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FX Overview

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Currencies remained in limbo into Thursday’s economic data announcements.

The Federal Reserve dropped their cash rate for the third time in 2019 from 2.0% to 1.75% and downgraded market expectations of further rate cuts for now. Fed officials removed recent rhetoric from June, July and September’s meeting changing- they would “act as appropriate” for something more subtle. The statement said “The committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path”. Eight of the ten officials voted in favour of cutting the rate by 25 points but two disapproved preferring to hold rates unchanged. The Fed statement also noted that business investment and exports remained weak while household spending had increased. In summary Powell’s opening statement sums up the situation well “we believe monetary policy is in a good place, cutting to provide insurance against ongoing risks”- rates could remain steady for some time!? 

Chile have cancelled staging November’s APEC meeting in Santiago overnight after protests against inequality turned to violence. They have also cancelled a United Nations climate change conference planned for early December. This dampens any hopes of achieving a result in “phase one” of the trade agreement between China and the US where the two countries were to due to hopefully sign something at the event. We wait now to hear when leaders will meet again.       Read more

Market overview

Brexit Extension Granted

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Australia

The Australian Dollar has been one of the strongest performers over the past week despite underperforming against the greenback. Risk factors are still supporting the currency as a more positive US/China trade outlook and Brexit continue to be negotiated. With a lack of local data to publish recently markets will be amped for this week’s key quarterly CPI and Building Approvals to offer some much needed volatility.  Also tonight RBA governor will give a lecture at the University in Canberra before Wednesday’s (FOMC) Federal Open Market Committee statement and likely cut to the US benchmark interest rate. Fitch Ratings has reaffirmed Australia’s AAA rating with estimates of gross debt remaining stable at 41.0% of GDP for 2019 just below the AAA medium of 44.0%. Fitch also is forecasting GDP to slow to 1.7% in 2019 from the 2.7% in 2018.

New Zealand

New Zealand Labour day Monday creates thin trading. We have another slow week locally with only ANZ Business Confidence on the economic docket. The first Labour Day was celebrated on 28 October 1890 to mark 50 years of Samuel Parnell’s efforts for an 8 hour working day. In 1840 Parnell won the 8 hour day only in Wellington, this was extended to other NZ cities but it was only a custom not an entitlement. It wasn’t until 1899 when parliament passed the Labour Day act making the second Wednesday of October a public Holiday. The Eight Hour Day Committee was made up of S Parnell, D.P Fisher (my great, great grandfather and son of Wellington Mayor George Fisher), E Player, C Worth, H Potter and W McGill. Read more

FX Overview

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Currencies have predominantly traded sideways this week over a lack of any meaningful economic releases. The Kiwi has outperformed its rivals gaining 1.1% over the greenback in an otherwise slow week. Risk sentiment turned slightly negative into Wednesday as US corporate earnings published a tad softer and concerns over Brexit continued.

Brexit has dominated headlines with the UK parliament voting twice in the last couple of days – the first being the Brexit agreement Bill, which was passed, followed by a failed attempt to get the new bill passed within a three day window. This has resulted in another delay to the process of UK exiting the EU and the only choice is to obtain another lengthy three month extension out to 31st January 2020. Johnson is expected to call a general election prior to Christmas, however once an election is called there needs to be a minimum of five weeks stand down before polling can take place. BJ wants a general election to try and restore the Conservative Party’s ruling majority in the Commons. The next election is not due until 2022, if every opposition voted against the government it would lose by a margin of around 45 votes. This would ultimately end the stalemate and make it easier to deliver a Brexit result. Further uncertainty in the English economy and the Pound itself looks a given at this point with downside bias expected. 

