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Australia
The Australian Dollar remained under massive pressure at the close of the week. Against its counterparts it has earned the tag of the worst performing currency next to the English Pound falling 3.5% versus the Japanese Yen. Aussie CPI bounced back in the second quarter 2019 to 0.6% after a flat result in quarter one, although underlying inflation remains well below the RBA’s target of 2-3%. We think a further cut of 25 points is likely before the end of the year but not likely at today’s RBA announcement. Anything past 0.75% will depend on upcoming economic data releases with RBA’s Lowe not writing it off. Iron Ore prices have come off from late July prices around 120.00 per ton to trade around 102.00 today, but the biggest threat to the Aussie appears to be the “risk off” sentiment affecting commodity based currencies as new President Trump trade war fears surface again with the US adding new tariffs (10.0%) to 300B worth of Chinese products beginning 1 September. On the positive front Retail Sales published up on expectations Friday after a print of 0.4% from the 0.3% surprising markets. Any small boost to the AUD was overshadowed by Trump news. Crucial consumer sentiment prints tomorrow before unemployment figures Thursday.
New Zealand
The New Zealand Dollar continued its fortnightly quest lower last week dropping across the board against most currencies – over 3.4% versus the Japanese Yen. Uncertainty gripped the kiwi as punters pondered if the Fed would indeed drop rates again in 2019. The RBNZ are widely forecast to cut the cash rate to 1.25% this Wednesday with recent consensus growing that they may cut again later in the year. The ANZ Business Confidence index released at -44.3 much lower than was expected, the lowest since 2008. This data also highlighted possible weaker inflation expectation targets possibly around 2.0% whereas the RBNZ are looking towards a target of 3.0%. Prospects are not yet priced in for a 50 point cut from the current 1.5% but they soon will be. Today’s unemployment rate came in at 3.9% surprising markets after 4.2% was expected for the June quarter. The fall in the unemployment rate reflected a fall of 9,000 in the number of unemployed bringing the total unemployment number down to 109,000 in New Zealand.
United States
Last week was one of the busiest weeks I can remember for the US Dollar. Friday’s unemployment held steady at 3.7% for July falling just shy of the markets expectations of 3.6%. In line was the labour force participation rate which clicked up to 63% from 62.9% which was positive news as it confirms the economy continues to soak up available labour numbers in waiting. Non-Farm Payroll numbers published at the expected 164,000 but the worrying fact is that employment growth seems to have slowed over recent months after accelerating in 2018. President Trump went against his advisers to increase tariffs on China after an awkward exchange by both the US and Chinese parties ended again in stalemate after Trump insisted that the best way to combat non compliance by the Chinese to to increase tariffs regardless. Starting 1 September they will add 10% to an additional 300B worth of Chinese products. We now see a reasonable chance the Chinese won’t come back into the ring until after the 2020 presidential elections. Up until now the tariffs in place have not affected inflation and the US consumer, but the new tariffs could start to impact price sensitivity on a number of Chinese made products sold in the USA. Ultimately this would cause increased cash rates which Trump has made it clear on many occasions he doesn’t want. The Fed have three further remaining meetings for 2019 with a large number of investors now expecting a cut at each. We don’t believe this will eventuate, but markets do seem overly anxious. Overnight equity markets suffered the worst day in some time on wall street, the S %P fell 3.5% while the Nasdaq dropped 4.0%. The downside comes as Trump has accused the Chinese of currency manipulation as a direct retaliation from ongoing increasing trade tariffs to Chinese products by the US.
Europe
As the US Non-Farm Payroll figures failed to spark further US Dollar strength the EUR recovered of the low of 1.1030 to trade back at 1.1130 after trading perilously close to breaking through key support of 1.1000. The US economy added 164,000 people to their workforce, a little down from previous months data while the unemployment rate held firm at 3.7%. China promised to counter Trump’s recent hike on a 10% tariffs to an additional 300B worth of Chinese products but speculators have suggested the ploy may be to wait until 2020 when Trump could lose his presidency. The US president has signed a deal to increase the supply of beef to the EU in attempts to help with the US agricultural industry hurt in the trade war with China. The agreement will lower trade barriers in the EU with quantities of beef to triple to 420M from the current 150M. Trump also jokes about adding a 25% tariff to all Mercedes and BMW’s coming into the US saying “only joking”- the truth is he may end up doing this if he doesn’t get his own way. This week’s economic docket is empty in the eurozone with direction focusing on offshore headlines.
United Kingdom
Boris Johnson has been “on tour” visiting the four nations which make up the UK and Northern Ireland drumming up support personally and for a possible hard Brexit. He has said repeatedly that he would leave the EU on 31 October with our without a deal. His visits to the four pillars were largely met with worried faces. In Scotland he was booed by pro-Scottish independence supporters. In Northern Ireland, which faces the worst outcome of a possible hard border outcome and return to the dark ages, he was met with protesters with signs saying “Brexit means Borders”. In Wales he had no answers for a possible “no deal” outcome and substance regarding any long term back up plans. The Bank of England left rates unchanged in a 9-0 vote with Carney suggesting ordinary people will pay more for food and petrol if a no Brexit deal eventuates given inflationary pressures. While further falls in the Pound would help the economy adjust it would also drive up prices. The Pound has dropped in value over 4% against the US Dollar in the past month, the worst monthly performance since September 2016. This week on the economic docket is June monthly GDP expected to print at 0.1% growth down from May’s 0.3%
Japan
With the recent fresh tariffs imposed on China by US officials late last week we have seen investors enter back into the safe haven JPY. With the combination of trade wars and falling equity and commodity prices this should continue to invite punters to continue buying the JPY putting further pressure on the US Dollar. Japanese Household spending y/y came in at 2.7% from the 1.3% markets were predicting boosting the JPY across the board. With intense downside risks continuing in risk based assets we see the JPY continuing to strengthen.
Canada
Gold prices in Canadian Dollars hit an all time high Friday reaching 1,917.00 per ounce. Investors Friday jumped into gold based on the uncertain economic climate in financial markets with ongoing trade tensions leading the way. Trump announced a 10% tariff to be implemented on the remaining 300B worth of Chinese products. The Canadian Dollar is being affected by volatile commodity prices such as the roller coaster ride that is Crude Oil. Crude recently narrowly avoided travelling into the 40’s and sits currently around 55.00 per barrel after recent sanctions and production increases. This week’s economic data is restricted to employment figures Friday.
Major Announcements last week:
- Australian q/q prints at 0.6% up from 0.5%
- US ADP NFP releases at 156,000 up from 150,000
- US Federal Reserve cut rates to 2.25% from 2.5%
- Bank of England (BoE) leave their benchmark rate unchanged at 0.75%
- Aussie Retail Sales prints at 0.4% up from the expected 0.3%
- US Non Farm Payroll releases bang on expectations of 164,000
- NZ unemploymewnt drops to 3.9% for the June quarter down from the expected 4.3%
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