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RBNZ

RBNZ Update

The Reserve Bank of New Zealand has left the official cash rate unchanged at 1.0% but indicated that further cuts remain likely.
Domestic indicators and global uncertainty show the softness in the economy should continue into the second half of the year. The RBNZ sees further scope for more stimulus as the economy tries to maintain inflation and employment targets.
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NZDUSD recovers off a 4 year low

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Australia

The RBA must now be considering further rate cuts after last week’s poor employment results. Last week the currency underperformed coming off the back of a fortnight of gains devaluing 100 points against the greenback and losing 1.5% against the British Pound. Banks have been revising their interest rate forecasts with the NAB seeing a rate cut at both the October and December meeting which would bring the benchmark rate down to 0.5%. CBA also bought forward their predictions to a 25 point cut in October. Early last week the RBA minutes of the 3rd September monetary policy meeting said the bank would think about easing policy if it thought it was needed to support growth, saying we will see an extended period of low rates in efforts to achieve better employment and inflation targets. In the wake of last week’s Federal Reserve cutting rates by 25 points to 1.75% and trade war flows we could continue to see a risk averse currency environment sending the Aussie dollar deeper.

New Zealand

The New Zealand Dollar crosses continued to dive lower in a week dominated by risk sentiment. By far the weakest performer of the G10 currencies the kiwi traded to 0.6260 at the close against the greenback, a 1.8% decline on the week. The low represents an August 2015 level. President Trump Friday said he doesn’t think he needs to strike a trade deal with China prior to the 2020 US elections. He also confirmed he was not looking for a “partial” deal with the Chinese after saying last week he would consider this. Equities turned negative on Friday after a Chinese delegation cancelled a US farm visit confirming things have turned again shifting earlier sentiment from buoyant to pessimistic. This week’s direction will be set by Wednesday’s RBNZ monetary policy statement and ongoing risk sentiment shifts. Given Orr cut rates by 50 points at the last meeting on 7th August we are unlikely to see a further cut as the last cut will take time to penetrate into the NZ economy.

United States

A risk off tone dominated markets during the second half of the week, the US Dollar retreating off early week highs to trade down to 107.50 against the Japanese Yen. Sentiment flipped when Trump made comments he wasn’t interested to piece together a partial trade deal with China going back on his earlier comments suggesting otherwise. The Chinese negotiation delegation cancelled their trip to US agricultural states adding to market gloom.  The Federal Reserve lowered its overnight rate from 2.0% to 1.75% Thursday as most predicted with Powell offering up a tinge hawkish statement closely matching the one he gave in the July meeting. Seven Fed voting officials opted for a 0.25% cut while two voted no cut, and one wanted a cut of 50 points. This confirms differences of opinion with the current state of US geopolitical uncertainty and how it may hinge future policy. This week’s economic docket focuses on a number of Fed members speaking and Final quarterly GDP which is expected to print at 2.0% how lower than the March quarter of 3.1%.

Europe

The Euro travelled broadly sideways throughout most of last week, breaking down slightly against the greenback to 1.1000 but picking up new ground against the depleted NZD. The EUR has suffered renewed selling pressures since the ECB announced new QE stimulus, the first in two years. The week ahead promises a mix of internal and external related data influences. Testimony via ECB President Draghi in the EU parliament as well as Septembers flash Eurozone PMI surveys will set the tone on Monday. Draghi also speaks on Friday at the European Systemic Risk Board annual conference in Frankfurt.

United Kingdom

A no deal Brexit result is still a very real scenario based on the large disparity in the negotiation process between the UK and European Union. Irish Foreign Minister Simon Coverey said Friday there was a wide gap between the UK and EU as they wait for serious proposals from London town. The Irish backstop – a policy aimed at preventing the UK returning a hard border on Ireland has been the biggest hurdle to get over in the UK/EU talks to date. The Bank of England has held their overnight interest rate unchanged at 0.75% in a unanimous vote 0-9. With less than two months until the Brexit deadline, the UK gets set to leave the EU with a dark cloud of uncertainty hanging over the Bank of England. No economic data this week on the docket suggests the Pound will again get its leads from Brexit and risk related headlines.

