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US Abandons Tariffs on Mexico

Australia

The Australian Dollar had a mixed week of results, depreciating in value against the New Zealand Dollar by just over 1%, while trading in a choppy range versus the greenback. GDP published meeting expectations at 0.4% growth for the March quarter, posting a slight rise from the 0.2% December quarter. Big picture growth slowed to 1.8% making this the weakest increase since September 2009. The Australian economy continues to grow but not even close to the long term trend of 3.5%. The data falls in line with the RBA cutting their cash rate from 1.25% to 1.5% last Tuesday the first cut in nearly three years – with Phillip Lowe saying the easing should encourage hiring and investment and help lower unemployment. The RBA also hinting another rate cut is on the horizon. Friday’s Trade Balance was down on expectations at 4.87B from the 5.05B markets were expecting and capped any further upside momentum. Jobs figures will be the focus this week with unemployment expected to print at 5.1% slightly better than the 5.2% for April.

New Zealand

The New Zealand Dollar has closed the week outperforming the other main board currencies, stretching its legs against the Japanese Yen extending its hold 1.5 cents or by 2.3%. US Non-Farm Payroll’s poor result Friday was reasonably expected after a soft ADP earlier in the week but no-one quite expected such a reading 100k short of the numbers expected, a major miss. With rising expectations the Federal Reserve will cut rates in July at their next policy meeting we should get further dovish remarks on June 10 keeping the USD under pressure. Despite the recent risk off tone the kiwi has been well supported on general USD weakness and healthy news in the ongoing tariff wars. Over the weekend Trump suspended tariffs on Mexico indefinitely, risk markets should receive a boost early this week on the news. It’s a quiet week on the calendar locally, expect movement to be driven by offshore forces. Read more

Weekly Economic Releases

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

Monday 10/06

  • All day, AUD, Bank Holiday – Queens Birthday
  • All day, EUR, French Bank Holiday – Whit Monday
  • All day, EUR, German Bank Holiday – Whit Monday
  • 830pm, GBP, GDP m/m
    • Forecast -0.10%
    • Previous – 0.10%
  • 830pm, GBP, Manufacturing Production m/m
    • Forecast -1.10%
    • Previous -0.90%

Tuesday 11/06

  • 830pm, GBP, Average Earnings Index 3m/y
    • Forecast 2.90%
    • Previous 3.20%

Read more

Markets focus on EU Elections, May resigns

Australia

Lowe’s comments post the RBA minutes signalled a shift in mood as he succumbed to a reality of a slowing Australian Economy as he sets an initiative to cut rates starting from the 4th June policy meeting. As wage growth weakens off after the RBA hoped the labour market would strengthen, the time has arrived to come out of denial. Inflationary pressures have also dropped below forecast after expectations that it would return to its target range of around 2%. First quarter 2019 showed a fall to 1.3% y/y from 1.8% y/y in the December quarter – the lowest inflation rate since the third quarter 2016. This week the Aussie has a light economic docket with just Building Approvals and Capital Expenditure q/q Thursday. Rate cut pressures should continue to weigh on the Aussie heading into June 4 and beyond with the potential for possibly 3 cuts this year which would lower the cash rate from 1.5% to 0.75%.

New Zealand

The New Zealand Dollar under performed into Thursday but closed the week in the black across the major currencies. Even though Equity markets posted declines we saw resilience in the kiwi and Aussie both come off earlier lows to push higher. This doesn’t happen very often as the kiwi tracks market risk sentiment very closely, we think this was due to profit taking in the market with investors being extremely short NZD. We also think the overall market sentiment could be that NZD has been exhausted on the downside – for now. The kiwi closed the strongest currency heading into the weekend. Fonterra dropped the 2018-2019 milk solid pay-out forecast price from NZD $6.30- $6.60 to the bottom of the range to $6.30- $6.40 along with the Global Dairy Auction results posting the first index decline in 2019. Adrian Orr speaks Wednesday prior to the ANZ Business Confidence survey. Thursday’s NZ “Wellbeing” Budget will be read at 2pm. Read more