The week’s economic data or event risk was fairly empty this week with most of the attention towards the ECB meeting this morning. This was the last ECB statement Mario Draghi will ever deliver before he departs as President of the European Central Bank making way for Christine Lagarde. We didn’t expect Draghi to rock the boat too much on current policy and he duly delivered a statement similar to the September meeting which featured a long term loosening of monetary policy outlined with ongoing concerns of growth risks amid fears of a German recession. Read more

Brexit On The Cusp

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Australia

The Australian Dollar had a mixed week climbing against the safe haven Japanese Yen but closing 1.7% down against the resurgent English Pound. Last week’s drop in Australia’s unemployment rate from 5.3% to 5.2% shows there is a good chance we won’t see a cut at the next monetary policy meeting on the 5th of November. But with underlying inflation expected to weaken over the coming months to below the 2% – 3% band we could easily see another slash to rates in December. Some Australian banks are now starting to price in the chances of the RBA dropping the current 0.75% rate to 0.25% by early 2020 if economic conditions don’t improve. The Reserve Bank of Australia could also start an asset buying program next year if interest rates reach the 0.5% threshold of their “lower band” effectiveness. Last week Reserve Governor Lowe said there’s very little chance we will see negative rates implying the “effective lower band” is above zero. Economic data this week is thin with only asst governor Kent speaking Wednesday.

New Zealand

The global dairy auctions Index showed a rise of 0.5% in overall dairy prices. While the Whole Milk price came in flat analysts are predicting a rise this season in the prices paid to farmers. Fonterra’s forecast is a wide range of $6.25 to $7.25 per solid, while bank forecasts narrower at this stage in the season ranging from $6.70 to $7.15 Prices are influenced by outcomes in the China/US trade war and how this affects Chinese demand. NZ Inflation for the September quarter rose 0.7% from the 0.6% markets were predicting supporting the NZD towards the end of the week. Consumer prices gained 1.5% from the previous year but were slower than the second quarter prices. If inflation continues to represent a worsening economy the RBNZ may have an argument for another cut at the 13 November RBNZ policy meeting. This week’s calendar is nude, the kiwi to get its drivers from offshore developments. Read more

Economic Releases

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

Wednesday 23/10

  • 130am, CAD, Core Retail Sales m/m
    • Previous -0.10%
  • 330am, CAD, BOC Business Outlook Survey

Thursday 24/10

  • 330am, USD, Crude Oil Inventories
    • Previous 9.3m
  • 815pm, EUR, French Flash Services PMI
    • Forecast 51.6
    • Previous 51.1
  • 830pm, EUR, German Flash Manufacturing PMI
    • Forecast 42
    • Previous 41.7
  • 830pm, EUR, German Flash Service PMI
    • Forecast 52
    • Previous 51.4

Friday 25/10

  • 1245am, EUR, Main Financing Rate
    • Forecast 0.00%
    • Previous 0.00%
  • 1245am, EUR, Monetary Policy Statement
  • 130am, USD, Core Durable Goods Orders m/m
    • Forecast -0.20%
    • Previous 0.50%

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FX Overview

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The global dairy auctions concluded this week with the Index showing a rise of 0.5% for overall prices. While the Whole Milk price came in flat analysts are predicting a rise this season in the prices paid to farmers. Fonterra’s forecast is a wide range of $6.25 to $7.25 per solid, while bank forecasts are narrower at this stage in the season ranging from BNZ at $6.70 to ANZ $7.15. Prices are subject to what happens in the China/US trade war and how this affects Chinese demand. NZ Inflation for the September quarter rose 0.7% from the 0.6% markets were predicting Wednesday bringing buyers of NZD back to the table. overall consumer prices gained 1.5% from the previous year but was slower than the second quarter price of 1.4%. This data may support the argument for another cut in the 13 November RBNZ policy meeting.

Worrying signs this week for the UK economy when the unemployment rate climbed to 3.9% from 3.8% and inflation down at 1.7% for the year to September, unchanged from August but lower than the 2.1% in July showing an overall declining trend shaping. Read more

Investors warmed by US-China talks and Brexit. Not so fast.

