AUD: Hitting on Dovish Fed
Month in Review
As if foretelling the explosive month the AUD was about to enjoy, Australia’s economic growth smashed expectations and had its fastest expansion since the September quarter of 2012. A significant positive for the Australian economy was that business confidence levels held steady. This provided important evidence that Australia’s non-mining recovery strengthened in the early parts of 2016. The AUD’s growth over March was widely the result of a softer USD and a significant change in the rhetoric from the Federal Reserve concerning their interest rates. A notably more dovish tone was heard from Fed Chair Janet Yellen, as she twice reiterated that the Fed was in no rush to raise their interest rates. Commodities also enjoyed a rally with iron ore and crude oil posting positive gains.
Key Trends
The Australian Dollar has enjoyed a nearly 8% climb since the beginning of March. This improvement can mainly be attributed to two surprisingly dovish speeches about interest rates in the United States by Yellen. She reiterated on two separate occasions that the Fed was in no rush to raise interest rates, as they first want to see a sustained increase in inflation. Further wage growth was poor, despite the positive non-farm payrolls and such growth is critical to a sustainable inflationary environment. With little home data helping the AUD higher, the jawboning from the U.S. has been crucial for our local currency, as shown further by the sharp declines also seen over the month where other Fed members worked hard to undo Yellen’s dovish statements. Indeed one Fed member even stated that “you could probably make a case for moving (rates) in April.”
What’s Next?
The higher AUD has caused a bit of a headache for the RBA. The previous weakening Australian dollar trends has in their mind, been essential for improvements in several sectors of the Australian economy, namely tourism and education, and provided further assistance in growth contributors. The general doom and forecasters have spouted off figures of 0.6000 and 0.6500 for AUDUSD, yet there is no chance of this happening if the interest rate differential between Australia and the USA remains where it is.
So, despite the usual suspects of commodities and employment from the United States eroding or supporting the Australian dollar, the key drivers for our currency over April (and 2016) will be whether the Doves or the Hawks have their way in the Federal Reserve.
Alex Cook
Phone: + 61 2 8298 4924
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GBP: God Save the Pound
Month in Review
Sterling is not calling out for a rate increase at the moment, although the support of tighter monetary conditions would aid the pound’s rather fragile backbone. Brexit fears are still the name of the game, with fresh lows seen in GBPEUR and progressive weakness against the dollar and other crosses.
According to the bookies there is now a 36% chance of a vote to ‘exit’ on June 23rd, compared to a 32% chance just 24 hours earlier. All indications are for a tightening of the polls as we get closer to the vote. All of these probabilities support the market belief that should the UK vote to remain, then GBPUSD will likely improve back towards 1.50, but fall towards 1.20 in the event of a vote to Brexit.
The Key Trends
Sterling has fallen against both the USD and the EUR this month – the ‘vote leave camp’ rolled out their pro-business campaign with a signed letter from 250 heads of industry, including former HSBC CEO Michael Geoghegan. It remains to be seen how the public will be influenced by the man who oversaw a 30% decline in HSBC’s share price during his tenure and the next round of polling will be keenly eyed for any sentiment swing towards ‘leave’ after the tragedy in Brussels.
What’s Next?
April has typically been a good month for the pound. Since 2000, April has seen sterling rise against the U.S. dollar 14 of 15 years. Only 2004 saw the pound fall, and of course in both 2010 and 2015, April was subject to a fair amount of political event risk courtesy of general elections. That being said, the level of political risk that the EU referendum poses is on another level and will continue to act as a depressant. We think that there is good case for a push of GBPUSD below 1.40 in the coming weeks.
Joe Donnachie
Phone: + 61 2 8298 4915
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USD: Fed Up
Month in Review
Job figures were the core focus at the beginning of March. Non-Farm payrolls came in at 242K, well above the 190K expected, while unemployment remained unchanged at 4.9%. These positive job releases, combined with overall growth in PMI, led to some speculation of a rate hike in March by the Federal Reserve. By month’s end, Yellen surprised the markets with the dovish tone of her speech at the Economic Club of New York. Taking a page from Draghi’s book, Yellen caused the dollar to plunge after suggesting the Fed will delay hikes indefinitely if the USD was to continue on the course it has been for the last year or so.
