Overview
Equity markets climbed higher, with Asian markets back at almost 10year highs and US indices remained at record levels after a stronger than expected US jobs number. The July Non-farm payrolls figure showed that hiring was increasing with 209,000 increase, above market expectations (183K).This result brings the 3 month average to 195,000, more than enough to provide for a growing population and 8 years after the last recession, returning to employment levels from before that period. Friday’s data also showed a small drop in the unemployment rate to 4.3%, showing an economy running close to full capacity. Gains were widespread across most sectors and average hourly earnings rose, which will please the Federal Reserve and lend more weight to their ongoing tightening bias.
In currency markets the USD strengthened, with the EUR/USD dropping below the 1.1800 level for first time in several days. However with the USD now back around 1.1794 on the EUR, a stronger correction is required to change the still dominant USD weaker trend and unless there is an uptick in inflation, the dollar has little chance to advance sustainably, as the Fed will maintain its cautious stance. Although June German industrial production last night was weaker than expected, generally over these last few days, European data has also been solid, as despite the growth pace decelerating by the beginning of the third quarter PMI’s are still only slightly below multi-year highs reached in previous months. After yesterday’s RBNZ reduced inflation expectations the NZD is softer against all its major trading partners and we look for consolidation at these lower levels heading into what should be a “dovish” RBNZ statement on Thursday.
Australia
Weaker than expected China export and import growth data has seen the Australian dollar stall around the 0.7930 level against the USD even though the NAB business confidence data was more upbeat. After a high last week of 0.8041 the AUD continues to struggle, having been at lows of 0.7890 over the last 4 days. The softer oil price along with other commodity price weakness is no helping the AUD and we look for a test of support down around the 0.7870 level over the next few days. Any push above 0.8000 would target last week highs of 0.8041 but overall we are mildly bearish on the Australian dollar and look for more downside in the short term as the USD holds onto Friday’s gains. Recent data has been mixed from Australia with a disappointing trade balance result late last week, countered by better than forecast retails sales figures. Overall there has been nothing that will impact the RBA’s current neutral stance.
New Zealand
The New Zealand dollar broke through key support at 0.7400 against the US dollar last night, hitting a low of 0.7346 (two week low) as traders closed long New Zealand dollar trades ahead of the RBNZ Monetary Policy Statement on Thursday which is now expected to be more dovish than previously expected given yesterday’s lower inflation forecasts. Also not helping the New Zealand dollar is the rebound of the USD which has been aided by better US employment dat. Although underlying NZ economic fundamentals remain solid we have over the last couple of months seen a run of softer data for GDP, inflation, building consents and the housing market appears to be cooling. At the same time, the exchange rate has risen (albeit helped by USD weakness) to levels that the RBNZ has expressed discomfort with. We do not expect any major policy change from the RBNZ on Thursday as the overall underlying economic position, for now, remains stable. There would have to be clearly identifiable broader inflation pressures before the RBNZ would even consider shifting from its ultra-neutral monetary stance.
United States
The week opens with US stocks gaining modestly last night with the S&P 500 Index and Dow Jones Industrial Average continuing their record runs, as strength in technology and consumer staples balanced out weakness in energy. Oil was lower on speculation that the increased supply situation will weigh on the market. The USD remains pressured by the EUR, as the USD has been unable to extend gains made against the Eurozone unit over the last few days. Investors show increasing confidence in European growth amid disappointment over U.S. President Trump’s failure get tax reform and infrastructure spending plans off the ground. After the major data dump for the US last week, the timetable is light this week, but Friday’s CPI figure will get close attention, especially given the Fed’s inflation forecasts. If the USD breaks back above 1.1820 a move back to the 1.1900 level is likely but we favour another probe lower for the EUR/USD cross to the 1.1715 level, before a push back to 1.1900, however if 1.1715 is broken this would open the way to target 1.1680.
