Only two weeks on from Donald Trump’s inauguration and the markets are reacting tumultuously to his plethora of executive orders and mandates. With further turmoil on the cards in the shape of a looming Brexit and numerous interest rate decisions, World First takes a look at the key trends of January 2017 and a glance ahead to the events shaping global currency markets in February.
AUD: Direction Trumped by the 45th US President
Month in review
As the new year kicked off, the Australian dollar benefited from Chinese data with small and medium size manufacturing firms in China improving at the fastest pace in four years during the last month of 2016. Throughout the initial and middle stages of January, Iron Ore also helped boost the Australian dollar whereby a continuous bullish sentiment from China helped push the price higher.
Throughout the month, in the lead up to Trump’s inauguration on the 20th of January, the markets treaded water as emerging themes of what a Trump presidency will hold for the markets, led to the Australian dollar trading moderately higher against the US dollar. The large jump for the AUD, however, came in the immediate aftermath of Trump’s first press conference since winning the November election. Risk aversion, particularly in relation to the confirmation of a ‘Hard Brexit,’ did manage to keep the pressure on the Australian dollar against the majority of its peers.
The Key Trends
Iron ore has enjoyed a terrific start to the year, climbing to a two year high. Following a massive rally in Chinese futures, the price jumped by 3.9% to $83.65 a tonne. This is the highest the price has been since October 14th, 2014.
Throughout 2016 iron ore was a key factor that allowed the Australian dollar to remain persistently buoyant in the face of US dollar strength. Having said this, the US dollar continues to strengthen and with renewed geopolitical fears hitting the market, the Aussie is being held in check. Trump was (unsurprisingly) the main theme of the month for the Australian dollar and highlights his potential influence on it. During Trump’s press conference in the early stages of January, he failed to address tax reforms or an expansionary fiscal policy, which had widely been expected. As a result, the US dollar, US stocks and US dollar index all weakened, which saw the Aussie reach a near one month high against it. Later in the month and outside of fresh hard Brexit fears, Trump’s somewhat negative comments on firstly, the strength of the US dollar versus China’s and secondly, on the One China policy took a toll on risk assets, like the Australian dollar. It thus spent the latter days of January, trading in a steady range, awaiting Trump’s next ‘well thought out’ idea.
In determining the immediate direction for the Australian dollar, one will need to understand what Trump is going to say and do. His plethora of executive orders on immigration and other policies have had a largely negative impact on the Australian dollar thus far. Additionally, if he continues down a path which hinders Chinese-American trade progress, the Australian dollar is likely to be hurt further. Another key factor that will of course influence the Aussie is the Federal Reserve. The Fed’s minutes from their December meeting erred on the side of caution. In justifying the rate hike Fed Chair Yellen commented that “my colleagues and I are recognising the considerable progress the economy has made towards our dual objectives of maximum employment and price stability.” The overarching theme of the minutes noted that they will continue to monitor the economy and judge the raising of rates on the basis of their goals and keep it in line with Trump’s own fiscal policies. Therefore, it will be important to watch both the Fed and Trump closely in February in order to determine what direction the Australian Dollar may take for coming months.
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Connect with Alex Cook on LinkedIn
USD: A brave new world
Month in review
January 2017 will be remembered for the swearing in of one of the most polarising US presidents in recent history. The US dollar started the year off with a bang following on from 2016’s dramatic conclusion, with optimism about Trumps fiscal policy plans and expectations of further interest rate rises from the Federal Reserve. However, as concrete economic policies failed to materialise, the USD sold off from its 14 year highs. On the economic data front, inflation expectations have made a comeback as energy prices shift from being a drag (due to past declines) to more of a supporting factor for inflation.
The Key Trends
The new administration’s policy agenda will continue to dominate the direction of not just the USD, but global markets in general. Whether we have a US government that delivers on tax cuts, regulatory reform and economic growth, or a draconian protectionist agenda is yet to be seen, and until then we expect further volatility. Economic data releases continue to hit the mark revealing a US economy at close to full employment, with the advance estimate of Q4 GDP revealing that the US economy grew at an annualised rate of 1.9% and unemployment at close to 10 year lows.
This week we have the FOMC meeting, and although markets are expecting no policy shift this time around, their views on the inflation outlook and signalling on future tightening will be watched closely. Although the Fed is in a wait-and-see mode regarding fiscal stimulus, there was a notably hawkish tone at its December meeting. Recent messaging indicates that the Fed believes the economy is at full employment. On the policy front the next scheduled speech is February 28 when Trump will address a joint session of Congress. In the meantime, it is expected that the @POTUS twitter handle will likely keep the USD and markets on its toes.
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Connect with Harry Balasuriya on LinkedIn
GBP: May to step up, but will the pound step down?
Month in Review
On the topic of Brexit, UK papers took a tone of how the UK can succeed under a hard Brexit scenario and let the Supreme Court ruling on the ability of the government to use its Royal Prerogative to trigger Article 50 be damned?
The emphasis on ‘America First’ was also particularly striking given the assertion that the UK was at the front of the queue for a trade deal with a Trump-led America. According to the new President, America is at the front of the queue and despite the expectation that a trade deal can be done quickly, does Britain want to be the first country on which Trump’s negotiating tactics are used? Quick trade deals normally turn out to be bad trade deals for the weaker partner.
