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A big week in store for the AUD

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Australia

Australia’s second quarter CAPEX report released showing a snapshot of business investment and what to expect in the future. The release came in at -0.5% from the expected 0.4% which was up on first quarter of -1.7% but highlighted soft business investment in firms. The result could flow through and impact this week’s GDP second quarter release on Wednesday. But first is the RBA’s monetary policy meeting on Tuesday with forecasts widely pricing in no cuts from the current 1.0% until November this year. The RBA have said they remain ready to cut if needed but with recent data they are not expected to shift their cash rate target largely based on key consideration around stable unemployment and job creation forecasts. With the Aussie trading close to long term low against the greenback we expect this week’s action to be well supported above the 0.6700 level.

New Zealand

Month end currency positioning bought fresh volatility to markets Friday with the New Zealand dollar closing bid. Yesterday’s US Holiday saw lower than expected trading volume across the board with the kiwi bouncing around the 0.6300 area. The word is the kiwi could push higher over the week on fresh anticipation of renewed upside based on general risk prospects. Summarising Orr’s comments from Wyoming last week, Orr said “We aim to keep inflation low and stable and contribute to maximum sustainable employment. This is the best we can do as a central bank to promote economic well-being. The reserve bank is among the global central banking crowd – we are not alone. But we need others to assist and understand”. He urged the government and businesses to take advantage of low interest rates and invest. Read more

FX News

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As the ongoing trade war continues to put fear into currency markets we end the month of August as we started – with anxiety and uneasiness. The New Zealand Dollar started the month of August on the back-foot as the worst performing currency dropping over 6% against the Japanese Yen following on from July’s similar falls over 6%. The overall decline of the New Zealand Dollar represents not only a cut to 1.0% in the cash rate but a risk measure of safe haven buying of the Japanese Yen over the past several months. Data of late has been solid with employment at full roar and the unemployment at 3.9% which is the lowest since 2008.

This week’s headlines have been no different to what we have seen over the past 18 months of negotiating with both China and the US, no closer to reaching a deal. China is playing the long game with Trump as they appear to be in no hurry to reach a trade deal- their retaliations will come in the form of targeted measures as they set to reduce their reliance on US markets by strengthening its domestic market. China is preparing for a long drawn out battle which could last years. Strengthening their trade ties with other countries to hedge the downside to the US tariff dispute with Thailand, South Korea, South America and Japan. US trade negotiator Mnuchin says a China meeting will take place in Washington but didn’t say if a previously planned September catch up would happen. One tweet by the US president has the power to undue week’s talks between the two countries as we have seen already. Read more

Trade talks dominate currency flow

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Australia

With most central bank governor’s speaking at the Jackson Hole Symposium over the weekend RBA’s Lowe didn’t disappoint. Lowe pushed the notion that governments should be doing more to increase respective economic growth. He warned that central banks only had a finite amount of tools in the shed to combat slowing growth. “Monetary policy cannot deliver medium-term growth, we risk just pushing up asset prices” Lowe said. As an alternative he called for more structural reforms and investment in infrastructure. These measures have been spoken about by the Bank of Japan and the ECB in recent times – as central banks continue with easing policy in the medium term we will see more rhetoric on this. Australia is not part of the G7 with the yearly meeting taking place in France at the moment, but this year Scott Morrison has a special invitation as an observer. He will attend the digital transformation session and talk again as he did at the recent G20 about the crack down on extremist online material and social media. Building Approvals print Friday.

New Zealand

The New Zealand Dollar held off depreciating further on Friday in the wake of President Trump increasing tariffs on China and raising the stakes in the ugly trade war. The kiwi traded off its lows across the board spiking higher after Adrian Orr spoke at the Jackson Hole Symposium. He said the 50 point rate cut set on the 7th August was a pre-emptive strategy to get ahead of the curve and reduce the need of further cuts. He said the NZ economy was in a good position and would like to see businesses investing more but realised the global outlook was holding back optimism. If other central banks keep easing policy this could become a problem for the NZD if investors opted to hold the kiwi based on return. Orr said the RBNZ is ready to act as necessary “we will do whatever it takes”. This week’s calendar is quiet with only ANZ business confidence Thursday. We suggest reasonable volatility this week for the local currency with safe haven assets preferred.

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Currencies confined to ranges ahead of Jackson Hole

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Australia

Australian employment figures published solid late last week with the workforce growing by 41,000 after 14,000 was expected. This helped to boost buying in the commodity currency especially after prices rose in US equities at the end of the week. We view this week’s movement limited to the topside with tensions around global risks weighing heavily. Iron Ore still looks to continue its bearish momentum seen since early July putting added stress on the Aussie. This week’s local focus is on the recent RBA meeting minutes today at 1.30 NZT. Lowe will also speak at the Jackson Hole Symposium at the end of the week. Forecasters are predicting an RBA rate cut in November and another in February 2020.

