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Brexit On The Cusp

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The Australian Dollar had a mixed week climbing against the safe haven Japanese Yen but closing 1.7% down against the resurgent English Pound. Last week’s drop in Australia’s unemployment rate from 5.3% to 5.2% shows there is a good chance we won’t see a cut at the next monetary policy meeting on the 5th of November. But with underlying inflation expected to weaken over the coming months to below the 2% – 3% band we could easily see another slash to rates in December. Some Australian banks are now starting to price in the chances of the RBA dropping the current 0.75% rate to 0.25% by early 2020 if economic conditions don’t improve. The Reserve Bank of Australia could also start an asset buying program next year if interest rates reach the 0.5% threshold of their “lower band” effectiveness. Last week Reserve Governor Lowe said there’s very little chance we will see negative rates implying the “effective lower band” is above zero. Economic data this week is thin with only asst governor Kent speaking Wednesday.

New Zealand

The global dairy auctions Index showed a rise of 0.5% in overall dairy prices. While the Whole Milk price came in flat analysts are predicting a rise this season in the prices paid to farmers. Fonterra’s forecast is a wide range of $6.25 to $7.25 per solid, while bank forecasts narrower at this stage in the season ranging from $6.70 to $7.15 Prices are influenced by outcomes in the China/US trade war and how this affects Chinese demand. NZ Inflation for the September quarter rose 0.7% from the 0.6% markets were predicting supporting the NZD towards the end of the week. Consumer prices gained 1.5% from the previous year but were slower than the second quarter prices. If inflation continues to represent a worsening economy the RBNZ may have an argument for another cut at the 13 November RBNZ policy meeting. This week’s calendar is nude, the kiwi to get its drivers from offshore developments.

United States

The US Dollar underperformed last week earning it the weakest currency of the major group. Risk on fundamentals have been supported by a potential deal on the horizon in the US/China trade relationship and Brexit deal. That being said economic data was poor last week for the greenback with Retail Sales and Industrial Production both coming in below expectations showing gradual deterioration in the outlook, bolstered by growth in China slowing to 6.0% year on year third quarter weakness. Fed’s Kaplan said the current line of rate cuts would be “modest and restrained,” the Fed has left the door open to cut again late October, Kaplan is not a believer a further cut is required just yet.


The Euro closed the week mostly in the black, extending gains on most major currencies and booking 115 points to 1.1150 versus the greenback with less than impressive US data publishing. This week we have French and German Services PMI and Manufacturing releases before the key ECB refinancing rate and monetary policy statement Thursday will take centre stage. This will be Mario Draghi’s last ever policy meeting as he bids farewell as President of the ECB. He has served as President since 2011. He fired a warning shot to the new President Lagarde Friday when he warned of “bubble” risk in the Eurozone by saying there was “mild signs” of overvaluation in the euro zone property and financial markets- good luck.

United Kingdom

Brexit continued to dominate markets last week, The British Pound surged to 1.2990 against the US Dollar up a whopping 2.65% over the week. The European Union will look to delay Brexit until February 2020 if Johnson is unable to gain support from MP’s this week. Over the weekend a Letwin amendment which can postpone any Brexit withdrawal until it has been properly passed by law was voted in over the weekend 306 votes to 322. In response government cancelled Saturday’s vote on the actual deal which was due to take place.  Johnson was legally obligated to send a letter to the EU to request an extension of three months by last Friday. He sent a letter to the EU unsigned but followed this up with another more personal letter saying he doesn’t think there should be an extension. All 27 nations need to agree to an extension to be granted. Government now plans to hold a meaningful vote on Tuesday if the speaker of the house allows it. This week’s economic cupboard is bare, expect Brexit to dominate headlines


As markets were “risk on” last week the Japanese Yen underperformed against its peers with investors choosing risk flavoured assets such as the NZD, equities and commodities. Monday mornings September Trade Balance figures dropped for the 10th straight month with exports showing a 5.2% decline from this time last year. Markets were expecting a 4.0% drop but instead got the longest run of monthly declines since November 2016. Market conditions remain reasonably stable, should Trade figures print poorly for the remainder of the year it may influence the Bank of Japan’s monetary policy in 2020. Later in the week, attention turns to the Japanese Manufacturing Index and is expected to represent a contraction in the sector for October pressuring the JPY.


Canadian Dollar headline news this week will be the Canadian Federal Elections. The latest polls suggest Trudeau’s incumbent Liberal Party is even stevens with the opposition Conservative party, both polling around one-third of the total vote. How they vote Tuesday will affect the Loonie with the currency being the strongest currency of the G10 this year. We suggest that a Liberal led minority could be detrimental for the CAD while a Conservative led minority could send the CAD higher as this would be better for market sentiment. The reason for this is because a conservative led party would have less smaller parties who oppose building more oil pipelines. Canada’s oil and mineral fuels equate to 22% of total exports. Certainly the risks lie to the downside for the Loonie this week.

Major Announcements last week:

  • Canadian Federal Elections are underway
  • NZ q/q CPI printed higher at 0.7% from 0.6% expected
  • US Retail Sales released -0.3% significantly missing the mark at 0.3%
  • Australian Unemployment dropped from 5.3% to 5.2%

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