AUD: Deflationary figure spurs chances of rate cut
Month in Review
The Australian Dollar was a high-flyer over April. Despite occasionally running into some turbulence, the AUD managed to hit multiple highs, reaching the pinnacle level of 0.7835 during the middle of April; a level not seen since June last year. This was in large a result caused by continuing USD weakness and improving commodity prices. Despite jawboning by Governor Stevens that a higher Australian Dollar could complicate the adjustment underway in the Australian economy, there was no rate cut and the currency traded, for the most part, between a precarious three cent range. The range was largely held as the currency looked for a key market mover to give it some clear direction. That direction came from Australia’s CPI and trade deficit figures, which widened to $3.4 billion (the 5th largest since records began 45 years ago). This figure led to wider speculation that the Australian Dollar would eventually trend lower.
The Key Trends
Commodities gave a strong performance over April, with iron ore imports in China reaching a high that had not been seen in 12 months. An OPEC meeting in Doha, during the middle of April did slightly hinder the AUD, as no agreement could be reached on a potential output freeze. This sent oil prices lower and strengthened the USD, which in turn sent commodity currencies (AUD) lower. The eagerly anticipated Consumer Price Inflation figure did not disappoint in its efforts to direct the Australian Dollar, as it came in well below expectations for the March quarter. This saw the Australian Dollar dive downwards as the CPI figure was the largest quarterly decline since Q4, 2008.
What’s Next?
Needless to say, financial markets were shocked by the weak inflation reading. The chance of a rate cut by the RBA soared within minutes of the CPI release. Before the release of the CPI figure, the chance of a rate cut was deemed highly unlikely, yet now expectations for an interest rate cut have bounced up over 50%. For months, as reiterated by Stevens in April, the RBA have deployed a policy that revolves around a mild easing bias, signifying that rates were likely to move lower instead of higher on a scale that suited the economy’s growth. What now matters however, is whether the RBA believe a rate cut tomorrow is directly necessary to support the domestic economy.
Alex Cook
Phone: + 61 2 8298 4924
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USD: Trump’s odds shorten in election race
Month in Review
The USD saw a strong start to April on the back of encouraging employment figures. The early strengthening of the USD in April was due to Fed members Harker and Kaplan’s hawkish comments, stating that faster rate hikes were likely if inflation rose aggressively. Unfortunately, the CPI release clipped the USD’s wings, pushing the likelihood of a U.S. Fed rate rise back once again. In political news, Donald Trump’s push for the U.S. presidency is gaining some serious steam, with him coming in just behind Hillary Clinton in the current odds. Trump’s hard rhetoric on protectionism would actually cause the USD to strengthen, as this will ironically continue to be seen as a safe haven asset in the global economy. Additionally, his stance on anti-money printing would provide further strength.
The Key Trends
Non-farm’s came in 10K above expectations at 215K. The highlights from the report were an increase in average hourly wages by 0.1%, and labour force participation increasing to levels not seen for a couple of years, coming in at 63%, due to an increase in workers actively looking for employment. Trend wise, employment still remains positive, while CPI has left the markets hanging once again. If in May we see a combination of strengthening employment and aggressive CPI increases, then we may see reignited speculation of a further rate rise.
Another key focus for April was the pressure energy companies are placing on the banking sector. Continuing low energy prices have contributed to bank woes as they start to set aside assets to cover potential loan defaults by energy companies. There is some speculation that the Fed will not raise rates in order to prevent another financials crisis, like we had when housing prices dropped.
What’s Next?
There is a high likelihood that the oil WTI price will continue to rise in May, which will in effect cause further USD weakness. The analysis of current trends reveals there is a far higher likelihood of the price increasing, rather than seeing a reversal in May.
Victor Erzikoff
Phone: + 61 2 8298 4909
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GBP: Pressure building
Month in Review
Like the unseasonably chilly weather that the U.K. is labouring under at the moment, the U.K. economy is sat, huddled under grey skies. The sunlit uplands that consumption in the U.K. used to conjure are masked in fog and is in danger of losing its way. Indeed, what used to be good news is now slipping into neutral territory, whilst data that was poor has only got worse.
The most dazzling of bright spots was once the U.K.’s unemployment market, but survey and anecdotal data has shown that this maybe starting to dull. The weakness in growth, PMIs and general consumer and business sentiment are depressants on the labour market and it’s a fear of ours that the momentum in job creation may be slowing. This will deliver a knock on blow on to wage negotiations in the coming months.