New Zealand

Early Monday the New Zealand Dollar was boosted by better than expected Services PMI numbers for July with figures showing an improvement of 54.7 with the June Index also being revised up to 53.0 from 52.7. The kiwi will need more positive data to improve the overall mood. It seems to have consolidated just above the 0.6400 mark against the big dollar which is surprising given the recent shift in policy by the RBNZ when they cut the cash rate from 1.5% to 1.0%. On the whole the NZD had a poor week across the main currencies only rising against the Euro and Japanese Yen as risk fears eased slightly. Focus will be on the Jackson Hole meeting in Wyoming by central bankers with Powell set to speak for the first time since recession fears spooked markets last week. We expect the kiwi to remain heavy into Friday. NZ Retail Sales prints Friday. Read more

FX Update

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Recession Alert- Recession Alert.

Weak Chinese data Wednesday has bought new fears into markets of a potential recession. A sharp decline in Chinese Industrial Production figures and Retail Sales for July has inflicted fresh anxiety and raised alarm bells with numbers representing a deceleration in industrial output – the worst since February 2002. Global growth expectations are driving the easing seen recently by central banks and a broad “risk-off” tone. The global barometer or measure of this is viewed through the 10 year US Treasury price. Right now the 10 year bond is inverted to its lowest level since 2007 at 1.58% and the 2 year at 1.59%. This is the first real time since 2008 we have seen a real chance the US Federal Reserve may struggle to relieve the current economic pessimistic situation as the yield curve reflects overall concerns by investors that economic uncertainties such as the ongoing trade war between China and the US will flow through to consumers impacting future positive data such as GDP and inflation. US CPI inflation surprisingly rose in the month of July to 0.3% m/m up from 0.2% with the y/y rate up to 2.2%. We expect the CPI rate to steadily climb as retail products increase due to increased tariffs and will be passed onto consumers. US equity prices have fallen Wednesday with the S&P down 3.06%, DOW down 3.16% and the Nasdaq also down 3.17% as risk products across the board took hits. Read more

The risk off tone continues as trade war intensifies

Australia

The RBA left their Cash rate unchanged last week at a record low of 1.0% for at least another month but left the door ajar for further easing after dropping rates in June and July. Lowe laying global risks were ’tilted to the downside”. The RBA will continue to carefully watch progress in the labour market with a rising unemployment with expectations the economy should grow 2.5% from the earlier forecast of 2.7%. Prices in Iron Ore have been supportive of the Aussie Dollar but is not a key driver. Risks in the trade war between China and the US intensified last week and have strained the AUD along with worse than expected Chinese CPI figures Friday with the y/y print dropping from 2.8% to 2.7%. This week’s wage price index followed by Australian unemployment holds the focus this week.

New Zealand

The New Zealand Dollar remains the weakest currency along with the GBP over the month of August. Last week’s downside momentum continued extending the recent pessimistic tone. Adrian Orr cut the overnight cash rate from 1.50% to 1.0% stunning markets, siting heightening global trade tensions based on the NZ economy being heavily exposed to negotiations between the US and China and uncertainty and declining international trade. Also of note was employment which sits at what is deemed maximum achievable levels or full employment after the unemployment dropped from 4.2% to 3.9%. The RBNZ felt that with falling inflation expectations they need to react accordingly to make sure business confidence and sustainable jobs data remains at current levels. The NZ Dollar was sharply devalued but has since recovered off midweek lows. With speculation that a result in the China/US trade war would happen late this year all but a distant memory, helping to support a recovery of sorts in the kiwi, we may see the NZD depreciate further towards the end of 2019. Against the greenback 0.6220 support looks to close for comfort. This week’s NZ data docket is bare. Read more

Weekly Economic Releases

Below are the weekly economic releases for this week (NZT)

Monday 12/08 

  • All Day, JPY, Bank Holiday

Tuesday 13/08

  • All Day, GBP, Average Earnings Index 3m/y
    • Forecast 3.70%
    • Previous 3.40%

Wednesday 14/08

  • 1230am, USD, CPI m/m
    • Forecast 0.30%
    • Previous 0.10%
  • 1230am, USD, Core CPI m/m
    • Forecast 0.20%
    • Previous 0.30%
  • 130pm, AUD, Wage Price Index q/q
    • Forecast 0.50%
    • Previous 0.50%
  • 830pm, GBP, CPI y/y
    • Forecast 1.90%
    • Previous 2.00%

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