Australia
As expected the RBA left rates on hold at its Tuesday meeting. Rates have remained at a record low 1.5% since last August. Economic data continues to be mixed with unemployment stubbornly high at 5.9%, retail spending weaker and inflation remaining at near record lows. In a speech presented yesterday by the RBA Governor he commented that the key risk to the economy from any fall in house prices or rising interest rates, is what might happen to consumer spending.
He warned that the nation’s plunge into record levels of debt and the associated property boom had created a new breed of risk which may lead to a sharp contraction in consumer spending should any property correction occur with a potential for flow on effects to other sectors of the economy. Overnight the AUD traded down close to 4 month lows, as commodity prices took a tumble with both iron ore and copper substantially lower and also undermined by weaker Chinese data.
The RBA will release SoMP (Statement on Monetary Policy) later this afternoon, but we expect little room for surprise on that front. Support is around current levels 0.7380/0.7400 with the potential for a good US payroll figure to drive the AUD down towards 0.7330.
New Zealand
The New Zealand Dollar pushed to a monthly high of 0.6970 Wednesday after data was released showing the unemployment rate dropping to 4.9% the equal lowest level since Feb 2009. A raft of positive US data followed, ISM Manufacturing published at 57.5 showing further expansion and the kiwi started to slide. US Federal Reserve rate decision came in unchanged at 1% yesterday the highlight being a possible hike in the June 15 announcement now 96% likely. The New Zealand Dollar fall all the way to my previously published support level of 0.6850 but looks likely to break lower in the near term with quarterly inflation expectations this afternoon and RBNZ cash rate announcement due next week probably to remain unchanged.
United States
As expected the US Fed kept rates on hold at its Wednesday meeting, downplaying the weaker first quarter economic growth while emphasising the stronger labour market in a sign that suggests there may be another rate hike as early as June. The statement was seen as bullish with the Fed commenting that consumer spending continued to be solid, business investment had firmed and inflation was running close to the Fed’s target. These factors outweighing sluggish GDP growth of 0.7% as consumer spending almost stalled for Q1 and slower job growth in march.
Also of note was that prior to the meeting most Fed policymakers had made it clear that unlike previous years the central bank was more confident of its forecasts for two more rate increases in 2017. As always, tonight’s Non-Farm payroll data will be closely watched, with expectations for an increase of around 190K jobs for April and the jobless rate to edge up slightly, but remaining at levels that the Fed considers to be at or near full employment. Now that the Trump healthcare bill has finally passed Congress (it still faces a battle in the Senate) attention will turn back to the tax changes and some clarity around the size and scope of tax cuts, infrastructure spending and regulatory changes that the Trump administration will be able to push through Congress. Any successful stimulus package should speed up the pace of interest rate hikes. Overnight crude oil prices hit a 6 month low erasing gains sparked by OPEC’s November output agreement, as concerns over a supply glut mounted. Earnings kept U.S. stocks afloat, while Treasuries slid with the USD.
United Kingdom
Although politics still dominates the UK headlines, new data out this week showed that although there was a small negative blip early in Q1, the UK economy is bouncing back with the expected slowdown failing to materialise. PMI (purchasing manager’s index) data for April, showed an increase to 55.8 with the dominant services sector grew last month at its fastest pace so far this year and outpacing much of the growth seen in 2016. Also positive was a pick-up in pace of manufacturing and construction in April, taking the combined PMI score to 56, also its highest level this year. For the economy as a whole, the employment index is at its joint-highest level since the start of 2016, as factories and building firms take on more staff. However this good news is tempered by price pressures that are squeezing household spending power and if this continues could threaten a slowdown later in the year. The GBP has maintained its strength over the last few days and extended its gains to a fresh daily high at 1.2924 against the USD. It looks to be in a consolidation phase, trading around a tight channel around 1.2920 and we expect little change ahead of tonight’s USD employment data.
Europe
It seems growth in the Eurozone picked up again as Italy and Spain joined the surging output seen in France and Germany. The Eurozone’s composite PMI – combining services and manufacturing – hit 56.8 last month, a fresh six-year high. Ireland led the way with an index score of 58.7, a three-month high, while Spain’s 57.3 represents the fastest expansion in almost two years, and Italy’s 56.8 indicates it is growing at the most rapid rate since 2008. After showing some encouraging signs following the FOMC statement yesterday, the USD suffered heavy losses against the EUR overnight. Investors seem to be taking advantage of the weak USD environment to increase their long EUR positions in anticipation of a Macron victory in this weekend’s final round of French presidential election. According to the latest poll released by IFOP, pro-EU Macron is seen beating Le Pen to become the next president of France by 61% to 39%.Additionally, participants will keep an eye on crude oil prices, which dropped nearly 5% last night and weighed on other commodities as well. The euro could gather further strength against the USD if the equity indexes react negatively to weak commodity prices.
Japan
The Japanese yen pushed through 112.00 USD yesterday on its way to 113.00 a 7 week high before falling back to 112.00 during late NY. The JPY has been declining since the beginning of the year. With the risk on rally in European equities and US Treasury yields this has boosted Investment interest in the USD Dollar this week amid slower than usual trade volumes because of Japan public holidays. With resistance at 112.50 I would expect the continuation of the bearish channel towards 108.00 the prior low of mid -April. Look for non-Farm Payroll early tomorrow for volatility with very little Japanese data next week.
Canada
The Canadian Dollar has shown little resistance this week after USD support saw the pair trade to 1.3770 a 15 month high. Focus over the past day has been over the federal Reserve decision to leave interest rates on hold with speculation a rise in June seems almost inevitable. The CAD drifted back to 1.3600 after the Fed announcement and was short lived pushing past 1.3700. The drop in metal prices hit the Canadian Stock market mid- week, oil also added to CAD pressure trading down 4 cents lower this week to 45.50. Early this morning BOC governor Poloz spoke about geopolitical risks to the Canadian economy her outlook failed to affect the Canadian markets, trade figures however were positive and boosted the CAD momentarily. Canadian unemployment rate is announced early tomorrow expect around 6.7% preceding this US Non-farm payroll figures. 1.4000 still looks on the cards.