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FX Update

Alexander Boris de Pfeffel Johnson (yes, that’s his actual name) is the new Prime Minister of the United Kingdom and the new leader of the Conservative Party. A smart man educated at the prestigious Eton College he will  bring his quirky somewhat unorthodox but humorous ways to parliament. He won 66% of the Conservative party votes by defeating Jeremy Hunt. He has been compared more like Donald Trump than to Winston Churchill his hero. Johnson now must focus on one overriding immediate item – Brexit. He has insisted that the UK will leave the EU with or without a deal in place which continues to weigh heavy on the English Pound. We think the risks of a no-deal Brexit are overstated and a no-deal Brexit won’t occur on the 31st October and a subsequent referendum or general election could follow. By sacking more than half of Theresa May’s cabinet and stacking his team with “leave voters”  this will increase chances. He has also brought in his brother into Cabinet Jo Johnson who has been appointed minister of state at the Department for Business, Energy and Industry Strategy.  If Johnson manages to extend the deadline of 31 October we think the Pound will appreciate off its oversold levels across most currencies.

NZ Trade Balance shot up to 365 Million in June up from the expected 100 million markets were expecting. This is the largest June figure since 2013’s 414 million. New Zealand exported more logs and wood in June 2019, despite falling log prices, jumping up 65 Million from a year earlier, to 472 Million. The value of all goods exported rose 136 Million from June 2018 reaching 5 Billion. The kiwi doesn’t have a lot on the calendar over the following few days leading up to the RBNZ cash rate announcement. We suggest price movement will remain topish until August 8th.    Read more

US Fed officials botch communication

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Australia

The Australian Dollar continues to hold comfortably above the 0.7000 level against the USD ahead of an expected 0.25% cut in the US interest rates at next week’s US Federal Reserve meeting. However the Aussie outlook is far from certain, balancing the mixed signals of higher iron ore prices, fluctuating interest-rate differentials, and a global economic slowdown. Although conventional wisdom suggests a weaker global economic outlook ought to translate into a weaker Australian dollar, a major expansion in Australia’s terms of trade, driven by a massive spike in iron ore prices and elevated gold levels as well as expectations for aggressive interest rate cuts from the Fed, has resulted in a short-term upside trend. However labour data will hold the key for the Aussie economy as the RBA referred to this as a “bell-weather” statistic, continuing to weigh-up the potential for further rate cuts to prevent the economy stalling. With another potential RBA rate cut on the horizon at some stage, any AUD move over USD 0.7100 should be seen as a good opportunity to buy USD.

New Zealand

The New Zealand dollar continues to hold at elevated levels against both its US and Australian counterparts, however if global growth continues to slow look for an erosion of this strength especially if the case for more RBNZ action becomes stronger. Tomorrow will bring the trade balance for June, which is expected to show a small $100 mio surplus, with both imports and exports softer than the May period. Read more

NZD and AUD gains continue.

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Australia

Declining business confidence and consumer sentiment weighed on the AUD in the first half of last week, but the currency finished the week on a somewhat firmer footing thanks in large part to dovish remarks from the US Fed Chair Powell. In the wake of those remarks the AUD gained not just against the USD, but also against the GBP, EUR, CAD and JPY. That positive momentum was given a boost yesterday with Chinese activity data (industrial production and retails sales) both coming in stronger than forecast. Today’s RBA monetary policy meeting minutes may take a little wind out of the AUD’s sails, but the real focus this week will be on Australian employment data due Thursday. The market is looking for an employment gain of 9.2k with the unemployment rate to remain unchanged at 5.2%.

New Zealand

With little in the way of local data released from NZ last week, the currency traded on the back of offshore influences. The most notable of those was the dovish tone struck by US Fed Chair Powell when he testified before a congressional committee. That sent the USD lower and the NZD higher. The NZD largely outperformed most of its peers during this period to finish the week on a reasonably strong footing. Yesterday’s release of solid Chinese activity data also helped to boost the NZD across the board. This morning we have also seen the latest reading NZ inflation data and that came in bang on expectation at 0.6% q/q and 1.7% y/y. Read more

Update

US employment gains drive the USD

Australia

The Australian dollar (AUD) lost ground to the USD in the wake of US employment data on Friday night, but against many of its other peers, the AUD has outperformed. This relative outperformance comes despite last week’s interest rate cut from the Reserve Bank of Australia (RBA) and some disappointing retail sales data. In fact, it’s hard to get too negative on the outlook for the AUD, and we may well see it continue to make gains against many other currencies. A lot of negative factors are already priced into the Australian dollar and are well known. Those include a slowing housing market weighing on the broader economy and the increased global trade tensions. But countering these, we have recently seen the banks regulator confirming easier mortgage rules which should allow home buyers to borrow more. The Morrison government is also going to provide an AU$158 bn tax stimulus which will help the broader economy weather the headwinds of slowing global trade, and iron ore prices continue to trade well above $100 per tonne, hitting a 5-year high last week. This week the economic calendar is pretty light with only second tier releases, but we do have a speech from RBA Assist Gov Debelle on Friday to digest.

