AUD: Always a bear, never a bull
Month in Review – The Australian Dollar started November nervously awaiting the release of Australian Retail sales and Non-Farm Payrolls from the U.S. The latter was of greater interest to the markets as the U.S. enjoyed strong figures, with unemployment decreasing to 5%. Further hawkish remarks from Fed Chair Janet Yellen and strong US non-manufacturing data saw the USD gain momentum. The AUD, as a result, plummeted. Further hindering the Aussie was lacklustre Chinese trade figures and general weakness in commodities. Some relief for the Aussie came from our own October employment report and the subsequent decrease in expectations that the RBA was going to adjust rates. The shocking events in France hindered risks assets strength and as a result the AUD came under pressure and slid lower as November dragged on. The AUD also fell mid-month as a result of broad based USD strength and lower base metals prices. Despite relief from investors uxoriously swooning to the RBA’s words that interest rates will not be adjusted anytime soon, the AUD dipped towards the end of the month as CAPEX figures came in at a record low.
The Key Trends – Jobs and international events were the key trends for the AUD during November. Strong jobs reports from the U.S. sent the USD rapidly higher and consequently pushed the Aussie lower. As well, risk appetite was heavily influenced by the Paris Attacks and also by the unfortunate downing of the Russian passenger plane. The usual suspects of rate cuts in Australia and a rate hike in the United States played a somewhat more subtle role. The talks waxed and waned between the Aussie’s “not now” and the United States’ familiar tone of “not now, but soon.” The Chinese slowdown reared its head once again as poor import and export figures were less impressive than expected and commodities slipped once again, with copper significantly striking a 6 year low.
What’s Next? The international incidents over November caused the markets to turn unexpectedly. This makes for a clouded outlook as we come into the last month of 2015. Fed policy speculation is almost certainly likely to continue as we come closer to the date that most pundits believe rates will be raised. Consumer confidence and US GDP figures are consistently highlighted as the calendar year ends, with market-watchers believing them to be a good indicator as to the strength of their currency in the proceeding year. The first market data to watch however will be US jobs figures which if previous months are any indication of, are key to the strength of the Aussie. No doubt investors and traders will be hoping we can remain above 0.7000 and close out the year on a positive note.
Alex Cook
Phone: + 61 2 8298 4924
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USD: Rate cut on the cards
Month in Review – The USD remained well supported as we closed out November. Unemployment reached 5%, its lowest level since early 2008, coupled with 271,000 new jobs being added, made for the strongest employment data release for the U.S. Dollar this year. U.S. CPI & Core CPI both came in at the expected 0.2%, with headline inflation figures rebounding 0.2% after an 0.2 percent retraction in October. Both of these readings were key factors as to why 4/5 commentators believe a December rate hike is imminent.
The Key Trends – Concerns about the already pricey USD could grow from here, with most investors adding longs ahead of the December Fed meeting. This has made the USD the second most over-valued it has been in 6.5 years & the most overvalued G10 currency next to CHF. The belief circulating through markets is that a rate hike is imminent, however concerns of excessive & unwarranted USD appreciation may lead to the Fed applying the brakes before any further hikes take place.
What’s Next? One more round of employment claims are due out before the Fed meets in December. These figures will need to come in at record lows to have a bearing on the Fed’s impending rate decision.
Victor Erzikoff
Phone: + 61 2 8298 4909
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EUR: Eur-over the edge!
Month in Review – What a horrible month for the poor old Euro! After speeches from President Draghi and Vice-President Constancio, speculation has risen suggesting that the ECB will not only increase the amount of asset purchases over a longer period than initially thought, but also look to decrease interest rates on bank deposits further into negative territory. This is all in an effort to spur further economic growth and development for the embattled zone as other G7 heavyweight currencies (namely GBP & USD) continue as safer investments. These drastic measures aren’t doing a lot for investor and consumer confidence whilst key data conjointly disappoints.
The Key Trends – A lot of selling! The EUR sunk to its lowest level against the USD in 7 months, whilst the AUD rallied an aggressive 5.7% against the EUR throughout the month. It looks like the strategy of selling any EUR rallies shall continue throughout an expected volatile December as global economies react to a probable interest rate hike from Janet Yellen & the Fed.
