AUD: Volatility shakes the Aussie
Month in Review
It was a volatile month for the Australian dollar as rate changes, unemployment and inflation splashed across the headlines. We began the month with the RBA’s rate cut, hardly a surprise considering the poor inflation figure that preceded it. This sent the Australian dollar into a downward spiral that was further compounded by a rebound in the U.S. dollar and significant falls in global commodity prices. The RBA was determined to continue this trend and undermined the AUD further by axing the core inflation forecasts all the way out to June 2018. Across the Pacific, Janet Yellen added to the AUD’s woes by talking up the chance of a rate rise in the coming months.
Amongst the significant deluge of data that came out over May, the only rays of hope came from Australia’s employment figures where the number of full time employed Australians rose to the highest level on record and building permits smashed expectations. Further good news came from crude oil which rose above fifty dollars a barrel for the first time since November last year. None of these figures were influential enough to push the Australian dollar onto a positive course, as inflation was the main talking point over May. The U.S. seems to be edging ever closer to reaching their 2% inflation target, and meanwhile RBA Governor Glenn Stevens importantly discussed his commitment to the RBA’s inflation target of 2-3%. Stevens pointed out that the RBA did not exist to act as a mechanism, designed to cut rates when inflation slipped, rather he was happy driving the AUD in the RBA’s preferred direction.
Many Fed members took to the stage over May, and they, Yellen included, gave multiple indications that the time was almost upon us to raise interest rates. Upon making such a decision, the Fed is looking mainly at a strengthening in the jobs market, improvement in the economy and their inflation target of 2%. Data from the former two are weighing heavily into the positive zone; but it is also important to remember that despite this data, the U.S. is a service/consumption-based economy and it is plausible to believe that despite recent readings, the U.S. economy is stronger than currently believed. Additionally, with the Brexit vote occurring next month, it is valid to assume that the Fed may wait another month before raising rates. Should a Brexit occur, investors will flock to the USD as a safe haven.
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USD: Trumping over its slump
Month in Review
The USD started off May at its lowest level in almost a year, however it only took five days into the month for the dollar to rise out of its slump. This was spurred by the U.S. Fed presidents for Atlanta and San Francisco saying that they would not rule out a June hike and would support it if the economy stayed on track. The FOMC minutes released later in May seemingly backed up these comments, indicating officials are willing to raise rates provided economic data continues a positive upward trend and the slow growth of the first quarter is proven temporary.
The Key Trends
The U.S. will see a lot of data coming through in the short-term to help answer questions around a second quarter pick up. Inflation is around 2% and employment, although below forecasts, is looking better which is lending support. According to federal funds futures contracts, the odds of a June hike have risen to 54% compared to just 4% earlier in May, with the Regional Fed President for Philadelphia, Patrick Harker, saying he expects two to three hikes in 2016. A gauge of the greenback against ten major peers shows an increase of 0.2% through May, with the stronger dollar bringing down commodities with gold and oil prices feeling the brunt.
ADP Employment Change Figures will provide a solid insight into the Fed’s likelihood of hiking rates in June. If the employment figures come out well above expectations, we should see the speculation of a June rate hike engulf the markets.
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GBP: Opinion polls still too close to call
Month in Review
With a month to go until the polls open in the EU referendum, sterling is starting the week quieter than how it ended. Certainly in the case of GBPUSD, the contrasting pushes and pulls of referendum voting and the clear message to markets from the Fed that U.S. rate hikes are around the corner with little preparation has made for interesting watching.
Looking back at Q2, retail sales firmly beat expectations with monthly sales volumes up 1.3%, over double the median analyst expectations. The introduction of the National Living Wage and the end of poor winter weather boosted sentiment on the high street.
The real disappointment of the month was the U.K.’s labour market. Employment could easily be topping out as we head into the U.K.’s referendum on its EU membership. Naturally, as an economy gets closer to full employment, the incremental gains that can be made in the labour market weaken; record highs of employment see to that.
