The WorldFirst Team take a look at the key trends of June and consider the many diverse events set to shape global currency markets through July.
USD – Trade wars continued
Month in review
June was another positive month for the USD, despite the geopolitical rumblings of a trade war. The US dollar index (USDX) was up 1.4 percent – despite being marginally down against the EUR, which holds the biggest trade adjusted weight in the index.
The major gains came against the antipodean commodity currencies, which were down 3 percent against the NZD and 2 percent against the AUD. The USDX is now above the previous highs seen last November. The main factors driving the USD higher have been the 50 basis hike this year from the US fed and the US’s threat of a trade war – predominately against their biggest single trading party, China.
The data for the month kicks off with the minutes of the June FOMC meeting and markets looking for the rationale for hiking rates and signalling further steepening of the rate path.
Given the escalation of trade war tensions, the market will be looking for any discussion of those risks. The payroll report consensus is for an increase of 200k, a decline in the unemployment rate to 3.7 percent, and an increase in average hourly earnings to 3.8 percent.
Markets will continue to see if the USD’s run of outperformance, due to the economic divergences with the rest of the world will continue.
On the fiscal side, the market will continue to be driven on the tariffs announcements and tit-for-tat escalation between US and China. Implementation of the first $34bn of China tariffs by July 6th will be the first major date. Clarity on the announced $16bn of intellectual property infringement related tariffs, and additional $200bn tariffs versus China alongside car import tariffs, will also remain an important topic.
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EUR – Hold the rates and boats
Month in review
The euro was given a real kicking in mid-June, by its very own European Central Bank (ECB) President, Mario Draghi, who made it very clear that they would not raise interest rates until (at least) next summer. Euro weakness swiftly followed, despite his announcement that the central bank (if the economic data warrants it) would end its quantitative easing program by the end of the year.
Draghi has made a strong case that he wants the ECB to halt its bond buying program by the end of 2018, putting a close to an extraordinary chapter in a ten-year battle with financial crises and recession.
Draghi said, “We will remain patient in determining the timing of the first rate rise and will take a gradual approach to adjusting policy thereafter.”
German Chancellor, Angela Merkel, has also called the current European immigration crisis as “make or break for the EU”, after a controversial proposal to set up asylum seeker processing centres in North Africa. This reached boiling point, with right-wing governments demanding a harder stance on the number of migrants entering Europe.
A migration plan is in desperate need for euro stability along with Merkel’s tenure, which is being threatened every day this crisis is not resolved.
The main issue for the EU, is the lack of distinction between genuine refugees and migrants looking to move for employment. Italy has since closed its ports to ‘charity boats’, with far right Deputy Prime Minister, Matteo Salvini, taking a hard-line policy to “stop the invasion”.
Salvini, dubbed as a ‘rock star’ of the right-wing has also pledged to deport 500,000 illegal migrants, recently stating at a rally that migrants should “get ready to pack your [their] bags.”
As is now a common theme in currency movements, politics is in the driver’s seat over macro-economic data.
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AUD – Tensions and tariffs
Month in review
The AUD lost against all the majors through June, as escalating US-China trade tensions weighed on the Aussie. With China accounting for close to a quarter of all Australian exports, it remains extremely vulnerable in this space. With the slowdown in the Chinese economy that these tariffs are expected to bring, we can expect a decreased demand for Australian goods – particularly iron ore and coal. Consequently, the AUD fell 2.2 percent against the greenback, 1.19 percent against the sterling, 2.73 percent against the Euro and 1.04 percent against the yen.
The other big development for the AUD through June, came from the RBA monetary policy meeting minutes. Breaking with the position they had been communicating in recent months, the board removed the lines that it was, “more likely that the next move in the cash rate would be up, rather than down”.
This dovish stance from the RBA highlights their diminishing confidence in the economic outlook domestically. A slowdown in employment growth, as well as the maintenance of a 5.5 percent unemployment rate, highlighted spare capacity remained in the labour market and was sighted by the RBA as contributing factors to this outlook.
30-Day Interbank Cash Rate Futures now don’t see a rate hike until the end of 2019. This further weighed on the AUD into the end of the month.
Amongst this environment of trade tensions, coupled with Australia’s late cycle position, a continued lack of inflationary pressures and a neutral/dovish RBA stance, there is little upside for the AUD moving into July. An easing of trade tensions would see a relief rally in the AUD, however, with the Fed expected to proceed with four hikes (overall) this year, the widening interest rate differentials will continue to put pressure on the Aussie.
