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FX Update


It’s been an interesting week for the Australian economy, and by extension, the Australian dollar. Earlier in the week we had softer than forecast Retail Sales and Current Account data, but releases turned positive on Thursday when GDP printed at 0.9% vs 0.7% expected. This was then followed by a better than expected Trade Balance figures yesterday. The RBA rate statement that hit the wires on Tuesday was pretty neutral with little changed in terms of wording from their prior statement. They continue to see further gradual progress reducing unemployment and inflation moving toward target. The Central bank may be a long way off raising the official cash rate but that doesn’t mean Australia hasn’t seen some monetary tightening recently. 3 of the 4 big Australian retail banks have all raised mortgage rates in the past week, two of them did it yesterday. The banks are blaming higher funding costs for the rise in mortgage rates. Higher mortgage rates mean less disposable income for consumers and therefore less consumer spending. The Australian dollar lost a little ground on the back of this quasi tightening.

New Zealand

There has been little in the way of key data released from New Zealand this week. We did have another dairy auction on Tuesday night which saw the overall price index drop 0.7%.  Dairy prices have actually dropped nearly 8% over the past few months. It was probably no surprise then when ANZ Commodity Export Prices came in down 1.1% for the month. Earlier this morning we had a speech from RBNZ Governor Orr entitled “Geopolitics, New Zealand and the winds of change”. It failed to have any significant market impact. There is little on the calendar for next week, so the NZD will be driven by offshore events.

United States

Earlier this week we saw very solid data from the US manufacturing sector. The ISM Manufacturing PMI printed at 61.3, up from the prior reading of 58.1. The jump in the index takes it to its highest reading since 2004. Last night’s Non-Manufacturing PMI also came in much stronger than forecast at 58.5 vs 56.8 expected. A notable comment included in the report read “In the labour market, we have seen a noticeable increase in difficulty to attract and retain talent at all levels. We have begun taking steps to change compensation packages to combat this issue.” These are further signs of just how strong the US economy currently is. It’s hard to justify why we don’t read more about this in the mainstream media, maybe it’s anti Trump bias, who knows, but make no mistake, the US economy is literally booming right now with 4.2% GDP and close to full employment. The result of that is going to be higher inflation, higher US interest rates and a stronger US dollar. The key data for the week is still to come however with Non-Farm Employment Change set for release tonight. The unemployment rate is expected to fall to 3.8%. The US political situation continues to be much better viewing that any drama currently on TV. Things are only going to heat up over the coming weeks as we head into what are likely to be the most important, and hotly contested, midterm elections the United State have seen in many generations.

United Kingdom

This week has seen a trifecta of PMI readings for the UK economy. Manufacturing and construction sector readings both disappointed, coming in below forecast and down on the prior readings. But the most important one, the Service Sector PMI showed improvement jumping from 53.5 prior to 54.3. The UK service sector makes up around 79% of the UK economy and one of the major components that drove the Services PMI increase was employment. That will make good reading for the Bank of England who raised interest rates last month. Next week we have GDP, Manufacturing Production, employment data and another interest rate meeting from the central bank. They are not however expected to alter rates from the current 0.75%.


Europe has seen the release of manufacturing and service sector PMI’s this week along with retails sales data. Overall Eurozone Manufacturing PMI was unchanged at 54.6. We saw small declines for the German, French and Italian readings and an offsetting improvement from Spain. It was a very similar story for the Services PMI to be honest, with the overall Eurozone index unchanged at 54.4. Eurozone retails sales did disappoint a touch printing down 0.2% vs an expected reading of -0.1%. Bloomberg had an interesting article this week linking the current emerging market issues to Europe. They suggested this could be Europe’s “Achilles heel”. This is as a result of the fact that Europe is a much more open economy than the likes of the US, and that the export sector is a larger part of GDP. This makes Europe much more sensitive to problems in emerging markets and global growth in general. A global, or even just emerging market downturn would be a nightmare for the European Central Bank who find themselves still undertaking quantitative easing and with interest rates at zero. They have no bullets left should they need to stimulate. It’s a very uncomfortable position to be in, especially at this late stage of the global business cycle.

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