AUD: 15 minutes of fall
Month in Review – The first month of 2016 was not kind to the Australian Dollar. The main culprit? China and its stock market and further weakening in the Chinese Yuan. Chinese stocks were in a word, obliterated at the start of 2016, falling quickly after a negative PMI report for December. The market tumbled by 7 percent in as little as 15 minutes, at the time the Australian Dollar immediately plunged to a fresh two month low. This momentum continued as January progressed and the Aussie eventually found itself firmly below the 0.70 levels as it was dragged down by concerns relating to the Chinese economy. Further negative news came from the Australian Stock Market, which after holding up against the US market, fell in December 2015, and then proceeded to play catch up through January.
The Key Trends – Stocks around the globe celebrated the New Year under tremendous pressure, as China’s stock market fell sending shockwaves throughout the global economy. The perfect storm as it relates to our local currency was a combination of concerns about the weakening Chinese Yuan and broader economy, fall in Shanghai stocks, risk created by growing tensions between Iran and Saudi Arabia, and the exponential rise in employment in the US non-farm payrolls. As a result, the Aussie dipped into fresh lows and trillions of dollars were wiped off the stock market. Some relief came at the end of January, as oil rose after the Russians came to the belief that the Saudis were willing to discuss production cuts, which in turn finally put pressure on the USD.
What’s Next? With China’s PMI reading at its lowest since 2012, it seems the AUD will have to wait a little bit longer before any respite is delivered. On this, it was the six consecutive month that the PMI came in below 50, indicating six months of contraction. A feature over February will be how markets in Australia handle U.S. data, in conjunction with the Chinese market and its currently fructuous relationship with the Australian economy. Yet the main factor as February opens will be oil. Namely, whether the Saudis will bring OPEC to the discussion table with the Russians in terms of negotiating a temporary production cut to a level that will sustain prices. The importance of this is that there is currently a positive correlation between oil and stocks, and if production is cut, stock could well slide.
Alex Cook
Phone: + 61 2 8298 4924
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USD: two steps forward, one step back
Month in Review – Global equities markets were in turmoil in early January after the Chinese stock exchange froze for the day, just 29 minutes after the opening bell. This spurred a larger global sell off in U.S. equities markets, with almost all metal prices down & oil prices sliding amidst Middle East concerns & oversupply. U.S. GDP showed the economy grew 0.7 percent in the fourth quarter, slightly less than the 0.8 percent expected, and 2.4 percent for 2015. This was similar growth to the year before, but does bring some concerns to the table in terms of potentially spooking markets, as the US and China have both showed slowed growth. The main factors in the slowed growth are unusually mild temperatures, low energy prices and a strong U.S. dollar.
The Key Trends – Morgan Stanley warned early in January that if current conditions of oversupply, record storage levels and a strong U.S. dollar continue, then we could see oil prices as low as $20 a barrel. However with the blizzard that struck the east coast, the U.S. dollar weakened slightly, which saw the oil price recover some lost ground. Most economists would like the oil price to reach $34/barrel before conceding that it has hit its floor.
To close off the month, the U.S. dollar has weakened on the dovish tone of the Fed’s statement. The main take away from their comments is that global risks and concerns, which they brushed off last meeting, are now being acknowledged and watched. This reassured emerging and overseas markets that additional rate hikes in the U.S. may be slower than the Fed originally said. Most currencies have gained ground against the dollar on this news.
What’s Next? Markets will closely watch the crude oil price and non-farm payrolls for January, both of which will have a huge impact on the USD. As always, GDP will be watched closely for any improvements in Q1 2016.
Victor Erzikoff
Phone: + 61 2 8298 4909
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EUR: Draghi’s daring return
Month in Review – The high- (or low) light of the month was the return of ECB President Mario Draghi; and what an entrance! While the ECB left interest rates unchanged as expected in their first meeting of 2016, Draghi said in a statement afterwards that the ECB may need to review and reconsider its monetary policy at their next meeting in March. He cited increased risks as the main driver behind that statement. Investors are still concerned that since inflation isn’t increasing as steadily as the ECB had hoped, they may take more drastic actions.
The Key Trends – We were reminded through January that the ECB will attempt to wrestle back control of the inflation picture in the coming quarters and that a weaker Euro is a welcome by-product. If they can’t effectively control this leading indicator, further stimulus measures will accelerate the EUR lower.
What’s Next? Due to the historical consistency of how quick the ECB are in reacting to negative data with further stimulus measures, investors will pay close attention to key February releases from Germany such as PMI, ZEW, CPI and Business Climate figures. Of course releases from the Fed still loom and will be a major influence on the EURs performance throughout February.
Ellis Taylor
Phone: + 61 2 8298 4935
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GBP: Remaining upbeat
Month in Review – Sterling has continued to slowly rumble higher, mainly against the US dollar following the as expected GDP announcement. As we have said for months now, the level of growth that we are seeing in the UK economy at the moment is entirely in line with the post-crisis normal; of course pre-crisis growth was higher, but that proved to be unsustainable in rather spectacular fashion.
Between now and then there is not too much to get excited about, although GBP is eking out incremental gains on a day by day basis to take itself further away from the multi-month and year lows it has hit against the euro and dollar this year.
The Key Trends – There is a strong argument that GBP could bounce back pretty handily in the coming weeks against the euro. Draghi’s press conference at last week’s European Central Bank meeting was a polite reminder that the ECB will attempt to wrestle back control of the inflation picture in the coming quarters and that a weaker euro is a welcome by product.
Against the dollar, the situation may be slightly more difficult although GBP:USD is oversold according to technical and sentiment indicators, and a quieting of the oil and China situations will help sterling repair.
What’s Next? In the longer-term, the fact that UK growth is so dependent on consumption may become an issue. Manufacturing and construction had negligible impacts on GDP in Q4 with consumption carrying the can. The weaker pound is unlikely to help for now and it would take a far more significant devaluation to do so.
Joe Donnachie
Phone: + 61 2 8298 4915
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NZD: Kiwi flightless in the face of nervous global markets
Month in Review – The Kiwi dollar has depreciated by five cents from the highs of 0.6880 on 30 December 2015 to a low of 0.6380 last Friday night. The reasons for the decrease have been many and varied, however it is has not been due to a stronger US dollar currency value on global foreign exchange markets as many have been expecting. Very uncertain and jittery world share markets since the start of January have been the principal reason for the NZ dollar weakness. Investors and traders have commenced the year in a very risk-adverse mode as they react to heightened global geo-political tensions, massive falls in the oil price and weaker Chinese economic data.
The Key Trends – The RBNZ held the official cash rate at 2.5 percent as expected, though the focus was in comments made about future easing bias for the rest of 2016. Markets are expecting a cut by March. Fonterra has cut its forecast farm gate Milk Price for the 2015/16 season to just $4.15 per kilogram of milk solids, from the previous forecast of $4.60 and concedes that this will be “very tough” for its farmers.
What’s Next? NZRB Governor Wheeler makes his annual scene-setting speech on Wednesday (February 3), arguably one of the most important speeches that the Governor will make – entitled, “The Global Economy, New Zealand’s Economic Outlook, and the Policy Target Agreement”.
Raphael Alvos
Phone: + 61 2 8298 4925
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