Overview
What a “difference a day (or two) makes”. The disappointment from the weaker than expected US payroll figure on Friday was quickly forgotten by Sunday as news came through of an atomic bomb test by North Korea. As markets opened yesterday (a quiet start due to the US holiday) geopolitical issues were back to the fore over the North Korean hydrogen bomb test which is in a different league from previous tests as these types of warhead are more to be mounted to Intercontinental ballistic missiles. There is now a much stronger focus on China’s trade relations with North Korea and whether there could be sanctions placed on China or any of North Korea’s key trade partners. How would this affect global trade and the relationships of these nations involved? We would expect these increased geopolitical tensions to be one of the main market drivers over this week, with safe-haven assets attracting capital inflows. The other point is we have seen the White House brief the press using Defence Secretary James Mattis and General Joseph Dunford take the stage, so a strong military contingent which is perhaps a statement in itself. The result of the disappointing Non-farm payrolls figure of 153,000 jobs created in August, and a tick higher in the unemployment rate to 4.4%, and a poor hourly earnings print at 0.1% mom, was a sell-off in US fixed income and after initial weakness a slightly higher USD. Helping the USD were comments from White House Economic advisor (and potential new chair of the Fed), Gary Cohn, who again talked up the idea of tax reform getting passed. In New Zealand, with the election coming down to the wire, it looks as if the result will be very close and this is attracting sellers which are pressuring New Zealand dollar downside as uncertainty around the outcome rises.
Australia
A data heavy week for the Australian dollar, kicking off today with the RBA rate statement, Q2 current account balance and later tonight a speech by the RBA Governor. The RBA is widely expected to leave interest rates unchanged at 1.5% with no surprises, but as always, it is the accompanying statement that will be studied for hints on future rate moves. The AUD/USD pair shed some ground on Monday in subdued trading, as despite gold prices soaring to new yearly highs, commodity linked currencies were dragged lower by weak equities in Asia and Europe. However overall the AUD has remained relatively steady over the last few days and opens around 0.7160 today. With the recent strength in ‘hard’ commodity prices, a better tone to economic data and perhaps even a mildly hawkish shift from the RBA the positive tone continues. Over the next few days in some shape or form we should get an update on those AUD-related factors. This afternoon’s Chinese PMI data determine short term direction but if support at 0.7935 remains intact, we look for a test of the 0.7970 immediate resistance level, then 0.8000 over the next couple of days. Any increase in risk-off sentiment would be negative for the AUD.
New Zealand
The New Zealand dollar is now in the grip of “election fever” as the uncertain outcome of result as evidenced by recent polls negatively influences NZD values. Also not helping is the increase of risk-off sentiment on the ratcheting higher of tensions on the Korean peninsula.
The NZD has been badly beaten up against the AUD, falling on Friday to 0.8968 a 16 month low. Today the NZD has opened around 0.7165 against the USD ahead of another Global Dairy auction tonight which is expected to produce a positive result, with futures markets already pricing a 3% rise in whole milk powder prices. Little in the way of NZ data this week, so political uncertainty and offshore events around risk sentiment and USD strength are likely to be the main drivers. A squeeze higher on the NZD/USD is possible on a good Global Dairy result later tonight but this should be limited to 0.7180/0.7200 with downside at 0.7130. In this climate upside looks limited and with the election overhang downside is favoured a break of 0.7130 targeting 0.7100 then 0.7050/60.
United States
With the USD closed on Monday for Labour Day trading was subdued. Stocks fell, while gold and the yen climbed as geopolitical tensions flared again, with U.S. President Donald Trump weighing new economic sanctions that could target China after a nuclear test Sunday by North Korea. The dollar was down for a third day. On the release of the jobs report on Friday the USD remained elevated, which is completely out of sync with fundamentals, as the slowdown in wage growth, uptick in the jobless rate, downward revisions to last month’s labour data, and the significantly weaker non-farm payrolls report should have driven the dollar and yields sharply lower. The NFP report showed only 156K jobs were created in August, the unemployment rate increased to 4.4% and average hourly earnings growth slowed to 0.1%. What made the report even worse was the fact that wages in July were revised down to 0.1% from 0.3% erasing one of the main reasons for last month’s post NFP rally. However not all data was bad and while looking through the areas where jobs were actually created there were a solid 36,000 created in manufacturing. Also on this point, there was a strong pace of expansion in the ISM manufacturing report, with the index printing 58.8 and the strongest reading since April 2011. Hurricane Harvey rebuilding is expected to boost the number by early 2018. It looks as if the reason for the dollar’s rise is that investors are hoping for hawkish comments from Fed officials later this week. Friday’s disappointing labour market report gives Yellen more reasons to back-off on signalling that another rate hike is coming. For this reason, along with geopolitical risks and the ongoing debt ceiling debacle continuing to plague the currency, the U.S. dollar should be trading lower and not higher. Looking ahead, there are not many U.S. economic reports on this week’s calendar but what the Fed says next on September 20th will be on everyone’s minds especially with Fed Presidents speaking throughout the week on relevant topics such as the U.S. economic outlook and monetary policy.
