AUD: moves down under
Month in Review – Another month and another record low. The Aussie plummeted spectacularly to levels not seen since April 2009. China, who has been on the fringes of the AUD’s descent, impacted the market in a big way in July. In mid-July Shanghai shares fell about 13 percent, and further putting pressure on the AUD was the lowest Chinese manufacturing activity reading since April 2014. Meanwhile, prices for our mining exports plummeted and the prospect of a September rate hike in the U.S. became ever more prevalent. The general fear now appears to be whether the Aussie battler will hold onto its 70 levels should the current perfect storm continue to brew.
The Key Trends – A strong greenback, stalled Chinese growth and falling commodity prices. Three factors which in their entirety sum up why the AUD has fallen. The downward slide in commodity prices gained. We have now surpassed the low that was previously set by the 2008 GFC – a 13 year low. In China, put simply, the share market in saw its biggest decline in one day, as opposed to the last eight years! Officials in China have currently unveiled a range of measures to halt this slump, these include a crackdown on short-selling and a longer 6 month halt on larger shareholders selling stock. In other news, the U.S. economy was boosted by an improved labour market, consumer confidence and retail sales.
What’s Next? The end of July saw a new record low reached in AUDUSD levels. This occurred due to the strong greenback rally off the back of positive GDP figures. While the figure was weaker than estimates, it did support slightly higher inflation. The importance of this is that in conjunction with the strong jobs growth – everything is now in line for US to raise rates. Indeed, while the jawboning remains consistent, the terminology of whether the U.S. will raise rates has now changed from an ‘if’ to a ‘when.’ Going forward, markets will be closely watching the Chinese share market and their growth figures, which will affect the AUD in the short term.
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USD: Fed up?
Month in Review – Overall July has positioned the USD well for a September rate hike, though it did encounter a few hiccups along the way. Some concerns were raised on consumer growth, after July’s CB Consumer Confidence figures came in at their lowest levels since August 2011. However, Yellen has noted she will look to things such as auto sales figures as a major sign of economic growth as this indicates more households have the confidence to purchase big ticket items.
A lot of anticipation surrounded the FOMC statement release for July, however the biggest clue came after the Federal Reserve meeting on the 29th July when the Fed added one word to their previous statements, “some further improvement”. This indicates that only a little more progress in labour market conditions is needed before raising rates & that they are reasonably confident inflation will move toward its 2% objective.
The Key Trends – Highlights from the July PMI Flash Manufacturing report showed that output & new business grew. This is a great result as the strong US dollar in previous months has had a significant effect on export competitiveness and demand, as the cost of goods to overseas customers continues to rise with the USD’s growth.
What’s Next? August should be the month where we see further hints towards a September rate rise. Key indicators toward a rate hike will be CPI and employment figures releases.
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EUR: An end to the Greek drama?
Month in Review – Finally, some encouraging signs for the Eurozone. The Greek tragedy has finally subdued, as Athens committed to the new bailout plan. Of course there are many more hurdles to come, though any decision is a good decision (for volatility anyway)!
Germany has also brightened up the EU, returning to some positive data (namely the recent IFO survey) which indicated that the Eurozone’s largest economy is on track for respectable growth for the balance of 2015.
However, the European Central Bank’s outlook on the Eurozone has surprisingly not changed that much over the past few months (despite the Greek crisis)! The ECB’s main concern is based on falling commodity prices, which are likely to push Eurozone inflation expectations lower.
The Key Trends – July has been a very whippy month, especially given the “No” vote in the landmark Greek referendum and the subsequent market reaction. The EUR was granted some stability until the soaring USD continued to oppress all of its cross-currencies. The ‘Bears’ have been selling any significant rallies in the EUR with gusto, as a new-wave of short sellers are banking on the commodity situation vs. USD strength to allow the tired EUR to break new levels on the downside.
What’s Next? Terms of the Greek bailout must be reached before August 20, with the first tranche of the €95bn bailout to be distributed in the weeks after that. This date also coincides with a repayment of more than €3 billion to the ECB. Despite that and the calming of markets that we have seen in the past week, the spectre of a Grexit still lingers. A survey of economists by Bloomberg saw 71% expecting some form of a Greek exit from the Eurozone economy in 2016.
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GBP: UK economy fights back
Month in Review – Much like their start to the 3rd Ashes test, the UK economy punched ahead strongly in Q2, expanding by 0.7%. Once again, as has been the story throughout the past 5 years or so, it was the services sector and private consumption demand that drove the economy onwards; people are spending money because they feel more secure in their jobs and those jobs are starting to pay more than inflation is taking away.
The environment for manufacturers is less pleasant and despite the government pledges to drive a ‘march of the makers’ and reinvigorate the UK’s manufacturing sector, growth remains hard to come by. A 0.3% contraction can be chalked up to many things, but weakness in Europe and the overt strength of the Pound will not be helping matters.
The Key Trends – GBP soared against the floundering AUD this month, moving from 2.0285 finishing off at 2.1375, representing a punchy 5% rise. Against the USD, levels finished off pretty much where they started at around the 1.56 mark, whereas the Euro saw a high of 1.4411 from a low point of 1.3843.
What’s Next? Obviously in the grand scheme of things, this is positive news and adds further power to the arguments within the Bank of England’s Monetary Policy Committee that a rate rise in the UK cannot be too far away. We predict that a rate hike will come in February 2016.
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NZD: Got milk?
Month in Review – We have seen a substantial fall in the NZ Dollar through July, as the old adage ‘we went up in an escalator and down in an elevator’ held true. The Kiwi tends to underperform in a risk averse environment. With the Greek drama playing out in Europe and uncertainty around the Chinese stock market, the NZD suffered against a negative backdrop, with investors less likely to hold onto their reserves. The RBNZ also cut rates by 25 basis points to 3% in the hope of lifting annual inflation and supporting the clear weakness in commodity prices.
The Key Trends – The GDT (Global Dairy Trade) fell for the ninth month in a row – it is now even lower than during the Global Financial Crisis. A substantial increase in dairy production across the globe and a slowdown in demand from emerging markets has been blamed for the falls.
The RBNZ delivered its second rate cut in a row as expected, but the market reaction was quite surprising in that the NZD rebounded on the news. The dollar had been sold off heavily in recent weeks on anticipation of a cut, so some of the move could be short covering against the news. It’s also possible that some traders may have viewed the statement as perhaps not as dovish as it could have been construed.
What’s Next? How the dairy auctions progress at the start of the new Chinese milk powder buying season in August/September will be closely watched as a key indicator of NZ economic recovery over the next 12 months. The New Zealand economy, much like those of Australia and Canada, has a heavy correlation with its commodity exports, thus this downward pressure on the their main export line will have a direct impact on the strength of the currency.
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