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Australia

Australian Dollar performance last week was patchy in a market driven by risk sentiment. Through Thursday we saw a risk off mood change into “risk on” with renewed optimism of a China/US trade deal being done, at least partially. Key elements seem to be China’s commitment to purchase more US agricultural products as well as a promise on intellectual property rights as well as currency policy changes. Further talks will take place later in the year in November, until then Trump has ceased all forecasts to increase tariffs from 25% to 30% which were set to take effect this week. Consumer sentiment in Australia is at the lowest levels since July 2015. The index has dropped over 8.0% since the RBA started cutting rates in June. This drop in particularly relevant with the RBA cutting 75 points since May 7th 2019 with expectations that rate cuts are supposed to boost confidence on a personal, business and economic levels but have not. This week we have monetary policy minutes from the 1 October rate cut to 0.75% which shouldn’t present anything new.  Later in the week attention turns to Aussie Employment data Thursday with the unemployment rate expected to stay unchanged at 5.3%

New Zealand

The New Zealand Dollar traded in reasonably tight ranges over the week into Thursday when risk sentiment deteriorated sending the NZD lower across the board. This didn’t last long as news hit the wires that the US and China had agreed to a partial trade deal. Risk into Friday’s close remained positive buoyed by the “phase one’ trade deal sending the NZD off lows to post fresh highs. Against the US Dollar the kiwi traded 0.5% higher to 0.6350. The same can’t be said versus the Pound with positive Brexit headlines the NZD/GBP cross depreciated to 0.4995 an October 2018 low. On the economic docket this week is quarterly CPI Wednesday the only focus locally, 0.6% is forecast for the third quarter the same reading as the second quarter figures. Read more

Economic Releases

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

Monday 14/10

  • All Day, JPY, Bank Holiday

Tuesday 15/10

  • All Day, CAD, Bank Holiday
  • All Day, USD, Bank Holiday
  • 130pm, AUD, Monetary Policy Meeting Minutes
  • 930pm, GBP, BOE Gov Carney Speaks
  • 15h-16th, CNY, New Loans
    • Forecast 1350B
    • Previous 1210B

Wednesday 16/10

  • 1045am, NZD, CPI q/q
    • Forecast 0.60%
    • Previous 0.60%
  • 930pm, GBP, CPI y/y
    • Forecast 1.80%
    • Previous 1.70%

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FX Update

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Risk tone in markets deteriorated Thursday under the strain of Brexit and US/China trade talks.

Currencies such as the kiwi and Aussie started to track lower as headlines around US trade negotiations with China in Washington lowered expectations that any significant deal would be made. Direct via Chinese media was news the Chinese delegation refuses to talk about technology transfers a key part of the negotiations for China. Higher level talks are only expected to last one day (Thursday) with the Chinese team leaving soon after. Dampening Chinese spirits ahead of the talks was the US blacklisting of 28 Chineae companies this week which upset Chinese officials. China were keen and willing to consider a partial deal based on them buying more agricultural products in return for the US to cancel some of the current tariffs in place. 

The Federal Reserve Minutes pointed to economic outlook risk management and inflation objectives. Trade tensions, geopolitics and the global economy weakening were the main points. Several policy makers suggested keeping rates steady saying forecast economic projections had not changed and would not affect ongoing expansion. Other members saw the opposite with further rate cuts needed to boost future expansion. The single best indicator of “recession” is an inverted yield curve. At the moment the short term rates cross (invert) the long term rates at around the 5 year maturity. This is particularly bad as the Fed increases short term rates this pushes the long term ones lower spooking investors. Every US recession since 1950 (all nine) have been preceded by an inversion in the yield curve. The most closely watched is the rates between the 2 year and 10 year.  Read more

Economic Releases

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

Monday 07/10

  • All Day, AUD, Bank Holiday
  • All Day, CNY, Bank Holiday

Tuesday 08/10

  • 6am, USD, Fed Chair Powell Speaks
  • 510pm, GBP, BOE Gov Carney Speaks

Wednesday 09/10

  • 650am, USD, Fed Chair Powell Speaks

Read more