What’s Next? We will have a clearer idea of the European Central Bank’s plans following its policy meeting late Thursday night. Our chief economist, Jeremy Cook believes that we will see the European Central Bank use a 20bps cut in the deposit rate and additional QE spending of around EUR30bn a month until March 2017, which will greatly dampen any type of recovery story for the Euro.
Ellis Taylor
Phone: + 61 2 8298 4935
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GBP: Living beyond its means
Month in Review – Looking back at November, it is evident that the UK economy is growing, but in a very unhinged way. While the employment rate improved, consumer prices figures like the negative retail sales gave pause to suggest everything is sunny. More importantly however is the third quarter GDP; while the economy is on course to grow 2.4%, the reality of the data has showed that the services sector is surging forward while manufacturing is gradually sliding. Evidence of this is that the UK economy has now advanced at its slowest pace in over two years. The slowdown in China is a big reasons behind this, however, with a worsening external trade deficit and a reliance on low interest rates and rising household borrowing, the outlook for the UK from many economists is in the red.
The Key Trends – On the fact sheet, retail sales were of particular note, coming in well below expectations. BoE Governor Carney further helped the pound lower by noting that the prolonged low interest rate situation would remain that way for some time. While this does leave the door open for a slight change, he reinforced the point that a low interest rate environment would not change. The Pound also fell after the downing of Russia’s jet, as commodity prices slumped in Europe. GDP for the UK was in line with estimates, though it is glaringly obvious that the UK economy has lost momentum in 2015 – manufacturing contracted for the third consecutive quarter and the biggest worry might well be construction, which fell by more than 2 percent.
What’s Next? The key takeaway from the negative future warnings is that the lowered commodity prices should have given the UK economy a chance for solid inflation free growth. While previous inflation free growth was evident, overall growth was poor – this is ultimately negative for the Pound.
In terms of the GBP:AUD pair, theoretically a U.S. interest rate hike will have the effect of boosting the Pound. The headwinds the UK economy is facing from a strong pound and anaemically ashen growth in the Eurozone should see growth unchanged in 2016 and demonstrate why Carney is in no rush to raise interest rates.
Joe Donnachie
Phone: + 61 2 8298 4915
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NZD: Kiwi a hostage to commodity prices
Month in Review – Employment and wage growth weakened more than expected in the September quarter, increasing the chances of a fourth rate cut on December 10, and raising the prospect that record net migration combined with a slowing jobs market could push the unemployment rate up towards 7% next year. Fonterra is seen as unlikely to raise its milk price forecast for the current season beyond the current $4.60 per kilogram, following another disappointing global auction result overnight. The GDT fell 7.4% the second consecutive drop after four strong rises. Expectations are that even lower prices for the commodity are expected for the remainder of the season. The reduction in milk being produced in NZ is being offset by European dairy farmers producing more milk. Until global milk supplies drop further, prices are likely to remain subdued.
The Key Trends – As with all commodity linked currencies, the NZD is a passive price taker and hostage to the wrath of the market and weather gods, which was rammed home again in the Global dairy trade. Local banks have been unanimously forecasting a lower NZD/USD exchange rate to below 0.6000 for many months now due to lower dairy prices, a stronger USD and a weaker NZ economy. Well, the first two forces have occurred and the NZD/USD remains in the mid 0.6000’s. Their prediction seems misguided with regards to the NZ economy as it appears to be on track to record stronger GDP growth in the second half of 2015 when compared to the first half of the year.
What’s Next? Volatility is widely expected to increase as markets digest and react to two crucial monetary policy announcements on the horizon from the Reserve Bank of New Zealand and the U.S. Federal Reserve. December 10 is when the RBNZ will sit down to discuss the OCR, which is sitting at a 50/50 probability for another cut to 2.5%. The US Federal Reserve’s meeting on December 17 appears to be more clear-cut, with the interest rate markets pricing a 75% probability of a 0.25% increase in the Fed Fund’s rate.
Raphael Alvos
Phone: + 61 2 8298 4925
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