New Zealand

There has been little economic data of note released from New Zealand since last Tuesday’s disappointing business confidence numbers. That result helped to cement the outlook for another 0.25% interest rate cut from RBNZ at their next meeting, which is on the 7th August. There isn’t much in the way of data scheduled for release this week either, so the New Zealand dollar (NZD) will remain at the mercy of offshore developments and swings in broader risk sentiment. To that extent, a weekend article in the Hong Kong press suggested Trump and Xi are no closer to a deal than before, despite seemingly agreeing to continue with trade negotiations at the recent G20. Of more interest however is the recent sharp decline in log prices, for exports into China. This is our 3rd largest export product and prices are down some 15% or so putting real pressure on the industry. Smaller operators are already seeing layoffs and it looks like it could be a tough few months for the industry. Read more

FX News

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Last weekend’s G20 meeting in Osaka, Japan ended with what seemed a truce of sorts between the US and China with President Trump agreeing to not impose additional tariffs to the remaining Chinese exported products. Details from the meeting lacked any real clarity, but the few facts we have seem to have been enough to boost market sentiment this week. Although Trump said “we are on the right track” no-one really knows what this really means. The prolonged unknown is awfully detrimental for corporate sentiment as the global economy continues to slow. With no real light at the end of the tunnel the situation will continue to weigh on the corporate sector and tighten financial conditions.

The RBA has decided to cut the cash rate from 1.25% to 1.0% Tuesday. This comes in line with a cut also at the June meeting highlighting two cuts in two months, something seldom seen. The easing of the monetary policy should support local employment over the next while as recently unemployment has risen to 5.2%. The RBA also said this lower cash rate will provide greater confidence to help inflation meet medium term targets. The fallout generated by the trade dispute between China and the US is tilting global economic momentum to the downside. Australian Building Approvals printed well along with a record trade surplus at 5.75B after 5.25B was expected. The Aussie dollar has pushed up across the board, the best performing currency in the major group. Read more

Today’s RBA holds market focus, with markets split over rate cut

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Australia

Over the past few days the Australian Dollar has benefited from some positive sentiment, rallying the AUD across the board to reach to reach an eight week high of 0.7010 against the greenback. This week’s Reserve Bank of Australia is the main event on the Australian economic calendar publishing today at 4.30pm NZT. Market analysts seem to be split as to if Lowe will cut or keep the cash rate at its historical low of 1.25%. Certainly markets have had plenty of reasons to expect a cut but we are not so sure. The main RBA’s communication around employment has been clear with recent data showing a rise to 5.2% alarming analysts with the RBA looking for improvements to around 4.5%. Lowe said recently the June cut wouldn’t be enough to shift the current growth path with a cut today perhaps already been decided weeks ago. If we see a cut this will take the cash rate to 1.0% – fast running out of room for further cuts if the economy really turns pear shaped. On the flip side, a pause will allow for a more gradual cutting cycle, however with domestic and global growth forecasts to remain slow we will get ongoing debate as to further cuts, which could possibly lead to the RBA introducing unconventional monetary measures such as quantitative easing. Building Approvals and Retail Sales print later in the week and could shift the AUD.

New Zealand

the New Zealand Dollar has continued to push higher, earning the tag of most improved player of the week, with it outperformed all major currencies. With risk markets improving the kiwi gained to 72.65 or 2.5% against the safe haven Japanese Yen and 2% in the US Dollar ahead of the Friday close. This week’s economic docket is light with only (NZIER) NZ Institute of Economic Research –  Business Confidence the focus. That survey was released this morning and it printed at a 9 year low. This makes another interest rate cut at next month’s RBNZ meeting almost certain. In this environment the NZD should struggle to make further significant gains. US and Chinese officials look to have finally shaken hands at the G20 meeting over the weekend with Trump agreeing to halt a further trade war escalation by re kindling positive negotiations. The Global Dairy Auctions are Wednesday with projections we could get a similar poor result to last fortnight (-3.8%) on the index. Read more

FX Update

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The RBNZ left the official cash rate unchanged at 1.50% Wednesday. With subdued domestic growth and a weaker global economic outlook a lower cash rate should be required to meet the RBNZ goals. Domestic growth has slowed with the services sector, and house prices have continued to dampen spending. Inflation is expected to rise to around 2.0% target range supporting growth with employment to stay at the maximum sustainable levels for a while longer. Overall the RBNZ said the outlook for the domestic economy has softened compared to May projections with a lower OCR rate more than likely needed and should be cut again on the 8 August meeting. The New Zealand Dollar dropped half a cent on the release taking out a bunch of market longs (long NZD trades) to 0.6595 against the US Dollar before retracing higher to post a fresh high just shy of 0.6700. With Gold higher, Crude Oil higher and Iron Ore prices charging to 110.00 per tone the Australian Dollar also has outperformed this week, the kiwi has mostly travelled with it – the main reason we see a perky NZD after the published RBNZ dovish statement.  Read more

G20 meeting holds focus with Trump and Xi expected to exchange blows

Australia

RBA’s Lowe spoke on a panel in Canberra Monday saying “Global risk has slowed with risks skewed to the downside”. The ECB is a potential fly in the growth ointment with this region struggling more than others. He went on to say if all central banks are easing this would have no real net impact on the Australian Dollar. As market participants weigh up a July rate cut by the RBA the Aussie Dollar should remain in relatively tight ranges. If anything based on a lack of economic data this week we may see the Aussie Dollar squeeze higher. The G20 meeting in Osaka starts Friday and may affect risk currencies if the unexpected eventuates. Commodity prices are solid with Iron Ore and Gold sitting at highs of 107.00 per tone and 1400 per ounce.

New Zealand

The New Zealand Dollar squeezed higher Friday cruising into the weekend in fairly good shape. The weaker US Dollar stopped prior downside momentum with US Manufacturing releasing down on expectation. A dovish Fed has also boosted the kiwi with overall growth expectations on the slide. Market participants are expecting no change to Wednesday’s RBNZ cash rate announcement with easing to continue in the third quarter this year. Markets have already priced in an August rate cut based on global risks and lower inflation forecasts. If trade negotiations at the G20 meeting late this week go well we could see markets turn to “risk on” significantly benefiting commodity based currencies such as Aussie and Kiwi.   Trade Balance released this morning at 264M based on predictions of 200M and pushed the kiwi north across the board. Read more