Overview
Broad based USD weakness continued to be the main theme of last week. Political paralysis in Washington has weighed on the USD and until the market starts to believe the Trump administration can pass key legislation, it’s hard to see the United States dollar making a significant recovery. We do have the Fed Funds rate meeting this week, although it’s not expected to contain any surprises. While no change in interest rates is expected, we may get further clarity on impending balance sheet reductions from the central bank. Tighter monetary policy throughout much of the developed world is going to be the dominant trend over the coming years. The Bank of Canada recently raised interest rates for the first time in seven years, and the ECB are likely to decide later this year just when to scale back monthly bond purchases.
The Bank of England too are expected to join the party and be forced to raise interest rate sometime next year due to rising inflation. Although the process of interest rate increases will be a very gradual one by any historical standard, at some stage asset market valuations are going to come under pressure as a result. Despite central bank’s best efforts the process of interest rate normalization is unlikely to a smooth one.
Australia
After the Reserve Bank of Australia’s (RBA’s) meeting minutes were released these helped to propel the Australian dollar higher early last week, the central bank went into damage control on Friday. Deputy Governor Guy Debelle was scheduled to speak and he used the opportunity to try and rein the currency in. He said a rising AUD is not welcome as it lessens the benefits of faster global growth for Australia and that Australian interest rates do not have to rise in line with global peers. He added that “no significance” should be read into the fact that the neutral rate was discussed at the July policy meeting. In the minutes it was revealed the bank believes the neutral rate is now around 3.5%. The discussion around the currently perceived neutral rate has no bearing on the current course of monetary policy, and the market may have got a little over excited when analysing that particular part of the minutes. These comments seemed to have helped in keeping something of a lid on the AUD’s gain, at least for now. Of interest this week will be the release of inflation data on Wednesday along with a speech from Governor Low later that same afternoon. We can expect him to try and talk the currency down as well.
New Zealand
Last Tuesday’s soft NZ inflation result only seemed to temporarily limit the New Zealand dollars gains. By late in the week the NZD was surging ahead once again, making across the board gains as the USD came under broad pressure. Strong migration and credit card spending data certainly didn’t hurt the NZD, and neither did Finance Minister Joyce’s comments that hit the wires on Friday. He was quoted as saying he’s unperturbed by New Zealand dollar strength, that it reflects a strong NZ economy, and that NZ firms are coping well with the currency at current levels. He added consumers are benefiting from low levels of imported inflation. The NZD finished the week on a very solid footing trading to a ten month high against the USD and recovering sharply against the AUD after losing significant ground earlier in the week. The economic calendar is very quiet this week with just the Trade Balance on Wednesday of any note.
United States
The United States dollar lost further ground last week still suffering the hangover from soft retail sales and inflation data earlier in the month. The currency was also weighed on by turmoil in Washington and the very real prospect that the Trump administration may struggle to pass any of its key legislation. Multiple failures to repeal and replace, or even just repeal, Obama care, despite a republican majority, raises questions about a whole host of other issues. Tax reform, the budget, and the debt ceiling all loom large as hurdles in the not too distant future. The debt ceiling is going to need to be sorted by late September or early October to avoid what would no doubt be a devastating government shut down for the Trump administration. Trump needs a policy win, and he needs one soon, to get the entire administration, and the USD, back on track. A credible tax reform package would certainly turn the USD around, but that could be a long way off. Other things that could see the USD stage a significant recovery would include inflation and wages finally breaking higher, or perhaps rising capex growth along with significant infrastructure spending. None of these things seem likely in the very near term, but all the market really needs to begin buying USD’s again, is a renewed belief in Trumps ability to enact his agenda. Until he gets a policy win under his belt, the USD is likely to continue to struggle. The main focus this week will be on the FOMC meeting, although it’s unlikely to deliver any major surprises.
United Kingdom
The UK Pound has struggled over the past week, weighed on by soft inflation data and Brexit concerns. Even better than forecast retails sales data late last week failed to turn the GBP around. The IMF just released their latest GDP forecasts and they have revised down UK growth for 2017 by 0.3% to 1.7%. They’ve left their 2018 forecast at 1.5%. Brexit concerns do seem now to be impacting consumers with the monthly Household Finance Index survey falling to its lowest level since July 2014. The survey showed household willingness to make big purchases fell to its lowest level in 4 years, reflecting an ongoing squeeze on incomes as inflation rises faster than wages. There are signs that this squeeze has started to spill over to consumer spending patterns. This week’s main focus will be on Preliminary GDP data set for release on Wednesday. The market is looking for a quarterly figure of 0.3%, up from the 0.2% prior.
Europe
The Euro had a positive week last week supported by expectation that the central bank will, in the not too distant future, be forced to scale back the ultra-easy monetary policy settings they currently have in place. ECB president Draghi tried hard to water down those expectations when he spoke in the wake of the bank’s latest policy meeting, but the market wasn’t buying it. The Euro area economy is on the mend, albeit slowly. Overnight we have seen Manufacturing and Service sector PMI’s from both France and Germany with most of the data seeing small declines from the prior readings. The data has helped to take a little heat out of the EUR, but the PMI’s are still at healthy levels and they don’t materially impact the current positive economic outlook. The EUR may have just come a little too far too fast some consolidation, or even a corrective pullback, seems likely over the course of this week.
Japan
Last week’s Bank of Japan Monetary Policy Statement was only notable for the moving target that is the 2% inflation goal. The bank once again delayed the date they expect to achieve the target, with them now saying it will take until 2019. This week should prove interesting with a raft of data out on Friday. Household spending, unemployment, and retail sales data are all set for release along with the latest reading on inflation.
Canada
The Canadian dollar had a mostly positive week last week, although some heat did come out of it on Friday in the wake of soft retail sales data. All in all though, the earlier hawkish interest rate hike by the Bank of Canada is still broadly supporting the CAD. Friday’s data saw core retail sales come in at -0.1% vs a forecast of flat, while inflation came in as expected at -0.1%. Last night saw Wholesale Trade Sales data that came in at 0.9% vs 0.5% expected. This stronger than forecast release saw the CAD back on the front foot making gains again. Later this week we have monthly GDP data to draw focus, although if forecasts are correct it shouldn’t negatively impact the CAD.
Major Announcements
• US Building Permits 1.25m vs 1.20 expected
• Australian Employment Change 14.0k vs 14.4k expected
• Australian Unemployment Rate 5.6% as expected
• BOJ Leaves interest rates unchanged
• UK Retail Sales 0.6% vs 0.4% expected
• ECB Leave interest rates unchanged
• Canadian CPI -0.1% as expected
• Canadian Core Retails Sales -0.1% vs 0.0% expected