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NZD – something so strong
Month in review
The NZD is the only G10 currency that AUD gained against over June. The Aussie dollar hit a low of 1.065 against the Kiwi on the 19th of June, before gaining to its current level above 1.09 – nearing the highest point in the last five months. The NZD broke a key support level against the USD and is now at its lowest level since May 2016.
The month started positively for the Aussie Dollar, with slightly better than expected retail sales, 1 percent GDP growth quarter-on-quarter and NZ having a -1.3 percent GDT dairy price, which hurt the strength of their dollar.
Between the 7th and the 19th, we had a 2.25 percent retraction in the Australian dollar against the Kiwi – falling below the average for the last 30, 90 and 365 day averages. This was mainly as a result of softer than expected trade data from China – Australia’s key trading partner.
Helping push the pair down was a drop in new home loans for the 5th straight month from Australia and weak unemployment growth figures. Finally, Governor Lowe spoke about the government’s concern that wages continue to stagnate despite record job growth, and this saw the pair meet its low for the month.
Between the 19th of June and the 2nd of July, the Aussie Dollar gained over 2.5 percent against the Kiwi, rising every day except one. The biggest driver was the RBNZ’s dovish tone in regards to when NZ would see its first interest rate rise. The Futures market shows a net short position in the NZD against the USD, opening up to 1.2 billion dollars, pushing the Kiwi. For speculators, it is now cheaper to short the Kiwi against the USD for the first time over two decades, due to the US raising interest rates. A reduction in dairy prices on the 20th and a 50 percent reduction in credit card spending on the 22nd from NZ, also helped the Aussie gain strength against its trans-Tasman rival.
The trade dispute between the US and China should continue to have an impact on this pair as anything that negatively effects China will pull down the Aussie Dollar. NZD CPI figures on July 18th will give a key indicator on the strength of their economy.
From Australia, retail sales and the RBA’s rate statement will be a key driver – especially if we see any surprises.
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GBP – 269 days and counting
There are 269 days and counting until the United Kingdom pulls the plug on Europe, but has Theresa May and her government given enough time for the movers to come in and clear out?
It seems not.
From the time of our last monthly update, very little has actually developed on the negotiations front. May managed to get her bill through the House of Lords, but only just, and at a cost. Theresa May has been mocked for failing to secure unity within her own cabinet on Brexit, as Tory infighting spilled out into the open ahead of a crunch meeting on Friday. Mr Rees-Mogg, who chairs the European Research Group of pro-Brexit backbench Tories, said she must deliver the Brexit that was promised or risk collapsing the government, ahead of crunch cabinet talks at her Chequers retreat on Friday.
Politics aside, it’s been a mixed month once again for the UK Economy, figures released as late as last night showed some positive signs of healing wounds – this time in the manufacturing sector, showing moderate signs of growth. However, the construction sector continues to drag its heels in the dirt. Figures released last month came in line with expectations at 52.5 (over 50 is an indication of growth) in May’s Purchasing Managers index.
Important to note, we have seen compression in this sector of late, below the 50 mark. The Services sector continues to show positive signs of expansion, beating expectations for the month. If we take a look at the labour market, conditions continue to remain stable with unemployment remaining at 4.2 percent for the month, however, we did see a slight reduction in the average hourly earnings, ticking down to 2.5 percent for the three-month average.
Finally, looking to the big pink elephant in the room, inflation. This continues to be the bane of Mark Carney and his MPC Committee’s existence. A couple of months ago, inflation ticked up to the 3 percent mark. Well above the bank’s 2 percent target rate. Last month, the figure remained unchanged at 2.4 percent year-on-year. It’s tough to call sterling at present and uncertainty continues to hamper the economy, that being the other elephant in the room (Brexit). We have continued to test up towards the 1.80 mark this week, with support piling in on Friday, currently sitting at 1.79 at the time of writing. Politics is clearly dominating the pound at present, and one has to wonder whether this is a good thing? If this Brexit fiasco was over, and the market focused on the macroeconomic data, would the pound be worse off?
Looking to the month ahead, construction PMI figures released tonight should give the market some indication if the sector has recovered in any way from its recent downward trend.
Services PMI figures have been revised down slightly from the previous month’s reading, but if in line with expectations, should signal a resilient services sector of late. Preliminary GDP figures will be the main focus for the month ahead, with growth expected to continue on a modest growth flight path. The BOE will monitor inflation for any signs of reduction in the current over-inflated levels we have become accustomed to. Taking the above into account, it may be somewhat of an uphill battle for sterling this month, not necessarily that it will be down, but politics is sure to play a key part in pricing – something we have become accustomed to of late.
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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.
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