over budget levels continues. The coalition government proposed a 2019 deficit of 2.4% of (GDP) Gross Domestic Product, Italy’s economic Minister Giovanni Tria defended it declaring that Rome was not a challenge to Europe after he said the debt levels will decrease over time. Economic growth over the next two years will be stemmed by investments Tria went on to say. China celebrate “National Day” all week which usually implies the markets could be a little less liquid producing increased volatility in currencies. Trump’s “good friend” Xi – (China President) may not be a good friend any more after Trump accused Xi of meddling in the US congressional elections in November. As the two countries impose fresh tariffs on each other the world’s largest economies will get together to avoid a drawn out trade war which dampen global growth. President Trump has threatened to slap tariffs on just about the total of all Chinese imports with China remaining staunch. US equity index the Nasdaq traded back into the negative after a Facebook security breach has apparently affected 50 Million accounts. The Nasdaq fall 3.4% on the news. Tesla shares have also taken a dive following on from the SEC suit against CEO Elon Musk with the price down nearly 12% Typhoon Trami is bearing down on Western parts of Japan as 100 mph winds have hit the mainland with 3.7 Million people on the evacuation plan. Tokyo is not in the path of the storm but very strong winds have been reported with trains and over 1000 flights being cancelled. US and Canadian officials have agreed on a new trade deal, Trump has called it USMCA (United States, Mexico, Canada) which replaces the old NAFTA trade deal. It sounds like Trump has won out on his hard ball negotiating tactics putting other world leaders, European Union, China and Japan on notice. The deal needs to be approved by congress before it comes into play on January 1 2020. The Canadian Dollar strengthened across the board against the G10 currencies reaching a 4 month (31 July 2018) high against the greenback. Price action in the NZD/AUD will be subdued this week with a lack of economic data on the docket and a Aussie bank holiday (labour day) Monday. Read more

FX Update

Australia

Yesterday morning’s Federal Reserve rate meeting took the Aussie outside its weekly range back into the 0.73’s against the US Dollar it but soon retraced lower easing to 0.7255 Thursday. Generally the Aussie Dollar has been choppy across the board only claiming victory over the kiwi, Japanese Yen and the Canadian Dollar in uncertain geopolitical times. US Fed’s Powell delivered a statement markets were expecting reiterating monetary policy would stay on its current path well into 2020 with further rate increases to come. The Aussie has endured a quiet week with no actual local economic data on the docket highlighting lighter volumes of currency trading. For now the Australian Dollar appears reasonably resilient with higher annual GDP and recent buoyant wage growth taking the currency off its recent low’s. Trade talks continue to weigh on overall Aussie sentiment after China pulled the pin on this week’s chats with Trump and his administration. Next week’s RBA cash rate meeting Tuesday will be the main event of the week, where the RBA is widely expected to keep the cash rate unchanged at 1.5%. We may get a surprise or two, Retail Sales releases next Friday.       

New Zealand

The (RBNZ) Reserve Bank of New Zealand kept the main cash rate unchanged at 1.75% Thursday as widely expected. Comments made by Adrian Orr were not as dovish as markets were predicting with Orr confirming his view that growth will gather momentum over the coming year. He also made comment that the next rate move could be “up or down” with policy to remain expansionary for a considerable time keeping the OCR at the current level until at-least through 2019 and possibly into 2020. Ongoing global trade tensions could see global growth in trouble if the situation didn’t improve with the lower New Zealand Dollar expected to support local exports. Local spending by individuals and government is expected to assist with ongoing growth with inflationary pressures expected to rise. Read more

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