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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.

United States

The US Dollar closed the week in the red after poor US NFP- Non-Farm Payroll figures published worse than expected. After the ADP figures were also poor we suspected the NFP could be also come in below expectation as the two are usually closely correlated. NPF printed an underwhelming 75,000 after 185,000 were expected to be added to the US workforce. This has done nothing to relieve the ongoing pessimism in the US economy after a string of damaging economic data has kept the big dollar on the backfoot. President Trump confirmed the US had signed an agreement to halt tariffs on Mexico indefinitely as an agreement on illegal immigration had been confirmed. The details of the agreement are sketchy but Trump has suggested he may again impose necessary tariffs on Mexico if their cooperation falls short of US/his expectations. The US Dollar index is trending around the 96.70 area just off a three week low. CPI m/m prints this week along with Retail Sales, expect both releases to give markets US Dollar direction ahead of the University of Michigan Consumer Sentiment Saturday.

Europe

The Euro had its best week since August 2018 appreciating 1.4% over the US Dollar. The New Zealand Dollar slipped nearly 1% as buyers sought the Euro. The ECB held rates steady last Thursday at 0.0%, 0.25% and -0.4% respectively with the ECB now expected to hold rates unchanged until mid-2020 and until necessary to boost inflation that is close to their target 2.0%. Mounting pressures by investors to signal fresh policy stimulus saw Draghi explain that he was ready to shift its monetary instruments as appropriate to ensure inflation heads towards the target in a sustained manner. The use of the much talked about TLTRO lending product should ensure a further boost of cheap lending to banks. It’s a quiet week for the Eurozone with holidays Monday in France and Germany to ensure volumes will be light. ECB Draghi speaks again Wednesday.

United Kingdom

The British Pound economic docket has been light recently which has suited the markets with attention turning to Brexit developments and Trump’s visit to the UK. The Pound retraced higher off the 1.2570 bottom against the greenback returning to 1.2800 also appreciated 1.0% over the Yen but was broadly weaker against all other majors. Theresa May has formally resigned as the conservative leader Friday with her successor poised to replace her as Prime Minister in July. Boris Johnson is picked to be the current front runner vowing over the weekend to take the UK out of the EU with or without a deal. He has promised to renege on the 50B Pound Brexit exit settlement payment until the UK are in a position to negotiate a better deal. The French president retaliated saying failure to pays it would be a breach of sovereign debt default. This effectively would get the British economy downgraded and plunge the UK into a state of carnage. The contest for the leadership will add new uncertainties to Brexit and should depreciate the Pound for a while. On the Data front- GDP m/m came in slightly down on expectations of -0.1% at -0.4%

Japan

The Japanese Yen has opened the week softer against the major currencies on the basis of President Trump confirming tariffs to Mexico would not be implemented from Monday. Instead they have been held back indefinitely as Trump has reportedly secured an immigration deal with Mexico. That said markets breathed a sigh of relief as risk currencies appear to have the edge through Tuesday. On the data front Japanese fourth Quarter GDP published at 0.6% which was mostly ignored instead markets focused on geopolitics. The weekends G20 meeting in Fukuoka, Japan highlighting the ongoing global risk associated with continuing trade conflicts but stopped short of suggesting any resolution. They summarised by saying global growth appears to be stabilising and should pick up moderately over the following two years. Producer Price Index m/m publishes Wednesday which is expected to print at 0.7% lower than May’s 1.2% and highlight a slowing sector.

Canada

The Canadian Dollar has outperformed over the week and holds the status of the strongest major currency. Canadian unemployment surprisingly dropped to 5.4% from 5.7% with an increase of 8,000 jobs. A gain of 27,700 people were added to the Canadian workforce after the massive April figure of 106,500. This is a record which goes all the way back to 1976. The average hourly wage rose 2.57% y/y to April. Canadian employment has been steadily improving since July 2018 with the nine month average of 13,900, we have nearly tripled this at 35,000 through to April 2019. Crude oil still holds up above 54.00 per barrel coming off the recent low of 51.40 after a decent slump but signs are still skewed to the downside with the ongoing US-China trade war creating carnage in demand. It’s a quiet week on the Canadian calendar with no tier 1 data to print.

Major Announcements last week:

• RBA cuts cash rate to 1.25% from 1.50%
• US Non Farm Payroll prints at 75k down from the 177k expected
• US Unemployment rate remains unchanged at 3.6%
• Trump backs down on introducing tariffs on Mexico instead agreeing on immigration crackdown

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