The Key Trends
Orders for durable goods fell 2.8% in February following a 4.2% increase in January. Economists saw the big decline in durable goods as evidence that the manufacturing sector remains under pressure. This was attributed once more to the strength of the USD, making imports from the U.S. less desirable than other countries.
What’s Next?
The U.S. Fed have stated that commodity prices will need to stabilise and that the U.S. needs to see stronger inflation growth moving forward to meet their yearly projections. With the Fed highlighting the importance of the gradual pace of hikes and overall caution, it is highly unlikely we will see any monetary policy changes in April.
Victor Erzikoff
Phone: + 61 2 8298 4909
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EUR: A Month to Remember
Month in Review
The ECB cut rates by 10 basis points from -0.3% to -0.4% and lowered the refinancing rate to zero. The surprise came in the piece about QE, where the ECB increased bond purchases by 20 billion Euros a month, to a monthly total of 80 billion Euros, which was more than expected.
The unfortunate Brussels attacks saw investors flee the EUR due to further terror fears, which subsequently increased momentum behind the UK’s bid to exit the EU. Funds then flowed into ‘safe haven’ currencies (notably the JPY & USD) thereafter, however the USD correlation has been traded rigorously given the US FED’s recent rhetoric regarding interest rate movements.
Greece also returned to the spotlight after the IMF and European Union revisited Athens over funding and budget issues.
The Key Trends
Every time (apart from December) we have doubted Draghi’s ability to beat expectations and knock the Euro lower, he has come through. Draghi and the ECB have used the Euro as the preferred transmission mechanism for dealing with its economic issues; lower Euro means rising inflation and rejuvenated exports.
German CPI continues to impress and bolster the volatile EUR as the EUs reliance on Germany grows stronger, which has meant the magnifying glass has returned to PIIGS nations.
What’s Next?
After the rate cut and increase in stimulus package, the entire Eurozone is potentially at the whim of consumer trends – a risky environment that will be significantly impacted by the ‘Brexit’ result in June. April is a relatively quiet month for EU data, though as the most traded pair in foreign exchange (against the currently unpopular USD), markets should expect to witness continued volatile trading sessions.
Ellis Taylor
Phone: + 61 2 8298 4935
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NZD: Spoiled Milk
Month in Review
The NZD has been a laggard of late, confirming that the decision by Governor Wheeler and his team at the Reserve Bank to cut interest rates this month continues to linger. The outcome of the move was to put a lid on NZD strength; great news for Kiwi exporters, and particularly the under-fire dairy sector, which could benefit from any increased demand from international buyers.
The Key Trends
Global dairy prices resumed their destructive downward path at the latest Global Dairy Trade Auction, with the GDT Index falling 2.9%, hitting its lowest point since last August. The latest auction results have simply poured on more trouble for farmers, following Fonterra’s decision last week to cut the forecast milk price paid to farmers to $3.90 per kilogram of milk solids for the current season, from a previous estimate of $4.15. The large volume of milk that was being produced around the world, particularly in Europe, continued to increase pressure on the markets. For any substantial improvement in prices to occur, we first need to see a reduction in milk production.
What’s next?
The RBNZ was projecting a return back to the 1%-3% inflation target band by the first quarter of this year, but this has now been pushed back to Q4, based on the Monetary Policy Statement released by the central bank last week. The RBNZ is in a sticky spot as they fight to combat the low inflation pressures, a red hot housing market and struggling export demand. A lot of economist are predicting at least 3 OCR cuts by August to a record low of 1.5%. All eyes will be on the next RBNZ OCR decision and statement, which is out towards the end of April.
Raphael Alvos
Phone: + 61 2 8298 4925
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