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Signs of progress in US/China trade deal

Australia

Twas a quiet week on the docket for Australian economic releases. The Aussie remained robust outperforming all major currencies only dropping in value against the Canadian Dollar.  Job vacancies for the 3 months to February showed solid demand, with banks supporting the view that employment will continue to improve and provide a balance for weakening housing numbers this year and running into 2020. This week’s RBA cash rate announcement and statement will be the main event with mixed opinion as to whether the RBA governor Lowe will offer up a more dovish slant than his previous comments suggest. With economic outlook looking soft the RBA are already concerned about weakening 2019 growth lowering the GDP forecast from 2.0% to 1.50%. We suggest the RBA could hint at cutting rates earlier than the November expectation markets are predicting. Friday we have Retail Sales.

New Zealand

Adrian Orr left rates unchanged at 1.75% mid last week as markets were expecting but hinted at softer domestic growth and global worries increasing potential for a rate cut towards the end of this year, some say earlier. The general feel is that drops could start as early as May with 3 cuts in total to next February. We have been at historical lows since September 2016- the average cash rate over the past 34 years going back to 1985 is 7.36%. So early 2020 we could well be looking at the overnight rate at 1.0% which would be quite an incredible outcome. The NZ Minimum wage for adults rose from $16.50 per hour to 17.70 per hour yesterday and is the biggest single increase ever. More than 200,000 are affected by the welcome rise but some say job losses could be the by-product of an unsustainable increase. With the government forecasting to have the minimum wage at $20 by 2021 expect the consumer price index (CPI) to go up as some products and services will need to increase prices. With a weakening economy this will no doubt put a strain on small-medium businesses. Read more

FX Update

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The RBNZ shifted its neutral stance on policy to dovish Wednesday, signalling the next move in cash rates would be down. Adrian Orr left rates unchanged at 1.75% as markets were widely expecting but hinted at softer domestic growth and global worries increasing potential for a rate cut towards the end of this year.

ANZ are forecasting drops starting in August then November and again next February. At this stage this seems a fairly extreme view as we have been at a historical low since September 2016- the average cash rate over the past 34 years going back to 1985 is 7.36%. The New Zealand Dollar slipped a whole cent to 0.6805 against the greenback on the release and has remained under pressure across the board ever since. Part of the issue for Orr is the global central banks dovish stances were putting increased upside pressure on the New Zealand Dollar which he is trying to avoid for export reasons. Read more

Trump Exonerated

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Australia

The Australian Dollar (AUD) spiked to a three week high of 0.7167 against the US Dollar (USD) Thursday after Australian jobs data pushed new interest into the Aussie. A small number of jobs (4,600) were added to the workforce, a little light on expectations, but it was the unemployment rate markets focused on coming in at 4.9% from 5.0% which rallied the AUD across the main board of currencies. Friday saw a shift in sentiment with markets focusing on the long term ramifications of a dovish fed together with a lack of any real progress in the US-China trade deal. Equity markets fell sharply and risk took a beating with the Aussie opening Monday at 0.7075 against the US Dollar. A quiet week on the calendar should see the AUD float on offshore headlines.

New Zealand

The New Zealand Dollar outperformed its rivals late last week after quarterly GDP published at the expected 0.6%. Markets were overly pessimistic of a lower reading so when the release published positive the NZD pushed topside. Focus this week will be squarely on the RBNZ Cash rate announcement Wednesday and subsequent statement by Adrian Ore. Markets are currently pricing in no chance of a move in the 1.75% current cash rate, but comments around an increasingly dovish monetary policy stance by Ore will be key. If we compare February expectation of an 18% chance of a rate cut by June to 10% rate increase now through to the end of June this shows a shift to policy outlook with the RBNZ becoming more neutral in the last few weeks based on weakening economic data. ANZ Business confidence prints Thursday before governor Ore speaks again Friday. Read more

