Overview
A quiet start to the week with relatively little economic data overnight to influence markets. Overnight US equities continued to surge higher with both the S&P500 and Dow indices rising to new record highs. On commodity markets oil continued to weaken, with WTI crude down 1.2% to US$44.20/brl continuing a four week decline as US drillers add oil rigs, circumventing attempts by OPEC to rebalance an oversupplied market. Also making news last night was the long anticipated news of an Australian credit downgrade by rating agency Moody’s, who dropped the credit rating of the four Australian banks, ANZ, Westpac, CBA and NAB on concerns over “elevated risks within the household sector due to high levels of indebtedness” i.e. Mortgages.
In Europe, Brexit negotiations commenced with little fanfare. The French election is now over and has left new president Macron a large majority for his En Marche party which will give him a free hand in embarking on reforms on the moribund French economy. Perhaps at last there is a chance of some real reforms to spur growth and reform archaic labour laws. A future reinvigorated France would be very positive for the Eurozone but this will be long term “work-in-progress”.
Australia
The Moody’s downgrade for the 4 major Aussie banks to Aa3 (now in line with S&P ratings) , saw the AUD take a hit early overnight to a low around 0.7585. This was short lived however and the AUD bounced back to the 0.7600 helped by a rally in the iron ore price which were up 1% and look to now be stabilising. Later today there will be the release of the RBA June meeting minutes which will be inspected for comments around any timing of interest rate movements. The market has fully priced in a’ no-change’ to rates for the rest of this year, any surprises in the language of the minutes, either way, could move the market significantly there is also the ANZ Consumer Confidence data later in the day . The AUD/USD has been in correction mode since the beginning of this month from lows of 0.7374. In recent trading, the pair broke up through the 0.7600 level. Any upside surprises from the meeting minutes could eye a break towards the 0.7640 resistance area, while on the flip side, a break below 0.7570 would expose 0.7520.
New Zealand
The New Zealand dollar was lower overnight, dropping in sympathy with the AUD, from 0.7280 to 0.7227. It opens around 0.7223 but continues to be well supported ahead of tonight’s Global Dairy Auction, expectations are for a slight increase in prices and the RBNZ statement on Thursday. Hawkish comments from a US Fed official overnight helped accentuate the divergence between the Fed and RBNZ and along with last week’s softer GDP data the NZD looks set to remain below the 0.7250 level at least until Thursday’s statement is out of the way. The NZD is currently trading around 0.7220 but a break of 0.7200 would target 0.7145, but expect consolidation around current levels for the next few days. The NZD/AUD cross has drifted lower and is currently holding around 0.9505 but looks to hold in a 0.9480-0.9615/20 range over the next few days…downside looks more favoured.
United States
US equity markets continue to forge higher, even though last night saw comments from Fed official Dudley displayed his confidence in the FOMC’s rate hike path in addition to acknowledging continued growth in the economy. One of the FOMC’s important messages from the June meeting was that the Committee was not unnerved by recent downside surprises in inflation or underperformance of some economic indicators in recent months, this has unsettled some investors who remain concerned that potentially rate hikes may occur as inflation flat lines. However Dudley last night provided the markets with yet another vote of confidence that recently lagging inflation would pick up, justifying higher interest rates going forward. In his speech, Dudley asserted, “inflation is a little lower than what we would like, but we think that if the labour market continues to tighten, wages will gradually pick up, and with that, inflation will gradually get back to 2%.” The USD was bolstered on the back of these comments and with the EUR/USD unable to break over the 1.1300 level a stronger USD looks to favour the downside targeting 1.1100 which if broken would expose 1.1000.
United Kingdom
Brexit negotiations began yesterday with little fanfare, however the UK’s negotiator, David Davis and the EU slammed the door on any prospect of a “soft” Brexit as formal negotiations on leaving the EU finally got underway in Brussels. The Brexit Secretary confirmed Britain would be leaving the customs union and the single market, in a move designed to scupper any parliamentary plots to water down the terms of the UK’s withdrawal from Europe. His counterpart, Michel Barnier, the EU’s chief Brexit negotiator, also confirmed that Britain would leave the single market and the customs union. Such a unified public declaration of the intention to press ahead with a “hard” Brexit, sends a clear message to former Remain campaigners in Parliament who still hope membership of the customs union and the single market are up for grabs. Davis commented that he intends to seek a free trade and customs agreement with the EU during the course of the negotiations, this is likely to meet with some resistance from the EU. The GBP/USD traded higher, climbing to 1.2813 , but then dropped to 1.2722 after the Fed comments …resistance at 1.2820 is now distant, with a move to test immediate support at 1.2705 more likely over the next day or so.
Europe
European equity markets were higher following the convincing parliamentary majority for President Macron. The victory is welcomed by investors and should bring political stability to one of the biggest countries of the EU, given that the French economy underperformed leading to stagnation and persistent high levels of unemployment (10%+) under Francois Hollande , investors are optimistic on future growth potential. In other news German Chancellor Merkel was reported as commenting that Europe had not yet made a full recovery from the GFC. The EUR/USD traded in a neutral 1.114-1.1265 range overnight with few notable data releases.
Japan
Disappointing Japanese trade balance data and the more hawkish Fed comments saw the JPY weaken against the USD towards the 112.00 level with an overnight high of 111.58, it has opened weaker, now around 111.64 . The May Japanese trade balance, released yesterday, was well below that expected, posting a deficit of ¥203.4 billion, missing the expected surplus of ¥76.0B. Imports, however, were up by 17.8% when compared to a year earlier, while exports rose by 14.9%, doubling previous month’s gain but slightly below expected. Immediate USD/JPY support is now at 111.25 with resistance at 112.00 and given the firm Fed stance a slow grind higher towards 112.45 once 112.00 if 112.00 gives way y over the next few days.
Canada
With WTI crude oil back under US$45/brl pressure is back on the CAD after ending the week at 18 month highs after comments from the Band of Canada Governor that he saw the potential to hike interest rates sooner than the market was expecting. The CAD dropped to 1.3190 overnight. It has now regained the 1.3200 handle trading around 1.3220. Immediate resistance remains 1.3300, then 1.3365. Last week’s low around 1.3165 is critical support, looks likely to be tested later in the week.
Major Announcements
• UK Average Earnings Index 2.1% vs 2.4% expected
• US CPI -0.1% vs 0.2% expected
• US Core Retail Sales -0.3% vs 0.2% expected
• FOMC hikes interest rates 0.25% as expected
• NZ GDP 0.5% vs 0.7% expected
• Australian Employment change 42.0k vs 9.7k expected
• Australian Unemployment rate 5.5% vs 5.7% expected
• UK Retail Sales -1.2% vs -0.9% expected
• Bank of England vote 3-0-7 to leave rates unchanged at 0.25%
• Bank of Japan leaves interest rates unchanged at -0.10%