Overview
Markets have been mostly range bound at the start of the week, with little to cause any major changes in current trends. Although US data in the form of Durable goods data was soft overnight, raising some questions over the resilience of US growth, the Fed desire to normalise interest rate policy continues which has helped the USD to hold onto gains against its main trading partners especially the JPY and EUR. Commodity prices remain choppy but the overall negative trend for oil prices continues and both WTI and Brent oil are now in a bear market, prices having fallen over 20% from peaks earlier this year.
With increases in production from Libya, the US and Nigeria, the oil market has now taken back all the gains seen after the OPEC agreement late last year to cut production. This trend is expected to remain in force for some time yet. In Europe the focus remains on the ongoing Brexit negotiations as the UK and EU square-off on their initial sparring stance. UK Prime Minister May had her hand marginally strengthened, on news last night that she had secured support for a minority government from the Irish Democratic Unionist Party, but this has come at a hefty GBP 1 billion cost to be spent for infrastructure, schools and hospitals in Northern Ireland. The distraction that is the Trump Presidency continues, with still no concrete steps forward on tax reform or increased infrastructure spending, as the repeal of Obamacare and the Russian investigation continue to absorb the administration’s energy.
Australia
The Australian dollar continues to consolidate around the 0.7560-0.7580 level having bounced back from the 0.7534 monthly low and looks to be attempting to re-establish upward momentum for a push back to the 0.7620/30 mark. News from China has been less helpful as the deleveraging trend continues and ratings agencies are predicting a rise in defaults, however the uptick in steel prices argues well for a potential recovery in iron ore prices. Also underpinning the AUD is a rebound in Aussie jobs creation which has kept the lid on any RBA rate cut, both of which is AUD supportive. However, longer term, the higher projected US interest rate path will chip away at AUD strength and we suspect that it will be back around 0.7300-0.7350 in 3 months.
New Zealand
The New Zealand Dollar maintained its bullish momentum during the NY session Monday posting a fresh 4 month high of 0.7260. Closing in on the previous high of 0.7360 of Feb 7th the kiwi against all predictions squeezed higher. The RBNZ kept the cash rate on hold Thursday at 1.75% siting major challenges still remain with political uncertainty. Inflation has increased over the past year in several countries but remain pressured with energy prices falling, monetary policy is expected to drop going forward. Longer term inflation expectations remain well anchored around 2%. May trade balance figures yesterday came in at 103M well under the expected 420M with a rise in imports and petroleum and vehicles tipping the balance. If ANZ Business confidence is positive tomorrow we could see the kiwi back trading around the late Feb 0.7360 lofty heights.
United States
US markets continue to trade at elevated levels, although off previous highs after data showing a steeper drop in durable goods than forecast raised concern about the pace of U.S. economic growth. Overnight comments from senior Fed officials intimated that although some recent economic data has been was weaker, the message of policy normalisation was unchanged. Attention will be focused on a speech by Fed Chair Yellen later tonight to see if she provides more clarification. The USD has dropped below the 1.1200 level against the EUR as the market eyes tomorrow’s consumer confidence report which is predicted to be softer. Next week will bring a raft of US economic data culminating in Friday’s Non-farm payroll figure. Currently the EUR/USD is trading around 1.1182 with major support at 1.1120 unlikely to be tested over the next few days. Topside resistance is 1.1220 but we look for consolidation at current levels ahead of Yellen’s comments.
United Kingdom
UK news is more positive with the GBP higher against the USD on the weaker US durable goods data and also helped by the political news that PM May has managed to cobble together with the Irish DUP to create a minority government, albeit at a hefty price, a GBP 1 bio in spend-up on Northern Ireland infrastructure. Brexit negotiations continue, with headlines over the past few days centring on provisions for EU immigrants living in the UK, but more worrying economically are reports of the several large banking institutions looking to move Euro clearing business to Frankfurt which has potential to negatively impact the City of London and its associated economy. Time will tell if these moves come to pass. The GBP is currently around 1.2720 against the USD after a high of 1.2756 a week ago. Immediate support is at 1.2690 then 1.2665 ahead of the weeks low at 1.2588. It should hold in the 1.2665 /1.2760 range over the next few days.
Europe
The EUR was lower overnight after comments from ECB President Draghi that low interest rates helped increase jobs, benefit borrowers and encourage growth. His comments were seen as dialling down on any expectations for an early ending of the ECB monetary stimulus policy. On a EUR positive note the German IFO business sentiment out yesterday was positive, with the Index rising from 114.6 points last month to 115.1 points in June, breaking May’s record. Companies were significantly more satisfied with their current business situation this month. They also expect business to improve. Germany’s economy continues to perform very strongly. Look for range trading around the present 1.2700 level ahead of Yellen’s speech later tonight.
Japan
The Japanese Yen was light on data releases last week relying on offshore news for direction. JPY was generally flat across most of the week dropping to a low of 110.90 midweek before giving up ground to the greenback trading at the close around 111.25. The BOJ released its summary of opinions for the June policy meeting which was unchanged at 0.7%, bang on expectation, and created no fuss in the markets with policy makers suggesting inflation would remain low for extended periods. There seems to be “no show” they will increase rates until inflation reaches their target price of 2%. The JPY trades currently at the solid resistance level of 112.00 and targets 114.60 early May levels if the US releases are positive this week, no significant local Japanese data pending.
Canada
The Canadian Dollar ended the week on a positive note, the US Dollar weaker after less than positive economic news. Crude oil traded to a low of 42.20 but recovered slightly this morning to 43.44 to boost the CAD to low 1.32’s. This could all go south again with the release of the crude inventories published tomorrow. The OPEC cut in oil production has failed to work with US and other non-agreement oil producers increasing their production keeping an over- supply in place. Thursday BOC governor Poloz speaks in Portugal and monthly GDP is published Friday. The weekly high of 1.3340 could be tested again if oil prices drop sharply, BOC is sure to bring volatility to the table and put CAD under further pressure.
Major Announcements
• RBNZ leaves the cash rate unchanged at 1.75%
• Canadian retail Sales 1.5% vs 0.6% expected
• Canadian Inflation 0.1% vs 0.2%
• US Durable Goods Orders 0.1% vs 0.4% expected