Markets were fairly flat Friday as investors waited for second quarter US economic growth data. As we expected we saw some much needed excitement with US economic growth increasing significantly for the second quarter as GDP rose by 4.1%. The interesting aspect of this number was that it’s the first time it’s published above 4.00% since 2014. The first quarter GDP increased 2.2%. President Trump will claim a win for Trump policies even though the figure could be revised lower. We will certainly hear more on this from Trump with several media outlets recapping on the comments made when Trump said he would create more than 3% economic growth in the economy when he was elected. Hear are a couple: “Democrat elites said President Trump’s policies would throw the US into recession”, “They said a 4.0% GDP rate was impossible. It was a thing of the past”. The New York Times- So we are very probably looking at a global recession, with no end in sight”. We are by no means on the Trump wagon here but one can’t ignore the USA is on schedule for their best economic year in well over a decade. The greenback ended the week higher than most of its counterparts with the US Dollar index up slightly to 94.73 after the GDP announcement. Only the EUR was stronger after Draghi delivered a confident future assessment of the Eurozone and Junkier defused any threat of possible trade tensions. Volatility in the currency markets will start to ramp up from Tuesday with a lot of continued focus on global protectionism with global trade. We also have a heap of economic calendar risk especially in the later stages of the week with several central bank decisions to release such as Bank of Japan (BoJ) today, Bank of England (BoE) Thursday with the vote expected to be 8-1 in favour of hiking to 0.75% and also the US Federal Reserve, which are not expected to hike rates this time around until the September meeting. To end the week if this wasn’t enough to rattle your cage we also have US Non-Farm Payroll early Saturday morning. We expect the New Zealand Dollar to retest 0.6760 this week.
Given last week’s soft inflation data the Australian Dollar held up rather well. The Aussie traded the week out in a bid tone pushing higher across the board. Most of the price action has been off the back of global offshore factors with the global trade outlook largely influencing any momentum. The AUD rose slightly Friday with positive second quarter US GDP data to 0.7400 against the greenback, but slumped back to 0.7380 to close the week. Australian by-elections were staged over the weekend but didn’t produce any victories for the government, not much of an impact was seen on the AUD. This week’s local calendar is small with only Trade Balance and Retail Sales to publish. Most volatility will be played out with central bank announcements with (BoE) Bank of England, (BoJ) Bank of Japan and the US Federal Reserve all to publish cash rates.
I know it’s early in the week but I’m going to go right ahead and say it – The New Zealand Dollar looks heavy. The kiwi benefiting Friday with small gains to 0.6800 against the greenback after we saw US quarterly growth figures hit 4.1%, the best growth in over 4 years. Risk returned to markets for a while and bid up the associated products. Re testing 0.6700 is a long range view but we think this key support level could be in jeopardy with the volatility in store this week and unsettling trade talks return. A move down into the 0.6500 is not far away. Fundamentally we can’t see much scope for the kiwi to push higher, with economies such as New Zealand taking on board cheap lending from offshore unwinding we may see the currency start to under perform in the long term. The main events will be central bank announcements and US Non-Farm Payroll. From Tuesday it will definitely be the best ride in the park.
President Trump took a bow Friday (god forbid) after second quarter GDP printed at 4.1% coming in on economists’ expectations. The Commerce Department reported that Gross Domestic Product the measure of good and services produced in the USA grew to a whopping 4.1% with consumers leading the way pushing aside high gasoline prices and slow wage growth to ramp up spending on just about everything from cars to clothes and restaurant spending. President Trump said the figure was of no surprise and was testimony on his policies on trade and taxes are not only working but are triumphs. He was quoted as saying “once again we are the envy of the whole world”. The Federal Reserve will announce their latest cash rate which is not expected on this occasion to be hiked past the current 2.00%. The September 27th meeting should show a rise to 2.25% in line with early year forecasts. The Unemployment rate along with Non-Farm Employment change follows Friday with the usual large shifts in currency movements expected.
An important week looms for the British Pound ahead of the crucial Interest rate announcement. The Pound is trading steady early Tuesday around major support of 1.3100 levels as the Bank of England (BoE) look to hike rates Thursday. The voting is forecasted to represent hike to 0.75% from 0.50% with 8-1 in favour of an increase to monetary policy. Ahead of the announcement are UK Manufacturing and Construction figures. Some economists are saying the hike is already around 90% factored into the curve which would indicate limited topside movement. The word on the street is that a fall back to 1.2800 August 2017 levels could be on the horizon in the medium term. Brexit concerns are still weighing on any momentum for the Pound with negotiations between the UK and EU to resume in mid August with Theresa May holding key positive sentiment with recently taking responsibility of the the negotiation process.
The Euro started the week off well after closing with the tag of best performing currency. Against the US Dollar it has reversed the early week bearish tone trading back to 1.1700. Juncker and Trump trade discussions were successful in defusing any international trade tensions with further trade talks to continue over the following months. The ECB made no real changes to its long range growth and inflation outlook but Draghi did seem more confident with his sustainable inflation targets. Having been knocked down from recent elevated growth concerns a more stable growth pattern is emerging and should allow for a possible Euro recovery over the coming months. Flash Spanish Consumer Price Index (CPI) released Monday showing a small dip in the inflation of good and services down to 2.2% from 2.3% expected. The Euro was not hampered by the data and should continue to appreciate over the week. German Retail Sales prints tonight and is widely expected to show a positive number and a turn around from the disappointing June figure of -2.1%.
Price action continues to be light with small declines over the week in the Yen but generally against the US Dollar it bounced around the 111.00 area. We have been waiting for further significant risk off sentiment to flow into risk associated products but this never really eventuated. We may get further global trade news this week which could be detrimental on the US Dollar strengthening the Yen. Japanese Retail Sales printed up on expectation of 1.7% to 1.8% but sent the Yen weaker somehow. This seemed strange after such disappointing May figures represented a decent turn around. Around midday today we have the crucial Bank of Japan (BoJ) Policy Rate, this should remain unchanged at -.10%. The statement to follow should tell us the BoJ are not ready to make any large changes to their QQE programme with inflation still very low. A downgrade to inflation forecast could also be in the mix.
The Canadian Dollar has outperformed over the last few days closing the week in positive territory against most of the majors including the US Dollar closing at a respectable 1.3060. Monday sessions saw little action across the board, the quiet before the storm but the Loonie did manage to make further gains travelling below the pivotal 1.3000 briefly a four week low. We have no Canadian indicators on the schedule for this week except monthly GDP Wednesday with 0.3% expected a tad up from the June 30 number of 0.1%. Anything below 0.3% will put pressure on the CAD. Negotiations have progressed slowly over NAFTA with policy makers in Mexico and Canada hopeful the US will extend their flexibility shown towards the European Union towards them.