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Central Bank Monetary Policy Dominate the Week

Australia

The Aussie Dollar lost a tone of value last week depreciating a fair chunk against the major currencies. Versus the greenback it has fallen approx 1.30% to open the week around 0.6870. The Aussie Dollar will derive its influence this week from 3 major events. The RBA Monetary Policy Meeting Minutes today at 1.30pm NZT- where they recently cut rates by 25 points to 1.25% , Federal Reserve rate announcement and statement on Thursday and the third- RBA Lowe’s speech titled “The Labor Market and Spare Capacity”. Recently soft data coming out of China has kept the AUD under pressure as global growth outlook has deteriorated dropping the currency to fresh lows. One of the more positive economic stories out of Australia of late is the buoyant iron Ore trading levels. The Ore price has come off a high of 106.29 to 104.33 and trades at the 5th June 2014 level. It’s been volatile recently, this is nothing abnormal, but it continues to rise holding up the Aussie Dollar somewhat.

New Zealand

The New Zealand Dollar has under performed across the main board since mid last week depreciating a hefty 1.3% against the US Dollar with price dipping under 0.6500 for a short time Friday. US Retail Sales for May met expectations of 0.5% where markets appeared relieved on fears the US economy has been slowing faster than expectations. Questions will be raised on whether the Fed will cut rates later this week to 2.25% or wait until August. A further cut is planned for later this year by the Fed. This week’s focus – in fact only local data of any significance is Thursday’s first quarter GDP which will act as the main driver together with the FOMC meeting Thursday.

United States

The US Dollar cruised into the weekend outperforming all major currencies on reduced pessimism the US Economy is weakening significantly. The University of Michigan Consumer Sentiment Index fell to 97.9 for June from 100.0 in May due to a slew of recent detrimental headlines which spooked optimism dimmed mainly by President Trump’s ongoing trade war with China. Retail Sales wasn’t as bad as expected coming in at 0.5% also easing fears of a US economic sharp decline. The US Dollar will continue to be caught up waves of global trade concerns and forecasting on when the Fed will cut rates. Certainly Thursday’s FOMC meeting will highlight future direction especially if Powell’s comments are dovish. We expect the Fed to leave rates on hold at 2.50%, however the statement may hint at evidence they may cut sooner than later. President Trump is adamant a new round of tariffs is needed to force China to end unfair trade practices to help US manufacturers. A hearing on the new tariffs will begin tonight with the US Trade office recently flooded with letters from companies saying they have few or no options besides importing their products from China. Reports are giving weight to such claims with the new tariffs including 273 categories of products. A US based importer of fireworks says he is unable to buy bulk quality goods from anywhere else except China – saying the US don’t make them. He has no choice but to pay the price of imported Chinese products.

Europe

The Euro continues to bounce around in a disorderly fashion losing most of its previous week’s value against the main board of currencies. Against the USD it should continue to trade between 1.1000 and 1.1350 range lacking any fundamental impetus which would lead it to move in a directional manner. Friday’s June Eurozone PMI for France and Germany are expected to stay heavy in line with recent economic activity and drag the EUR down further. The undervalued EUR remains a real bonus for Eurozone economic activity and is an important aspect of support for euro. EU leaders meet this week in Brussels to appoint a new President for the European Commission, European Council and Central Bank touted to be either Jens Weidmann the President of Bunderbank, or Claudia Buch.

United Kingdom

The English Pound endured another week of declines across the board due to risks that the new Conservative leader will chase for a hard Brexit. The second round of voting for the Conservative leader takes place Tuesday with only 6 candidates remaining in the race. Pro Brexiteer Johnson is clearly out in front winning the first round by 114 votes out of a possible 313 people you voted, significantly more than his next rival Jeremy Hunt with 43 votes and Michael Gove who was third with 37. Former Brexit secretary Dominic Raab was fourth.  Leader voting will keep the Pound on the backfoot this week we suspect. The Bank of England is widely expected to leave the cash rate unchanged at 0.75% with comments around policy to reiterate a gradual and weighted tightening bias.

Japan

The Japanese Yen has picked up the lazy risk averse trade based on a deterioration of global sentiment and optimism. The Yen hovers around the 108.50 area against the greenback with momentum expected to continue to the downside especially given a dovish bias this week at Thursday’s Federal Reserve meeting is forecast. Chinese media continue to speak up on President Trump’s dislike of Chinese trade and the tariffs he has imposed, saying a resolution of trade tariffs from the upcoming G20 meeting on the 28th of June is looking more and more doubtful.  Protests in Hong Kong over the proposed extradition bill have ended for now after 2 million people marched demanding the Hong Kong leader Carrie Lam resign over the handling. This was the biggest march in Hong Kong history and shows the passion for such a bill to be dropped. Lam’s announcement on the weekend that she was suspending the proposed law “indefinitely” was welcome news. Down the track when nobody is watching she will quietly bring in the bill as she clearly insists it is still needed. The 10-year US treasury yield hangs on to 2.10% a good measure of global risk tone.

Canada

With no data on the Canadian calendar last week direction in the currency was driven purely by offshore headlines. The Loonie rebounded against the US Dollar giving back all gains as it traded back to 1.3400. US Dollar strength dominated for most of the week even with slightly poor data and an expectation the Fed will hold cutting this week. Markets will be focused on two releases – CPI m/m and retail Sales. CPI is expected to print at 0.1% in line with recent quarterly releases with first quarter CPI coming in at 0.1% coincidently, this was the lowest level since 2016. Crude Oil hasn’t done the CAD any favors of late as it still struggled to trade over 53.00 per barrel. Russian Energy Minister Novak said he could not rule out a scenario in which oil prices could fall to $30.00 if a global deal was not extended. He said there were big risks of oversupply, at some point steps will be taken to make sure the price doesn’t fall to much as there is too much at stake for several oil producing countries.

Major Announcements last week:

  • Austalian unemployment rose to 5.2% from 5.1%
  • US Retail Sales prints poor at 0.5% based on 0.7% expectations
  • NZD and AUD trade at the edge of the abyss
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