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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.   

The ECB held rates unchanged overnight at their cash rate meeting, announcing interest rates would remain at record lows for now or at least until early 2020. The ECB highlighted a “wait and see” approach choosing to watch potential adverse economic data and developments. He said a significant amount of stimulus could be needed to boost growth which may come from further QE plans.  The problem is with interest rates at zero you only have so many options at your disposal which has caused considerable ECB stress. The ECB are well behind the eight ball now with signs starting early this year in the first quarter that further stimulus was required. Further sluggish growth continues across the region especially with PMI’s back to 2008 levels suggesting further QE and (TLTROs), Targeted long-term refinancing operations will continue again in September.

Next week we have the FOMC meeting where rates are expected to be cut from the current 2.50%. Predictions and polls are expecting a 95% probability of a 25 point shift with a small number expecting 50 Points. Certainly a 25 Point move is well priced into market expectation and the curve, if they don’t follow through with the market perceived expectations this will cause a significant shock to currencies.

RBA’s Lowe spoke yesterday saying he sees no case to adjust his 2-3% inflation target. He did however say the Australian economy should expect a long period of low rates with further easing to be delivered if demand stays soft. He has kept the door ajar for more possible rate cuts should the economy no respond to recent stimulus. Lowe said “it remains to be seen if future growth in demand will be sufficient to put pressure on the economy’s supply capacity and lift inflation in a reasonable time frame”

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