United Kingdom
The Brexit talks grind on and over the weekend UK Brexit Minister David Davis denied reports that the UK has agreed to pay a EUR 50 bln Brexit bill, while the EU and the UK continue to blame each other for a lack of progress. Latest reports have suggested that the UK is proposing to extend the next round of Brexit negotiations with the EU until a breakthrough on the UK’s “exit bill” is reached, to push the issue forward in time for the European Council meeting in October. Latest data out from the UK was disappointing with Construction PMI figures showing an unexpected decline to 51.1 in August, yearly lows, down from previous month’s 51.9 and worse than 52.0 expected. The GBP/USD slid from the 1.2990 level on Friday to 1.2926 currently. The tone is negative and we look for a test of 1.2890 which if broken would extend to the 1.2850 region. Any upside should be held at 1.2965 this week.
Europe
Market attention this week will centre around the outcome of the ECB meeting and monetary policy announcement on Thursday. The main focus at the ECB meeting is likely to be how big of a problem the current pace of euro appreciation is for the ECB. Expectations are for ECB head, Mario Draghi, to express concern about Euro strength and explicitly mention that the stronger euro is the main reason the ECB has lowered its inflation projection and that there is further downside risk. However, Draghi is also likely to maintain some hawkishness in his tone. This is because growth momentum remains strong, which has previously been one of his arguments for why inflation will rise eventually. But given that, as Draghi said in July, a financial tightening is ‘the last thing’ the ECB needs”, look for the ECB to continue its QE purchases but at a reduced pace of EUR 40 bln per month in H1 18. We look for this to be announced at the meeting in October but with some signalling of it at this week’s September meeting. Any EUR advance ahead of Thursday’s meeting should be capped at the 1.2000 level.
Japan
With a more risk-off tone beginning the week as Korean tensions crank up, Japanese economic data has taken a back seat as safe haven concerns come to the fore. The USD/JPY has slid in the last two days of last week from 110.65 highs to its current 109.75 level, the downtrend exacerbated by the disappointing US jobs data. We look for the bearish tone to remain over this week with immediate support at 109.30, we expect a test of this over the next day or so a break of which targets 109.00 then 108.65. The upside level of 110.25 unlikely to be threatened given the current geopolitical pressures.
Canada
Solid Canadian dollar performance continues, USD/CAD has rallied above 1.2400, now at 1.2415, after making a 26-month low on Friday at 1.2339. The weak U.S. August jobs report weighed on the pair. USD/CAD has fallen by over 6% year-to-date, reflecting a rebalancing of the Canadian economy as the drag from the oil price shock is phased out. At its policy meeting on Wednesday, the Bank of Canada is expected to leave monetary policy unchanged, but expectations are for it to make a second rate hike in October. There is a batch of Canadian data releases this week, culminating in the August employment report on Friday, which overall should leave BoC’s gradual course of monetary policy tightening on track. USD/CAD initial resistance is now at 1.2475, with support at 1.2340 …likely to remain inside this range ahead of Wednesday’s BoC meeting.
Major Announcements
• US Prelim GDP 3.0% vs 2.7% expected
• Australian Private Capital Expenditure 0.8% vs 0.2% expected
• Canadian GDP 0.3% vs 0.1% expected
• UK Manufacturing PMI 56.9 vs 55.0 expected
• US ISM Manufacturing PMI 58.8 vs 56.5 expected
• US Non-Farm Employment Change 156k vs 180k expected
• US Unemployment Rate 4.4% vs 4.3% expected
• UK Construction PMI 51.1 vs 52.1 expected