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US Fed officials botch communication

Ian Dobbs

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The Australian Dollar continues to hold comfortably above the 0.7000 level against the USD ahead of an expected 0.25% cut in the US interest rates at next week’s US Federal Reserve meeting. However the Aussie outlook is far from certain, balancing the mixed signals of higher iron ore prices, fluctuating interest-rate differentials, and a global economic slowdown. Although conventional wisdom suggests a weaker global economic outlook ought to translate into a weaker Australian dollar, a major expansion in Australia’s terms of trade, driven by a massive spike in iron ore prices and elevated gold levels as well as expectations for aggressive interest rate cuts from the Fed, has resulted in a short-term upside trend. However labour data will hold the key for the Aussie economy as the RBA referred to this as a “bell-weather” statistic, continuing to weigh-up the potential for further rate cuts to prevent the economy stalling. With another potential RBA rate cut on the horizon at some stage, any AUD move over USD 0.7100 should be seen as a good opportunity to buy USD.

New Zealand

The New Zealand dollar continues to hold at elevated levels against both its US and Australian counterparts, however if global growth continues to slow look for an erosion of this strength especially if the case for more RBNZ action becomes stronger. Tomorrow will bring the trade balance for June, which is expected to show a small $100 mio surplus, with both imports and exports softer than the May period.

United States

The week started off on a quiet note with technology shares leading gains among U.S. stocks after mixed sessions in Europe and Asia as investors looked ahead to a busy week of corporate earnings. Crude oil rose on tensions in the Persian Gulf. With little new news on the Sino/US trade wars, attention shifted to next week’s Federal Reserve meeting, and with the Fed on a communication blackout, President Trump burst into tweet reiterating his opinion that rates are too high, tweeting “with almost no inflation our country is being forced to pay a MUCH higher rate than other countries because of a very misguided Federal Reserve”. (Remembering of course than Fed Chairman, Jerome Powell was Trump’s nominee). After speculation last week that the Fed may cut rates by up to 0.5%, the market has subsequently reduced its expectations down to the more likely 0.25% scenario. A slow front end of the week for US economic stats, with most US data releases coming at the end of the week with manufacturing PMI’s, and durable goods orders printing in the early hours of Friday morning, ahead of the US advance quarterly GDP release late on Friday evening. Look for more geopolitical posturing around  Iran/US tensions around the Straits of Hormuz region.


The main news for the Euro region is on Thursday with the ECB policy decision. This is widely expected to see ECB officials signal their readiness to cut interest rates and potentially broaden stimulus, with some market commentators even picking that there is the chance of an immediate rate cut (we view this as unlikely at this early stage).  ECB President Mario Draghi will hold a briefing afterward. The appointment of Christine Lagarde as the next ECB President is unlikely to impact the ECB’s decision making process but with patchy data from Germany and sluggish growth across the region we continue to anticipate a comprehensive easing soon including a deposit rate cut and further QE.

United Kingdom

The tortuous path to Brexit continues, with the UK Conservative Party leadership race nearly at an end with voting closing earlier this morning. Boris Johnson remains the firm favourite to take Theresa May’s place in Number 10, with his appointment due to be confirmed later this evening. The GBP slipped lower after a forecast showed Brexit may have already pushed the U.K. into a technical recession. Also weighing on both the economic outlook and the GBP are continued concerns around Boris Johnson’s insistence that the UK will leave the EU with or without a Brexit deal. We believe that the outlook for the GBP and UK economy is skewed to the downside, as the fundamental questions around Brexit that dogged PM May’s premiership remain and with several Conservative MP’s intending to resign rather than serve under PM Johnson his Parliamentary majority continues to erode, making an early election ever more likely. Sellers of  GBP should position themselves positions on any rallies.


The main news out of Japan was a sixth straight national election victory in Sunday’s upper house election for Japanese PM Shinzo Abe’s ruling coalition, however falling short of the supermajority required to launch a change in the country’s pacifist constitution. These results were much in line with expectations, creating little effect on stock or bond markets in yesterday’s trading, while the JPY was marginally softer. With geopolitical tensions rising the JPY remains the ”go-to” currency for risk aversion. However, BOJ’s Governor Kuroda reiterated overnight that the central bank will “persistently continue with powerful monetary easing,” toward achieving the desired 2.0% inflation target, so no change of policy likely in the near-term. There are no major releases for Japan this week.


Wholesale sales data out yesterday saw sales drop by the biggest margin since 2016 in May, on declines in motor vehicles, while a measure of sales to inventories rose to the highest in more than two decade. The value of wholesales fell 1.8% on the month Statistics Canada said Monday from Ottawa. This missed the median forecasts for a gain of 0.5%. This disappointing wholesale sales report follows a miss in the retail sales data late last week, and now casts doubt on the Bank of Canada’s expectation for a significant second-quarter growth rebound. The CAD traded lower after the release but continued tensions in the Persian Gulf keeping crude oil at elevated levels should help underpin any further short-term CAD weakness.

Major Announcements last week:

• USD Core Retail Sales 0.4% vs 0.1% expected
• UK CPI 2.0% as expected
• Australian employment change 0.5k vs 9.1k expected
• Australian unemployment rate 5.2% as expected
• UK Retail Sales 1.0% vs -0.3% expected
• Canadian Core Retail Sales -0.3% vs +0.3% expected

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