Indeed, such is the scale and size of the task that needs to be undertaken for a trade deal between the UK and US that you would have to quadruple the amount of trade the UK does with the US to get close to the trade it currently holds with Germany, Netherlands, France, Belgium, Ireland, Spain, Italy, Sweden, Poland and the Czech Republic let alone the other members of the EU-27.
The Key Trends
Many political commentators believed that government would look to move quickly in introducing the Brexit bill with some suggesting that a short, sharp bill to invoke Article 50 could be brought forward.
January’s retail sales numbers showed a definitive collapse in retail spending in December but the quarter was still positive thanks to a whopping amount of spending in October. The preliminary reading of GDP tends to focus on the first 6 weeks of the quarter more than the second and therefore while we expect GDP to average 0.5% on the quarter as a whole, we think that may only be seen following a number as high as 0.7% in the preliminary reading.
The process of Britain leaving the European Union cleared a significant obstacle on Wednesday when members of the UK parliament voted in favour of allowing the government to begin divorce talks.
Members of the House of Commons voted by 498 to 114 to advance the bill that would give Prime Minister Theresa May the authority to invoke Article 50 of the Lisbon Treaty – the formal process of leaving the EU.
The size of majority in favour of triggering Article 50 on Wednesday means the bill is almost certain to become law. The House of Lords, the UK’s upper house, will also need to approve the Article 50 legislation before it can become law.
While we believe that inflation will drive higher in the coming months and overtake its 2% target (probably by the end of the quarter), the chances of a hike in interest rates remains poor, especially given the expansion of consumer credit and increases in mortgage spending in the past year. If the Bank of England wants to bring forward any decline in economic output, hiking the cost of the average household’s debt pile would be a great way to start.
Until the announcement, we expect sterling to maintain its recent profile of support around current levels with risks to the downside from further Brexit negotiation revelations and any amendments that could be bolted on to the Article 50 bill due by the end of next month.
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Connect with Joe Donnachie on LinkedIn
EUR: ECB tapering back in focus
Month in Review
The EUR/USD kicked off 2017 with its first positive month since August, up 1.75%. As was the case in December, the USD was the main driver of the currency pair, with the greenback giving back some of the post-election gains seen over the last couple of months. The Italian banking crisis has somewhat drifted into the background without much notice taken by markets. The Italian government will likely inject 6.6 billion euros into troubled bank Monte dei Paschi, taking a 70% stake. The bank needs to plug a capital shortfall of 8.8 billion euros and is set to be nationalised, after it failed to raise money from private investors last month. French and Italian election campaigns have added to rise of anti-euro politics seen across the Eurozone of late. It’s hard to believe that data earlier in the month saw consumer and business confidence reach its highest level since 2011.
The Key Trends
Looking to the other majors, it was relatively poor news for the European single currency. There were some significant declines against the AUD (-3%) and NZD (-3.2%), along with smaller negative moves against the CAD (-0.75%) and JPY (-1%). The AUD briefly touched above EUR 0.71 for only the second time since 2015, but failed to hold onto these gains. On the technical front the AUDEUR has run into some congestion around 0.7060-0.7080, with the 71 figure looking like forming a key resistance level.
Looking forward, it is likely we will see the debate around the ECB’s monetary policy come into focus, especially in light of rising German inflation levels. The recent reading of 1.9% annual inflation shows that the ultra-loose monetary policy is having the desired effect, but now ECB President Mario Draghi will have to balance calls from the Bundesbank to control inflation while continuing to provide economic stimulus to the southern areas of Europe with stuttering growth and higher unemployment. While the policy is expected to remain unchanged over the course of 2017, any talk of tapering would see the EUR boosted.
Phone: + 61 2 8298 6972
Connect with Matthew Cudmore on LinkedIn
NZD: NZD strong as markets remain uncertain
Month in Review
The NZD/USD exchange rate traded to a low of 0.6870 on Christmas Eve 2016; however due to a variety of factors the downward momentum has not continued, and over this last week the Kiwi has rebounded upwards to 0.7270. Global currency shifts, in particular a dramatic turnaround in the fortunes of close cousin currency, the Australian dollar, have reversed the Kiwi dollar’s direction and caused significant gains. Historically, the NZ dollar does appreciate in January as thin wholesale FX markets allow the local dairy/meat export industry NZD trade buying of Kiwi dollars to dominate market flows and thus rate direction.
The Key Trends
The Trump victory-inspired US dollar rally that commenced in mid-November has definitely run out of steam as we enter the New Year. US shares and the USD were heavily bought in the weeks following the Trump Presidential win, however the trade had become very crowded by year-end, and what we have seen in recent weeks is traders/investors taking profits and thus becoming sellers of shares and the USD.
The NZD/AUD cross-rate has pulled back to 0.9480 from highs of 0.9650 when the Aussie was at its weakest point. In the short to medium term, the only change that could cause the NZD/AUD cross-rate to fall further to 0.9300/0.9200 would be deteriorating dairy commodity prices, whereas iron ore and copper prices remain stable.
The GDT auctions over the next month will be crucial for the outlook on dairy prices over the remainder of this year. Any hint that the Chinese are reluctant buyers of imported milk powder over coming GDT dairy auctions will see a slide in the WMP price and the Kiwi dollar should follow.
Phone: + 61 2 8298 4925
Connect with Raphael Alvos on LinkedIn
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