FX News

It’s been an action filled week with plenty happening but little currency movement – until Thursday. The Federal Reserve left their benchmark rate unchanged at 2.50% but it was the dovish stance which sent markets in a flurry exiting from the US Dollar. Powell has maintained his neutral position but markets were well ahead of him sensing prospect for a rate cut later this year possibly in 2020 – at the 29 January 2020 announcement markets had priced in a 47.1% probability of a cut but this has shifted to 33.7% chance with virtually no further hikes for 2019 on the radar. The US Dollar index slipped to 95.80 after Powell’s speech and looks to move lover once markets have digested reasonable prospects that growth may be capped above 2%. Powell went on to say he expected the economy to still grow at a solid pace giving mixed signals. It wouldn’t be right if we didn’t talk about trade tariffs, as we have done over the past 9 months, so here is the update – Whitehouse adviser Hassett has said trade deals are moving forward. But, Trump has come out and said, trade tariffs on Chinese imports may remain in place for a substantial period of time. NZ GDP released bang on expectations of 0.6% for the 4th quarter and took the kiwi to fresh highs across the board as analysts were expecting a negative result based on recent data. This will keep Ore happy with the prospect of a rate cut being pushed out a while longer. We think
GDP will continue to grow at around 2.5% y/y through to 2020 with no rate cut for 2019. 2020 could be a different story as projections for continued growth are skewed to the downside. Read more

Mr Speaker. My 3rd attempt at Brexit will be different.

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Australia

With a lack of data published last week in Australia the Aussie Dollar followed offshore risk themes for most of the week based on Brexit and trade talk headlines. Perched around the 0.7050 area versus the US Dollar since early Friday sessions the currency looked to push higher Monday. If the Aussie can push above key 0.7120 resistance we see thin air through to 0.7200. With the shift to neutral from the RBA and slowing growth in China confirmed in recent data the Aussie has been unable to find any support higher across the board. A miss recently with Industrial Production and property slumping this week’s job’s report remains key. Recent rhetoric by the RBA confirmed they were certain of future upbeat results to come out of job numbers and lower unemployment. Monetary meeting minutes from the RBA’s 5th of March review releases today, with the all crucial jobs data Thursday. Unemployment is expected to remain unchanged at 5%

New Zealand

The New Zealand Dollar under-performed against its main rivals in the later stages of last week’s trading nearly losing 2.0% against the Pound as Brexit carnage swung markets. A very quiet week for local data the kiwi was stuck in the 0.68’s against the big Dollar. This week’s economic docket sees Current Account Wednesday and quarterly GDP Thursday. Both could move the kiwi out of current ranges if the data surprises. Last quarter showed a large -6.15B deficit, the largest in many years, with Wednesdays number expecting to come in around -3.55B, the next largest since December quarter 2017. GDP is expected to print at 0.6% positive growth if this is releases lower as it did in the December quarter we could see the kiwi hit hard. Risk markets will be guided by headlines in the ongoing Brexit saga as well as US-China trade talks which are could be quiet this week with the next trade meeting pencilled in for late April. Read more

Brexit Holds Focus

Australia

The RBA left rates unchanged at 1.50% with governor Lowe suggesting rates are consistent with GDP growth and inflation forecasts. Inflation remains low but stable and should pick up over the coming years. With all aspects of the economy showing weakening data the RBA seem to be upbeat that wage growth and low unemployment should improve in the coming months. Quarterly GDP released lower than expectations adding fuel to the depreciating AUD with Retail Sales also printing down at 0.1%. Trade Balance has surprised markets when figures showed an increase of nearly 2B to 4.55B after 2.85B was forecast. The only reason the Aussie has bounced off 0.7000 against the greenback is the buoyant Trade figure. Analysts are predicting a pick up in the Aussie towards the end of April based on seasonal import/export figures and solid iron ore values, I’m not so sure? It’s a quiet week on the calendar this week with only RBA assistant governor Debelle speaking today.