The Key Trends
Pressures are coming from the exact places that you would expect them to. The referendum on U.K. membership of the EU is acting as a depressant on almost all economic indicators.
That is not to say that every single piece of weakening data is as a result of the vote due on June 23rd. British businesses are battling against Chinese and U.S. growth concerns, an increase in currency volatility, contractionary fiscal policy from the conservative government and a continued pall of good news from the Eurozone.
The decision in February to call a referendum for June has brought the poisonous effect on business and consumer confidence forward, and this will likely hang like a dark cloud over the U.K. labour market until the outcome is known.
What’s Next?
Sterling continues to drag itself out of the referendum mire, as more and more people believe that the interjection of President Obama will have had a lasting effect on polling in favour of the ‘Remain’ camp. We are yet to see poll results that will have been influenced by the last week’s Treasury report or the visit of President Obama, but the mood music in currency markets and anecdotally in Westminster has shifted.
In the meantime, the pound is enjoying the recovery while it lasts, though realising that positive movements for the pound now will limit the beneficial snapback in the weeks following a vote to remain. That is unless U.K. data starts to improve drastically.
Joe Donnachie
Phone: + 61 2 8298 4915
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EUR: Brexit looms!
Month in Review
The EUR has enjoyed an uncharacteristically flat month, taking a back-seat to USD movements.
At the last European Central Bank meeting, where rates were again left unchanged, Draghi made it clear that the ECB has done what they need to in response to the current economic situation and the effects of that policy easing are still yet to be felt. If changes need to be made then they will be, but the message was that as much as the ECB will continue to emphasise that they stand ready to do ‘whatever it takes’, time is a very necessary part of that pledge. Markets are becoming sceptical about whether negative interest rates and continuing quantitative easing are working, whilst a host of European analysts have begun to question the ECBs ‘loose’ policy approach.
One central bank that has overtly promoted a ‘loose’ approach is the Swedish Riksbank, who increased quantitative easing spending by an additional SKR45bn in the second half of the year. Whether this plan was also put into place in an explicit bid to weaken the krona remains to be seen. Governor Ingves commented in the post-decision press conference that it is “important that krona doesn’t strengthen too fast.”
The Key Trends
The Brexit has clearly been impacting economic activity across the Eurozone, supported by slightly weaker than expected data releases. The USD’s slide saw the EUR break through levels not seen since October 2015, however oil intervened at different stages, unwinding some significant gains.
Technically, significant resistance levels in EUR were tested, though not broken across a range of crosses, allowing the Bears to re-engage short positions in expectation that the EUR should depreciate on the lead up to Brexit vote.
What’s Next?
Debates over Brexit still continue, though at the time of writing, it seems the status quo should continue. Some pundits are trading the EUR based on the timing of the FOMC’s decision to raise rates in the U.S., though the situation in Europe is considerably worse; namely negative interest rates, massive stimulus packages and deflation. A closer eye on expectedly weaker Euro data through May and June will strengthen the ‘No’ Vote for Britain’s exit from the Eurozone.
Ellis Taylor
Phone: + 61 2 8298 4935
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NZD: Strong NZD squashes commodity gains
Month in Review
Global dairy prices have increased again, with the latest Global Dairy Trade auction seeing an overall 3.8% climb, though virtually all of this was neutralised again by the rapidly rising New Zealand Dollar, which has pushed up through US70c. Importantly, in what was the second consecutive auction of rising prices, (the first time that’s happened this year) the crucial Whole Milk Powder prices gained 7.5%. This will act as encouragement to farmers in the middle of a second consecutive bad season.
The Key Trends
In April we saw The Reserve Bank hold the Official Cash Rate at 2.25%, as broadly expected, but indicated it may be lowered again later this year. In the latest statement from the RBNZ, Governor Wheeler again commented that he would like to see the currency lower. “The exchange rate remains higher than appropriate given New Zealand’s low commodity export prices. A lower New Zealand Dollar is desirable to boost tradable inflation and assist the tradable sector.”
What’s next?
Banks’ lending to the dairy sector will be waiting for the new season’s milk solids payout forecast from Fonterra at the end of May before deciding on their next steps with delinquent borrowers. One potential large negative for the NZ economy and dollar value is media headlines in June regarding widespread bank foreclosures on dairy farm borrowers.
Raphael Alvos
Phone: + 61 2 8298 4925
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