United Kingdom
Consumer spending data for July, out yesterday, showed a fall for the third month in a row, highlighting how rising prices and a lack of pay rises are causing the public to curtail their spending. The data from Visa reflects all consumer spending and not just that on cards, giving a better picture of how Britons are being more careful with their money. It has four years since such a sustained drop has been seen in consumer spending, indicating how the pressure on consumers’ finances has intensified – and adding strength to the argument for the Bank of England holding the base rate at current historic 0.25% lows. The UK Pound continues to shift lower against the US dollar now at 1.3041 and as long as resistance at 1.3060 remains intact the downside is favoured. There was nothing positive in last week’s Bank of England Quarterly Inflation report and monetary policy announcement. Given how much GBP/USD rose in the last 4 months (from 1.24 to 1.3250), the tone of the central bank and the healthy U.S. non-farm payrolls report means 1.3270 seen last Thursday, is most likely the top in GBP/USD. With the ongoing political ructions over Brexit having potential to unsettle the markets further, we remain bearish for the UK pound. The next stop for GBP/USD should be 1.3000 and then 1.2920.
Europe
The stronger Euro looks to have started to cool the Eurozone’s boom this year, as it takes its toll on export related industries and the earlier ECB fiscal boost wanes. German industrial output fell by 1.1% in June from a month earlier – the first drop this year – and the latest Sentix gauge of investor expectations for the Eurozone fell sharply. The reading for Germany dropped from 12.5 to 5.8 in August amid deepening worries over the diesel scandal in the car industry. It is now becoming increasingly clear that economic momentum may have passed its high point. The EUR has jumped by 12% to $1.18 against the US dollar this year as the currency bloc enjoys the best growth since the global financial crisis. However we view any pullback in the EUR against the USD as corrective and we look for a move back to the 1.1615 region before another crack at the 1.1900 level targeting a move into 1.2000
Japan
The popularity of PM Abe continues to slide, with his support now below 30% (lower than President Trump’s!) in polls released last weekend. The Japanese economy is still entrenched in its “lost-decades” morass; and growing at just over one percent year over year in Q1 2017. Japan’s dramatic slowdown in growth, which averaged at an annual rate of 4.5% in the 1980s, fell to 1.5 % in the 1990s and never recovered. In addition to this, higher healthcare costs from an aging population have driven government healthcare spending to move from 4.5 % of GDP in 1990, to 9.5% in 2010, according to IMF estimates. For years Japanese savers have not only seen their yen denominated deposits garner a zero percent interest rate in the bank, but even worse, have lost purchasing power against foreign currencies. The yen has lost over 30% of its value against the US dollar since Abe regained power in 2012. It would now appear that the Japanese voters have had enough. After trading in a 111.84-109.83 range for the last 4 days the USD/JPY is sitting back around 110.60, political issues aside we still favour the JPY above the USD but the USD/JPY needs to hold support at 109.85 and break over the 111.05 level to resume the uptrend.
Canada
Canadian Jobs data for July released on Friday were below expectations, showing the country’s labour market added 10.9K jobs in July, falling below expectations for a gain of 13.1K new positions. However, the unemployment rate fell to 6.3%, while economists anticipated an unchanged reading of 6.5%. The surprisingly lower unemployment supported the Bank of Canada’s intention for one more rate hike in October. However this was balanced by, additionally reported trade figures, which were weaker than expected, meaning the BoC may be forced to wait for more signs of sustainable economic expansion before pulling the rate hike trigger. The Canadian dollar dropped against the US dollar to a low of 1.2590 after the data, but yesterday in choppy trading rallied back to 1.2713 , it is currently at 1.2668 with resistance at 1.2710/15 then 1.2745 …support 1.2625/30 them 1.2590
Major Announcements last week
• ISM Manufacturing PMI 56.3 vs 56.4 expected
• New Zealand Employment Change -0.2% vs 0.7% expected
• NZ Unemployment Rate 4.8% as expected
• UK Construction PMI 51.9 vs 54.3 expected
• Australian Trade Balance 0.86b vs 1.78b expected
• UK Services PMI 53.8 vs 53.6 expected
• BOE leave rates unchanged as expected
• ISM Non-Manufacturing PMI 53.9 vs 56.9 expected
• Canadian Employment Change 10.9k vs 13.1k expected
• Canadian Trade Balance -3.6b vs -1.3b expected
• US Non-Farm Payrolls Change 209k vs 182k expected
• US Unemployment Rate 4.3% as expected
• NZ Inflation Expectations 2.1%