The Australian dollar (AUD) lost ground to the USD in the wake of US employment data on Friday night, but against many of its other peers, the AUD has outperformed. This relative outperformance comes despite last week’s interest rate cut from the Reserve Bank of Australia (RBA) and some disappointing retail sales data. In fact, it’s hard to get too negative on the outlook for the AUD, and we may well see it continue to make gains against many other currencies. A lot of negative factors are already priced into the Australian dollar and are well known. Those include a slowing housing market weighing on the broader economy and the increased global trade tensions. But countering these, we have recently seen the banks regulator confirming easier mortgage rules which should allow home buyers to borrow more. The Morrison government is also going to provide an AU$158 bn tax stimulus which will help the broader economy weather the headwinds of slowing global trade, and iron ore prices continue to trade well above $100 per tonne, hitting a 5-year high last week. This week the economic calendar is pretty light with only second tier releases, but we do have a speech from RBA Assist Gov Debelle on Friday to digest.
There has been little economic data of note released from New Zealand since last Tuesday’s disappointing business confidence numbers. That result helped to cement the outlook for another 0.25% interest rate cut from RBNZ at their next meeting, which is on the 7th August. There isn’t much in the way of data scheduled for release this week either, so the New Zealand dollar (NZD) will remain at the mercy of offshore developments and swings in broader risk sentiment. To that extent, a weekend article in the Hong Kong press suggested Trump and Xi are no closer to a deal than before, despite seemingly agreeing to continue with trade negotiations at the recent G20. Of more interest however is the recent sharp decline in log prices, for exports into China. This is our 3rd largest export product and prices are down some 15% or so putting real pressure on the industry. Smaller operators are already seeing layoffs and it looks like it could be a tough few months for the industry.
The big release of last week came in the form of Non-Farm Employment Change on Friday night. Earlier indicators, such as the ADP employment report, had suggested the risk of a weak number, but the actual outcome was much stronger than anyone expected. Non-Farm Employment increased 224k on the month, up from a prior 72k, and well ahead of the expected 162k. The release prompted the market to quickly reassess its expectations for potential interest rate easings from the US Fed. Many forecasters had been starting to entertain the prospect of a 0.50% cut at the upcoming meeting, but that now looks extremely unlikely. A 0.25% cut is still fully priced into the market however. We do get to hear from Fed Chair Powell this week with a speech set for release on Tuesday night, and then later in the week we have inflation data to digest. President Trump made his feelings clear when he said the Fed doesn’t know what they are doing, and that if they did interest rates would be lower. He may have a point, and there is every chance that employment data is a lagging indicator and the broader economy is not as strong as suggested by this recent release. That being said the USD made across the board gains in the wake of the data and further support may well be seen in the coming days.
Recent data from Europe has been something of a mixed bag, but a couple of releases last week focusing on the vitally important German manufacturing sector, highlighted the fact that in the current global environment it’s hard to get too excited about Europe’s economic prospects. Early last week we saw German Manufacturing PMI fall further into the red printing at 45.0. Then on Friday German Factory Orders printed at -2.2% against an expectation of only -0.1%. Digging into the data suggests it is not just the trade war affecting exports as well. While foreign order are down 9.6% year on year, domestic orders are also significantly weaker, down 7.4% year on year. Whoever takes over from Dragi at the ECB will have their work cut out for them. ECB council member Villeroy was on the wires over the weekend suggesting that no one should doubt the ECB’s determination to act and its capacity to do so if needed. That sounds well and good, but in all reality the ECB finds itself in a very uncomfortable position should the economy require further stimulus. With interest rates already at zero percent, they have limited room to cut, which leaves the only option of restarting quantitative easing, but that comes with its own problems.
The Great British Pound (GBP) struggled in the wake of Friday’s US employment data, trading to the lowest level against the big dollar since January. That data really was the nail in the coffin for the Pound after a week of local economic releases that were universally soft. Manufacturing, construction and service PMI’s all declined to levels that suggest an outright contraction in economic activity may well be near. A weekend piece in the Financial Times highlighted this point, suggesting that a recession looms, starting in the third quarter of this year. The Brexit deadline of October 31 is also drawing near and whoever wins the current leadership contest, most likely Boris Johnson, will have their work cut out for them trying to negotiate anything significantly better than what has already been voted down by the UK parliament numerous times. In this environment it’s hard to see the GBP making any meaningful recovery, at least in the near term.
Japanese household spending data provided a pleasant surprise on Friday coming in +4.0% y/y versus expectations of +1.5%. This sort of data will go a long way to alleviating any fears of a significant slowdown or recession over the coming months. Countering this however was yesterday’s release of Core Machinery Orders, which printed -7.8% vs forecast of -3.6%. This data is seen as a leading indicator of capital expenditure over the next 6 months or so, but it is likely affected by the US-China trade war so some caution is warranted before reading too much into it. The prior number was also pretty strong at +5.2%, so some give back was always likely. Bank of Japan (BOJ) Governor Kuroda was on the wires over the weekend saying the BOJ will keep short and long-term rates at current very low levels for an extended period, at least through to spring 2020.
The Bank of Canada (BOC) hold their interest rate meeting this week on Wednesday night, NZ time. There is a unanimous expectation that the central bank will keep interest rates unchanged at 1.75%. The market is also looking for the BOC to upgrade its GDP forecast for 2019 on the back of recent better than expected data. Friday’s release of Canadian employment provided something of a mixed bag, which only served to reinforce the expectation that the central bank will sit on their hands for now. The headline employment change disappointed coming in at -2.2k vs +9.9k expected, while the unemployment rate ticked up to 5.5% from 5.4%. Countering this however was the hourly wages data which was very strong at +3.6% vs +2.7 expected. That’s a big jump and it really did grab much of the attention, helping the Canadian Dollar to outperform most of its peers, aside from the USD.
Major Announcements last week:
- RBA cuts interest rates to 1.00%
- US ISM Non-Manufacturing PMI 55.1 vs 56.1 expected
- Australian Retail Sales 0.1% vs 0.2% expected
- Canadian Employment Change -2.2k vs 10k expected
- US Non-Farm Employment Change +224k vs +162k expected