AUD: Hanging Out for an Election Result

Month in Review

It is unclear when Britain’s politics, and indeed Australia’s, became more absurd than America’s. However, with the exit from Europe by Britain in the highly publicised Brexit and the Australian election ending without a winner, America’s politics is beginning to look less bizarre than the rest of the worlds. What this spelt for the Australian dollar over June was turbulence and turmoil. The Australian dollar was in a positive mood prior to the referendum, as was the rest of the world. Following the decision, it crashed, trading in a nearly four cent range throughout the day.

The Key Trends

In interest rate news, after Brexit, there was a consensus that the RBA will be cutting rates in August after the inflation data is released on the 27th of July. The justification behind this is again reflective of the global uncertainty caused by Brexit, as the RBA is now expected to provide a notional easing bias as to assure markets, businesses and households that the Australian economy will continue to grow.

The Election

A hung parliament is now the likely outcome of the Federal Election, which will result in the Australian dollar and stocks to fall. This also adds fuel to the gossip that a rate cut could occur in August. The hung election is a terrible outcome for the Australian economy, as rating’s agencies would hold the hung result in a negative light as Scott Morrison’s budget measures would definitely struggle to be approved. What this means is that the pressure is now on the RBA to support the economy, since a fiscal policy cannot.

What’s Next?

No doubt in the short term the Australian dollar will continue to move in volatile patterns as the finality of Brexit separation comes to fruition. Australia’s economy is strong. The reason for this has been our cautious interest rate structure and economic platform based upon free trade agreements. These agreements could now come under pressure, which would place a higher premium on Australia’s risk assets, which would in turn weigh heavily on the Australian dollar. In the short term, our currency could be seen as safe haven, as investors have typically flocked to risk assets after cataclysmic market events.

 

USD: 2016 Rate Hike Chances Down

Month in Review

What was once a much heralded and anticipated rate decision, the June FOMC meeting turned out to be merely procedural in June. The Federal Reserve kept its main rate on hold at 0.25-0.50%, citing near-term risk in the Brexit referendum and a terribly disappointing May US Non-Farm Payrolls report as the key factors in this decision.

The main question now is how quickly does the Fed think it will be able to raise rates next? Having a look at the U.S. Treasury yield curve over the last year indicates that the U.S. economy is moving closer to a recession, reducing almost all potential of substantially higher interest rates in the long-run. Markets are currently pricing in a 51% chance that the Fed will raise rates in Jan 2017, and it’s handy to know that the Fed has never raised rates unless the market has priced in the chance as over 60%, meaning we can likely expect a rate rise beyond this date.

The Key Trends

The GBPUSD fell temporarily to a 31-year low after the currency markets were shocked by the voting to leave the European Union. Over the coming weeks we should see the downside risk extend to the 1.30 area in the near-term, with the BoE expected to inject 250 billion GBP into the markets to provide extra liquidity. This will see the GBP weaken further against the USD.

What’s Next?

June’s US Non-Farm Payroll results will be released on July 8. The markets are hoping for a rebound in June’s figures to rekindle the spark of the US Economy and bring back some chance of a rate hike in 2016.

 

GBP: Brexit Becomes a Reality

Month in Review

The less said about the football the better, however in the past week, England has lost a Prime Minister, Shadow Cabinet, football manager, £100bn off its major stock market and its AAA credit rating. Sterling continued to press to fresh 31 year lows proceeding the political circus in Westminster and the continued uncertainty as to what’s actually going on? Osborne’s reassurance to the markets lasted all of an hour, before the selling restarted with banks taking the majority of the beating.

Banks have been the main focus for a number of reasons; the issues around pass-porting their regulations through the EU, the additional highs costs of setting up new offices in Dublin or Frankfurt, worries over bank funding models in a world that may see further negative interest rate policy from central banks and, for some, the prospects of an additional Scottish referendum as well.

The Key Trends

The usual caveats exist about liquidity, but these moves are concerning and bring back pretty painful memories of 2008. GBPUSD didn’t have this bad a day in the Global Financial Crisis, and the weakness in sterling persisted as the vote was confirmed.

A ‘Leave’ vote has already been incredibly negative for sterling and City and Canary Wharf traders could come out swinging in a bid to take the pound lower, still as the results pervade throughout the UK. Fears over the twin deficits – current account and budget – alongside concerns over a possible recession, interest rate cuts or increased quantitative easing from the Bank of England are all reasons why GBP will be very unloved.

What’s Next?

It is our belief that Q3 and Q4 growth in the UK will be negative – a technical recession. The trickle down from the vote is thus; the vote came at a time when UK data was not running well in any case and the uncertainty and fear is set to exacerbate and amplify this. We believe that the main harbinger of this will be felt in investment with businesses holding off, cancelling and easing back spending decisions on capital projects, R&D and employment.
UK consumers are a hardy bunch, but we will see a period of belt tightening as employment concerns rear their heads, inflation in imported fuel and food categories pinch pay packets and rainy day funds are bolstered.

 

EUR: A Month to Forget

Month in Review

The EU is technically down to 27 members after the recent Brexit referendum and fear has mounted over the possibility that this number could continue to shrink. Italy has already begun preparations for a potential bank bailout of €40m, which raises questions amongst prominent parties in France, Holland and Sweden who will closely monitor the British consequence.

The Key Trends

Focusing on data; June Consumer prices rose for the first time since January, showing that stimulus plans by the ECB have had some positive impact. However, inflation goals may take even longer to achieve because of the Brexit referendum. ECB President Mario Draghi recently told European leaders in Brussels that output could drop 0.5% below forecasts over the next three years and this will weigh on the EUR.

What’s Next?

The EUR rose 9% against the embattled GBP in a historically volatile month, though as ‘domino-effect’ related rhetoric emerges, many investors are expecting to see these gains reversed. All eyes will be on data performance, as the EU requires some favourable results leading in to a new era of highly expected underperformance.

 

NZD: Kiwis Await Impact of Brexit

Month in Review

The Reserve Bank of New Zealand left the Official Cash Rate on hold at 2.25% for June, as most local bank economists had expected, and has repeated its guidance that ‘further policy easing may be required.’ The Reserve Bank’s 90-day bill forecasts suggest the bank is planning at least one more OCR cut to at least 2.0%. Wheeler said that the Kiwi dollar was higher than was appropriate, but he noted that Auckland house prices were very high and that house price inflation there and in other regions was adding to the bank’s concerns about financial stability.

The Key Trends

Even though NZ holds a reasonably high OCR compared to that of surrounded countries, making the country a somewhat attractive currency to hold for investors, kiwi exporters are feeling the pain. The slight increase in the Whole Milk Powder price is being eaten away by the strong dollar value.

What’s Next?

Following Brexit, the nervous global environment is likely to see the New Zealand dollar fall further against the US dollar in the months ahead. What Brexit means for NZ exporters is very difficult to say. Suggestions that the UK will now trade more freely with New Zealand seem overconfident and premature. Existing trade agreements would remain in place for some time while the UK and EU negotiate the exact nature of exit arrangements. So at least in the immediate aftermath of the vote, NZ’s trading relationships with the UK and the EU will be unaffected.

What we do know is that the UK accounts for a much larger share of New Zealand’s tourism sector than it does merchandise exports. The large drop in the UK pound versus the New Zealand dollar, combined with the likelihood of a weaker UK economy, will impact UK tourist arrivals into New Zealand. So for the short-run at least, we regard Brexit as a negative for New Zealand’s external sector.

 

 

 

Disclaimer:

These comments are the views and opinions of the author and should not be construed as advice. You should act using your own information and judgement.

Whilst information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed.

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