New Zealand

The New Zealand Dollar followed the Australian Dollar lower in the early stages of last week bottoming out against the US Dollar at 0.6744 before things changed. US (NFP) Non-Farm Payroll jobs data showed only a further 20,000 people were added to the workforce – the figure significantly down on the expected 180,000 number. Unemployment came in better than expected at 3.8% from 3.9% but the US Dollar traded softer allowing the kiwi to regain early week losses. Global Auction Milk prices have again posted another positive result of 3.3%, this is the seventh increase in prices since November 20th with farmgate prices set to improve over time. Another quiets week for data for the local currency suggesting outside influences will impact for the second week running. Read more

FX Update

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Overview 

Central banks this week are firmly the focus with cash rate results from the Bank of Canada (BoC), Reserve Bank of Australia (RBA) and the European Central Bank (ECB). The RBA left rates unchanged at 1.50% with governor Lowe suggesting rates are consistent with GDP growth and inflation forecasts. Inflation remains low but stable and should pick up over the coming years. With all aspects of the economy showing weakening data the RBA seem to be hinging hopes on upbeat wage growth and low unemployment towards 4.75% in the coming months. Quarterly GDP released lower than expectations yesterday putting added pressure on the AUD with Retail Sales also printing down at 0.1%. Trade Balance has surprised markets when figures showed an increase of nearly 2B to 4.55B after 2.85B was forecast. The only reason the Aussie is not trading below 0.7000 against the US Dollar right now is the buoyant Trade figure. The Bank of Canada maintained its 1.75% rate saying the global slowdown has been worse than predicted and widespread than the bank had forecast especially in the fourth quarter of 2018. Inflation is forecast to be a little less than 2.0% for most of 2019 but given the pressures on lower Oil prices CPI has eased to 1.4% in January. The BoC are uncertain about future timing of rate increases and will watch developments in Oil markets, household spending and US trade policy. The Canadian Dollar got absolutely hammered on the announcement and is sitting around weekly lows. Read more

Trump fails to cut a deal with Kim Jong Un

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Australia

Weekend news following the Trump/China trade talks was positive with Trump formally taking the 1 March increase to 200 million of Chinese worth of products off the table. Investors bought risk currencies with the Aussie gaping higher to 0.7100 from 0.7075 on the weekly open. It’s a big week of data for the Australian currency starting with building approvals and Company operating profits printing Monday. Building approvals has come in at 2.5% from the expected 1.5% which is clearly better than the past two months of data which were down 9.85% and 8.4% but its the year on year figure which has us concerned down 28.9% from January 2018. Company operating profits were also a miss with 0.8% q/q after 3.0% was expected, significantly down on the December quarter showing worried strain to Australian businesses. The AUD fell across the board on the combined news back to 0.7080 versus the big dollar. The RBA will announce their benchmark cash rate today at 4.30 NZT with no expected change to the 1.5%. Comments by Lowe will be keenly analysed after recent banks have forecast at least one rate cut later this year. I suspect that if the property market devalues much lower we could see an intervention sooner by the RBA.

New Zealand

ANZ Business confidence Friday came in worse than expected with a net 30.9 % of businesses expecting the economy to perform poorly over the remainder of 2019. The New Zealand Dollar was slightly weaker on the news trading down to 0.6800 against the US Dollar after the news. Earlier Trade Balance printed at -914 million which showed the weakest January number since records began. Dairy Farmers received mixed news when Fonterra increased the milk solid price to a range of $6.30- $6.60 per kg from $6.00 – $6.30 but dropped the earnings forecast. As all dairy farmers who shop through Fonterra have a share in Fonterra the lower share earning of 15c to 25c from 25 to 35c is a real kick in the teeth for farmers. Hurrell the chief executive said – the business is not where it needs to be. We have a light economic calendar this week so offshore factors will drive the kiwi. Read more