The Key Trends
While wages have grown slightly this month, alongside disappointing CPI numbers, these numbers are relatively meaningless for the consumption landscape in the short-to-medium term. We can say wage pressures are building and we can be content that industries are not losing workers ahead of the referendum, however what was once the crown jewel of U.K. economic data has been shown to be slightly less lustrous than originally thought.
Labour market data is typically slow moving, and viewed through a prism of the referendum, is increasingly difficult to gauge. The certainty that our central scenario of a vote to ‘remain’ should allow some of this fog to lift. It is only then that damage done can be repaired and the time needed can be determined.
After months of speculation, the time has finally come to vote. On June 23 the people will have spoken and we’ll finally know what’s next for the world’s fifth largest economy.
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EUR: Pounded by the pound
Month in Review
The EUR has fallen against the USD by 4.2% during May, which is a 10-week low. This was due to a combination of USD strength and rising political events spearheaded by a possible Brexit and Greece’s return to question.
The chances of a Brexit occurring are looking less likely, which is pressuring the EUR as political and economic cracks are starting to appear. Haven currencies, most notably the USD, have therefore attracted favour given the difference in interest rate and growth projections, combined with a more stable administrative framework.
Greece is back in the spotlight as fear grows around the struggling nations ability to strike an effective debt relief program. The Greeks aren’t going to increase their spending rationale with a VAT rate (value-added tax, similar to Australia’s GST) of 24%, so the government has had to impose further backward and regressive fiscal policies. This has once again weakened business and investor confidence.
The Key Trends
May wasn’t a great month for the EUR, continuously and seemingly easily breaking some key support levels against the majors, particularly against the GBP where it lost 4.6%.
Brexit! June 23 is the biggest event on the Euro calendar. As expectations of a U.K. ‘Leave’ vote are beginning to fade, data from both areas will be watched closely by all comers, but none more so than the U.S. Fed, who have declared their June 14-15th meeting as ‘live’ for a possible rate hike. Even though they are separate events, the Fed have to be mindful of a problematic USD surge that could prove uncontrollable if both the Fed hike & Brexit occurs. This would likely cause investors to rush to the USD as a safe haven currency.
The ECB meet in a week full of significant data releases to discuss the Eurozone’s inflation projections. Many investors believe that the ECB looks likely to increase their inflation and growth projections due to higher oil prices. They are also expected to announce the official start of its corporate debt purchase program (CSPP) on June 2nd.
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NZD: Crying over spilt milk
Month in Review
When the RBNZ surprised the markets in early March with a 0.25% interest rate cut, they did not get the expected lower currency impact they had hoped for, as the USD weakened on global FX markets at the same time and the NZDUSD increased from 0.6600 to above 0.7000.
It might be said that the RBNZ was just plain unlucky with that March timing and that their good intentions to drive the NZ dollar lower to get annual inflation back within the 1% to 3% target band was usurped by Janet Yellen’s overly cautious dovish signalling.
The Key Trends
There was little encouragement for the struggling dairy sector from the latest Global Dairy Trade auction, with prices remaining flat at already low levels. The GDT Index dropped 1.4%, with butter and skim milk powder (SMP) prices weakening. The key whole milk powder (WMP) prices gained overall by 0.7%, however, longer dated contracts were weaker, which sends discouraging signals about future demand for the product.
Fonterra announced an opening forecast milk price of $4.25 per kg/milk solids, very much at the low end of expectations. The shareholders’ council said the forecast was a “tough number” to hear, but represented the reality of where the market was at the moment. When you map this against expected expenditure, many farmers are still struggling to break-even despite cuts in expenditure and other farm management changes to help re-adjust individuals’ and the sectors’ cost base. Until the milk price moves back above $5/kg MS, and higher dividend payments persist, it’s going to be difficult for many farmers to generate profit.
The Reserve Bank has pushed again for the Government and Auckland Council to do more to increase housing supply as it grapples with an Auckland housing market that is heating up again and worsening the outlook for financial stability. The bank will be looking for new measures to curb these housing market conditions. Reserve Bank Governor Wheeler said that he is now considering introducing debt-to-income multiple limits or toughening existing loan-to-value ratio controls, possibly for all of New Zealand.
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