FX Update

Markets continued the risk off theme deep into the week, the Aussie and kiwi currencies reaching fresh multi month lows. Yesterday’s Fed minutes offered up no real surprises. The minutes from the last meeting hasn’t changed the pessimistic market mood. Friday mornings poor US data, with PMI and new Home Sales, has bought home the true significance and worry of the global economic downturn. New Home Sales declined for April recording the largest m/m drop since December 2018 and signals that the housing market is on a tender footing amid the crucial spring selling session. Purchases of new home sales fell 7% in April. Folks in China and the US and becoming increasingly worried about the impacts and tensions of the tariff dispute and how it could affect the long-term recovery of growth. This is according to a new report run by the (IMF) International Monetary Fund. The IMF warned markets of being to complacent of a near term negotiated trade deal between China and the US rightfully dropping its 2019 global growth forecast from 3.5% to 3.3%. The WSJ (USD) Index dropped 0.2% to 91.11 overnight as a result with the 10 year US treasury yield also extending its decline slumping to the lowest level of 2.29% since December 2017. Closer to home, in a statement by Fonterra they have dropped the 2018-2019 milk solid price from NZD $6.30- $6.60 to the bottom of the range to $6.30- $6.40. The kiwi underperformed into Thursday along with the Global Dairy Auction results posting its first index decline in  2019. UK Prime Minister May is again on the back foot with senior Tory MP’s to request a rule change to allow a vote of no confidence in her leadership. Her departure seems imminent now with her new Brexit deal being pooh-poohed by her own party. She will outline changes to the Withdrawal Agreement Bill and has promised to give MP’s a vote on holding another referendum.

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Liberals Win Australian Election

Australia

Main event heading into the week was the surprise (unpleasant for the ALP) result of the Australian election with the Liberal Party retaining power.
The Australian Dollar was lower at the open on concerns that Australia risks getting caught in the crossfire of the trade war between its most important ally, the U.S., and biggest trading partner, China and that the Liberals were perhaps seen as less able to manage the Chinese part of this equation.
The victory, and the fact that Liberal party rules have now been amended to make it harder to topple leaders, may ensure Morrison is the first Prime Minister since 2007 to survive a full term, currently the record sits at six different leaders in 11 years.

The AUD after initially dipping  to a low of 0.6864 against the USD , climbed back above the 0.6900 level to a 0.6933 high in late afternoon trading yesterday but  has retreated back to the 0.6900 region on lower equity markets overnight as the risk-off tone remains. Market focus will today be on the release of the RBA minutes later this afternoon, not expected to surprise, while at the end of the day, RBA Governor Lowe, will offer a speech titled The Economic Outlook and Monetary Policy, likely to have a more relevant effect on the Aussie.

New Zealand

With nothing of note publishing on the economic calendar for New Zealand, the NZ Dollar was tormented by a risk averse market in the wake of stalled negotiations in the US/China trade talks. The kiwi topped out at 0.6580 against the greenback before continuing to decline the fifth week straight to fresh yearly lows around 0.6510. Ardern’s Christchurch call summit in Paris went well with global tech companies and governments agreeing to fight online right-wing extremism. Facebook for one commented saying the new “rule” would have stopped the Christchurch shooter livestreaming the horrific event. This week’s economic docket is reasonably quiet again with just March quarter Retail Sales and Trade Balance Friday to entertain us. The NZD will be largely led by offshore action in particular any ongoing speak around trade talks. Although no actual meetings are scheduled this week between US and Chinese officials, we are bound to see further media headlines. Read more

US/China trade dictates risk off currency moves

Australia

The Reserve Bank of Australia left the cash rate unchanged last week once again, at a record low of 1.50%, in what was billed as a 50/50 call on whether they would cut or not. In the statement by RBA governor Lowe he never explicitly said they were shifting to an easing bias, but the economic signs are still there for a cut later in the year based on current fundamentals. Again pinning economic hopes of improving employment to boost the economy, Lowe will be watching the labor market over the coming months to gauge further targets. Markets are still pricing in a drop in the next 18 months – possibly two. They may not wait to long if CPI inflation continues to fall like it has in the last quarter of 2018 from 1.8% to 1.3% in the first quarter of 2019. This week’s unemployment rate and job’s numbers q/q will be key, followed by Federal elections in the weekend. Scott Morrison’s Liberal party is slightly behind labor in the polls with Bill Shorten the preferred Prime Minister.