FX Update

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Market Overview
US trade officials have confirmed they will suspend the March 1 tariff increases to Chinese products entering the US until further notice. US Trade representative Lighhizer said the country’s problems with China were to significant and to serious to be resolved by promises of further US product purchases, currently China have agreed to buy 30 Billion worth of agricultural products over the next 12 months. So as it stands China will get themselves another 60 days before tariffs rise to 25% from the current 10%. Trump has said this is an amazing deal. Markets were buoyed by early week positive comments but have since come off highs on risk aversion after the general feeling a deal could be a long way off being properly negotiated. Fed chairman Powell has said they will be patient and won’t rush to make judgement about changes in policy, instead waiting for economic data to flow in as they were in a currently in a good place economically. Consumer confidence bounced back in February after poor figures in January up from 1.21.7 to 1.31.4 which shows an improvement to business and labour conditions. Donald Trump has met Kim Jong Un for the second time in Hanoi for the nuclear summit. Trump seems to think the first meeting was a great success and the second dinner meeting would be even more successful. If he thinks North Korea will suddenly and openly declare denuclearisation in North Korea he is a better President than he looks.  As it turns out the US President has left early from the summit, saying “sometimes it’s better to walk away”. The Pound rallied to its highest level in over 7 months as markets digested prospects that a no deal was pretty much off the table and the UK’s leaving the EU party would be delayed. NZ Business confidence showed that 30.9% of respondents expected the economy to deteriorate over the next 12 months. Momentum over the last 6 months has slowed noticeably. Fonterra this morning have raised the milk solid price to $6.30- $6.60 per kg, the price is expected to go up further to $7.30 for the June 2019- May 2020 season from $6.90.

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Trump Delays Increase Of tariffs On China

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Market Overview:

Currency markets closed lower Friday after investors became nervous around US/China trade talks. Over the weekend President Trump has delayed the planned increase of tariffs which were to take effect on 1 March. He said “substantial progress” had been made over the past few days with further talks planned in Mar-a-lago on the 3rd or 4th week of March to hopefully lock in a deal. Trump saying “a very good weekend for US and China”. The optimism around the meeting in Washington with the progress being made has been supportive of risk currencies, Monday morning has seen every major currency push higher including the NZD and the AUD. The kiwi received an extra boost when Retail Sales printed well up on the expected 0.5% at 1.7% for January, with decent spending on pharmaceuticals which is strange, duty free products and food. At the same time last year Retail Sales was also very good but with an increase of “grocery” sales. Australian Trade Minister Birmingham has downplayed the Friday claims of China imposing a full ban of Australian exported coal into China saying “I want to provide reassurance that we have no basis to believe that there is a ban on Australian coal exports into China or into any part of China,”. Apparently Chinese officials were just carrying out quality and safety inspections of imported coal to make sure they complied with laws and regulations to better protect Chinese importers. Checking the quality of Australian coal seems a little odd as the quality is of a much better standard than other countries provide – political retaliation perhaps. Support is building in the UK for an extension of article 50 past the 29th March deadline with EU senior officials in support of an extension by as much as 21 months past the deadline. 21 months seems an extreme amount of time with the more likely scenario being 2-6 months. Equity markets closed the week in positive territory amid fresh news coming from the Washington Trade talks with the DOW reaching 26000 for the first time since November. Interestingly after US indices had the worst December in 87 years markets bounced back gaining 7.9% in January – the best January since 1987. Historically when the equity markets start the year in the black they finish the year higher, with global uncertainty still on the horizon we will need to see economic data post significantly better than predicted over the second half of this year. The calendar this week looks reasonably exciting with most announcements to come from the US with the Fed speaking tomorrow and Friday as well as Trump who will talk on a range of topics. US GDP is Thursday along with manufacturing Friday. Key NZ data to release Wednesday is ANZ Business Confidence with Aussie Capital expenditure Thursday. Read more