Japan

The Bank of Japan (BoJ) retained their overnight cash rate at -0.1% and their 10 year yield target unchanged at 0%. Forward policy for future monetary targets was also unchanged with the central bank maintaining their opinion of the economy – the Bank saying they will keep rates low for an extended time at least through to June 2020. The Bank of Japan would not hesitate to ease if necessary and would review at the next meeting on October 31st. The decision on this seems to be a ploy to kick the can down the road for a while they figure out the best option. They don’t really have any preconceived ideas we know of on further easing. Not signalling to ease as most other central banks have done increases prospects of the Japanese Yen going higher across the board. Part of the BoJ’s objectives are to keep higher Yen values under wraps but this latest move is a little weird.

Canada

The Canadian Dollar has concluded a week of mixed results with the currency trading all over the park a by-product of earlier Crude Oil production setbacks. After Crude oil reached new highs around 62.50 prices seem to have stabilized somewhat around 58.00 but the situation in Saudi Arabia with the oil field attacks still seems a real threat to ongoing production with media reporting everything is tickety boo not being the case. It’s only going to take one oil outage somewhere to explode the oil price back through 60.00 again and send the CAD into orbit. Aramco vowed to keep the Abqaig oil production disruption to a minimum and restore things back to pre attack producing volumes but stories surfacing suggest a long drawn out repair is the more likely scenario with reports suggesting the end of 2019. It will take a week before serious reports are provided to the extent of the damage and the time frame involved before normal production can resume. In the meantime the Canadian Dollar hangs in the balance, especially in the NZDCAD pair with it trading at long term support levels currently. No significant data in Canada this week.

Major Announcements last week:

  • Bank of England retain cash rate at 0.75%
  • Bank of Japan leave rates on hold at negative levels.
  • Federal Reserve cuts cash rate form 2.0% to 1.75%
  • NZ GDP q/q rose from 0.4% to 0.5%

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FX Update

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Currency markets were generally unmoved a day or so prior to Thursday’s Federal Reserve meeting, perhaps slightly with a risk off bias. Post Fed equity markets reacted positively as the Fed is unlikely to support the overall market in the medium term which could be detrimental for positive risk sentiment as global markets risks increase. The Federal Reserve lowered its overnight rate from 2.0% to 1.75% as most thought with Powell offering up a policy statement nearly identical to the one he gave in the July meeting. Seven Fed voting officials opted for a 0.25% cut while two voted no cut, and one wanted a cut of 50 points. The difference of opinions between fed officials lends support of what may happen over the rest of the year. Low unemployment and an increase in inflation kind of suggests the fed should not be cutting while trade tensions and a slide in growth could cause further downside momentum for the economy. Fed chairman Powell commented saying the Fed would action a more extensive sequence of cuts if the economy turns down but no Fed officials see rates falling below 1.625% through to 2022. Powell said – we will stop cutting rates “when we think we have done enough”. He doesn’t see a recession or negative rates coming into play.

UK yearly inflation fell to 1.7% to August 2019 its lowest level since December 2016. The monthly fall of 0.4% from July’s 2.1% was the largest drop since 2014 and far chunkier than economists had predicted. This is expected to reflect weaker demand in the economy as consumer confidence deteriorates amid the continued Brexit uncertainty. A no deal Brexit result is still a very real risk. The Bank of England has held their overnight interest rate unchanged at 0.75% in a unanimous vote 0-9. With less than two months until the Brexit deadline as the UK gets set to leave the EU uncertainty hangs over the Bank of England. The central bank set monetary policy at a 2% target to assist with sustained growth and employment. Developments with Brexit are making the UK more volatile with GDP in the second quarter falling 0.2% is now expected to rise by 0.2% in the third quarter, the MPC said underlying growth remains slow but positive.    Read more

Crude Oil attack undermines weak global economy

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Australia

The Australian Dollar remained broadly within recent ranges propped up by easing tensions between the US and China trade tariffs.  News Friday suggested China have announced that they have excluded some agricultural products including soybean and pork from tariff levies on US imported products. Chinese data out Monday showed Industrial production missed the mark for August publishing at 4.4% after 5.2% was expected. Growth in the sector comes in at the lowest reading in 17 years. Year to date is 5.6% down on the predicted 5.8% markets were expecting. Chinese Premier Li Keqiang said it would be “very difficult” for the country to grow at an annual rate of 6% or more in the current global climate. The Aussie crosses are all lower as we head into Tuesday. The focus this week will be on Australian employment figures printing Thursday and should report a small number (15,000) of new workers were added to the Australian economy in August.