New Zealand

The Reserve Bank of New Zealand surprised markets by cutting the cash rate 25 points from 1.75% to 1.50% on Wednesday in a unanimous 0-6 vote by the new monetary policy committee. Global growth has slowed since the last quarter of 2018 so a cut was necessary to support the outlook for employment and inflation. The RBNZ sees annual CPI at 1.7% by June 2020, improving off the 1.5% currently. The New Zealand Dollar initially moved significantly lower across the board but had soon strangely retraced more than 50% of the downward moves into Friday. Further risk off sentiment also hindered any topside momentum in the kiwi with US/China trade negotiations ending without any agreement. Trump clearly speaking out over Twitter at his displeasure with how the Chinese officials have handled negotiations to date with “they love ripping off America” threatening to increase the 200B tariff total to a much higher 500B if no cooperation was forthcoming. “We are right where we want to be with China”. Zero data on the calendar this week for the kiwi dollar so movement will be dictated by offshore events. Read more

FX Update

Markets have been risk off for most of the week contributing to a shift lower for the kiwi and Aussie. US Equities have traded in the red with the S&P down over 2% surrounded by uncertainty in the ongoing US/China trade negotiations as we headed into Friday.

The US/China trade dispute rumbles on this week with President Trump finally losing his cool when China returned part of the negotiated draft deal with lines crossed out through most of the concessions negotiated over the past few months. The mood surrounding the trade talks, it’s fair to say, has taken a turn for the worse over the past few days after talks of a deal going from immanent to distant. Trump has responded by threatening to raise the existing 200B tariffs and impose new ones on an additional 325B worth of products. It’s unclear at this stage whether the two countries can make a deal before the new tariffs come into effect in the next day. Chinese Liu and his team will travel to Washington in last minute attempts to prevent spiralling out of control, talks will start at 5pm EST which is 9am Friday NZT.   Read more

Focus on RBA and RBNZ cash rate announcements

Australia

Friday’s Building Approvals disappointed, to be fair it was only going to go one way with approvals falling 0.6% in March. The release pulled the Australian Dollar lower to a four month low of 0.6985 against the greenback. US (NFP) Nonfarm Payroll came in higher than markets were expecting at 263k and 3.6% unemployment a 49 year low, with the Aussie traded back to 0.7030 at the weekly close. US trade talks have again reared its ugly head with tariffs to be raised this Friday from 10% to 25% on Chinese made products entering the US. Talks between the US and China were supposed to take place this Wednesday but China are considering cancelling talks after recent Trump threats. In a fresh wave of downside momentum the Aussie is battling to stay over the pivotal 0.7000 level and looks extremely vulnerable ahead of tomorrow’s Retail Sales and RBA cash rate announcement which could go either way – down or remain unchanged at 1.50%

New Zealand

On the surface things looked rosy with NZ unemployment nudging lower to 4.2%, however the size of the workforce shrank 0.5% raising further questions as to whether the RBNZ will lower the cash rate this Wednesday. Chances range around the 50% probability for a cut at the meeting. We think the RBNZ will hold for a while yet possibly through to the August meeting. Quarterly inflation expectations print first today at 3pm NZT and are expected to remain at 2.0%. In the past the RBNZ have spoken about the downside risks to the NZ economy due to the decreased global outlook, but the threat of such a view for global growth seems to have been overstated. Although with renewed US China trade discussions taking a turn for the worst with the 10% tariff increase to 25% this Friday, this could sway RBNZ opinion. We have said a few times how we think Trump is sugar coating the true picture- expect things on the trade front to become considerably worse before anything improves. The kiwi is trading around the 0.6600 level against the greenback- if rates are cut we should see a retest of the yearly low of 0.6580. Read more