Whilst the Aussie Dollar soared during July, the USD made it six consecutive months of losses – the US Dollar Index falling to levels not seen since June 2016. Ahead of ‘Super Thursday’ at the Bank of England and a range of other important data releases, check out the World First monthly currency update!
AUD: Lift Us Up Where We Belong
Month in Review
The Australian dollar had a bumper July, following a solid June with AUD/USD starting proceedings at 0.7677. By the 5th we had seen the worst of the month with AUD/USD hitting lows of 0.7574, largely due to the RBA’s decision to keep rates on hold at 1.5%, before a combination of emails from Donald Trump Jr, weak US data and strong iron ore prices helped the Aussie soar to 2 year highs peaking at 0.8055.
Emails from Rob Goldstone to Donald Trump Jr emerged, revealing discussions from a Russian lawyer (Natalia Veselnitskaya) to provide information “that would incriminate Hilary (Clinton)… and be very useful to your father”. This of course added more fuel to the fire regarding Trump’s pre-election ties with the Russian Government, as the word ‘impeachment’ echoed across media platforms; however the chance of Donald Trump’s actual impeachment still appear slim to none.
Mid-month Chinese GDP figures beat expectations, rising 7.6% year-over-year in June, well above estimates of a 6.5% increase.
Ending the month we saw a weak Q2 inflation report and CPI q/q missing the forecasted rise of 0.4%, instead coming out at 0.2% – bringing AUD/USD back slightly under the 80c mark. Iron ore made back ground after 4 months of losses, now sitting at $65.74US/t, compared with last month’s price of $57.86US/t, up 11.98%.
July proved to be a solid month for AUD up 3.71% to hit highs that we haven’t seen since May 2015. August will be heavily determined by extent to which iron ore continues to rise, the RBA’s approach to interest rates and essentially whatever it is that the Trump family say, tweet or email next!
Phone: + 61 2 8298 4982
Connect with Daniel Damarra on LinkedIn
USD: Tic Tac Toe, the USD’s Down Six Months in a Row
Month in Review
The US dollar continued its fall in July, making it 6 consecutive losing months; the USDX (US Dollar index) falling to levels not seen since June 2016. It fell against all G10 currencies with the exception of the Swiss franc, with the Norwegian Krone and the Aussie dollar eking out the most gains.
It was a predominately macro driven move when Janet Yellen addressed markets signalling the Fed was unlikely to raise rates for the balance of 2017; prior to this fed funds futures were pricing in one rise, with a possibility of two. Fed fund futures rate implied probabilities fell to below 20% for a hike in November. Minutes of the FOMC meeting in July were released late in the month and signalled that it is ready to start balance sheet normalisation.
US political uncertainty has increased in the past weeks with the stalling of the healthcare reform, the broadening of the Russia investigation and a shake-up of Trump’s legal and communications teams. The uncertainty has weighed on the USD as the administration spends time and resources that could have been used pushing for tax reform. The prospects of a meaningful fiscal boost look slim, as the policy agenda is crowded with budget discussions, debt ceiling and NAFTA renegotiations. With unemployment at 4.2% and a likely positive output gap, financial markets are still showing a pronounced reluctance to price a hiking cycle for the Fed.
Phone: + 61 2 8298 6963
Connect with Harry Balasuriya on LinkedIn
GBP: Brexit Blues
Month in Review
It has been quite the lacklustre month for the GBP, losing ground to most major currencies as the calendar turned into the second half of the year. Inflation figures, PMI and trade data fell short on expectations, however UK retail sales figures increased by +0.6% m/m versus +0.4% expected. Despite UK CBI Industrial Order Expectations missing the mark, UK Manufacturers reported strong output growth in the 3 months to July, with the fastest rate of employee growth in 3 years.
The GBP also experienced a sell-off during the month as the UK began its second round of Brexit negotiations in Brussels. The EU chief negotiator Michel Barnier urged Britain to give more clarity in Brexit talks in relation to the financial settlement and citizens’ rights in Ireland – with the two key points being the common travel area and the Good Friday Agreement. The EU has reportedly threatened a two-month delay to talks after the exit negotiations stalled over the distinct lack of progress on the divorce bill and citizens’ rights. “This week’s experience has quite simply shown we make better progress where our respective positions are clear,” said Barnier.
Looking forward to the month ahead, markets are pricing-in a dovish outcome from the BOE’s ‘Super Thursday’ this week, given that inflation continues to overshoot the central bank’s 2% price target, weighing down on the odds for a rate hike this year.
What will matter for the pound will be whether Governor Carney will make comments on the slowing activity and uncertainties over Brexit, or whether above-target inflation and the cost of low interest rates in the form of emerging credit bubbles is keeping the BoE chief awake at night.
Phone: + 61 2 8298 4966
Connect with Pharida Khiev on LinkedIn
EUR: Continuing the Disconnect
Month in Review
The Euro has continued its impressive surge, finishing the month just off 2-year highs. The rally is a the product of not only continued speculation from traders that the ECB will begin tapering its bond buying program, but also the dovish stance taken by the Federal Reserve. When combined these factors have led the major market participants to price in a reduced interest rate differential between the pair, which has supported the Euro.
Once again we are seeing a disconnect between what is being communicated by the ECB and the resultant market moves. Despite leaving rates on hold and continuing with the dovish tone, the Euro continued its upward move. Even though ECB president Mario Draghi gave no hints as to when tapering would occur, the markets drove the Euro as they continued speculation that the ECB would change its stance shortly. Market expectations are now that the ECB will announce a reduction in the amount of bonds it is willing to buy from 60 to 40 billion Euros in September, with January 2018 expected to be the start of such tapering. All of this notwithstanding Draghi making it clear that the ECB had not yet discussed different scenarios for tapering its quantitative easing program.
Phone: + 61 2 8298 4930
Connect with Tim Macdonald on LinkedIn
NZD: Do We Need a Lower Kiwi?
Month in Review
What a month it has been for the NZD! Despite a relatively neutral month of economic releases for the Kiwi, we saw the NZD rise over 2.5% against the USD for the month – up to a near 2-year high. Support largely came off the back of downward pressures on the USD, and the resultant rally in commodities such as dairy and whole milk powder. A highlight this month domestically was CPI coming out at 0% growth for the quarter. This inflation indicator is key for a central banks decision on monetary policy – and with this level of growth, the market is expecting rates to be on hold for the immediate future.
The back end of the month saw RBNZ Assistant Governor McDermott speak about economic trends and the central banks inflation targeting framework. McDermott implied that the NZD was not overvalued due to positive terms of trade outlook, however he did comment that a lower NZD is needed to promote growth towards other sectors.
The RBNZ have their next meeting on August 10, with the current expectation being that rates will be on hold at their record low of 1.75%. In conjunction with the accompanying RBNZ statement, it would worth monitoring downward pressures on the NZD, especially if it trades past 0.7500 against the USD.
Phone: + 61 2 8298 4927
Connect with Patrick Idquival on LinkedIn