New Zealand

The New Zealand Dollar retreated off 0.6445 Friday against the greenback as the kiwi struggled to push higher. Friday’s Business PMI improved from 48.1 to 48.4 in August but remains below the 50 benchmark economic growth level showing a contraction in manufacturing activity for the second straight month. The last time the index showed a contraction in two consecutive months was October 2012. Despite fresh optimism in the trade war tensions the kiwi underperformed assisted by improving US CPI and Retail Sales releases. This week with the Federal Reserve announce their cash rate and monetary policy- this may keep the kiwi bid as expectations of a cut to 2.0% from 2.25% should put pressure on the big dollar. Read more

FX Update

It’s been 18 years since the sad events of 9/11/01 when 3,195.00 people lost their lives.

The New Zealand Dollar remains range bound this week bouncing in recent levels as the currency awaits further direction. The Australian Dollar has subtly edged higher to 0.6880 against the greenback over the week and looks to re-test 0.7000 levels if data allows having fallen through this level on the 24th of July. 

Risk markets improved Thursday when China waived import tariffs on 16 US products said to be a tactic to win over President Trump. This is the first time something odd like this has happened since the trade war started around a year ago. Products which were among the list were shrimp, fish and cancer treatment drugs. It was notable that most of these products were staple Chinese goods rather than others omitted such as soybean or meat. These are the ones which really matter – agricultural and manufacturing products produced in the states with strong Trump support. The Chinese are not yet ready to make any compromises to ditch IP theft. Midday yesterday Trump announced he will defer hiking trade tariffs on 250B worth of Chinese products from 25% to 30% until October 15, Trump tweeting- “at the request of the Vice Premier of China, Liu He, and due to the fact that the People’s Republic of China will celebrate their 70th Anniversary”. The President has again attacked Fed President Jerome Powell saying they should cut rates to zero or less. This in turn should help cushion the economy against larger fears of a global slowdown. Trump calling the leaders of the Fed “boneheads”. We may see an aggressive few months ahead for the Fed with speculation they may drop the cash rate every month through to December with growth now expected to fall to 1.5% by mid 2020, the next Fed policy meeting is 19th September.  Read more

NZD and AUD trade higher on risk appetite

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Australia

The Australian Dollar outperformed its rivals over the week with a general improvement in market risk and supporting Australian economic data. The RBA left rates unchanged at 1.0% as widely expected with Lowe delivering a speech markets perceived to be less dovish. Lowe said risks were still tilted to the downside but with uncertainty on the horizon left the door open for further rate cuts as required. Trade Balance posted a surplus of 7.291B for July a decrease of 709M seen in June but still slightly ahead of expectations of 7.2B and quarterly GDP published bang on expectations of 0.5%. Against the greenback the Aussie made a strong come back rallying to 0.6875 reversing a chunk of the past six weeks of losses. On the calendar this week we have NAB Business confidence followed by Westpac consumer confidence.

New Zealand

The New Zealand Dollar closed up every day last week against the US Dollar and the Japanese Yen, earning the tag the best performing currency from the G10. Ironic given no local economic data published, most price action was due to positive risk sentiment. Business Manufacturing Index releases on Friday the only significant data, with the index falling into contraction in July for the first time since August 2012, we are expecting a print similar with pressure mounting on the sector. Further optimism around positive trade talks by China and the US may continue to affect the kiwi this week building on its current higher form. Read more

FX Update

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The New Zealand Dollar has retained recent gains this week with no local data publishing, as markets rebounded off better risk sentiment. Equity markets responded higher into Thursday jumping over 1%. Hong Kong leader Carrie Lam has finally retracted the extradition bill that has sparked months of protesting on the streets of Hong Kong saying it was in line with public concerns bringing investors back into risk.     

The Australian Dollar has outperformed its peers with supporting data and a less than dovish RBA Tuesday. The RBA left rates unchanged at 1.0% and delivered a statement which markets perceived as less dovish than predicted. Inflation expectations are to remain under 2.0% through to 2020 with growth supported by low rates, tax cuts and a potential turnaround in the housing market. Lowe said risks are still tilted to the downside with general uncertainty and kept the door ajar for further easing. Yesterday’s Trade Balance registered a surplus of 7.291B for July a decrease of 709M seen in June but still slightly ahead of expectations of 7.2B. The news sent the Aussie higher to 0.6820 against the greenback.    Read more