AUD: Turnbull turns-up
Month in Review – The Australian Dollar enjoyed its highest rally in months amidst historic political and economic events, however the weakening resources sector, combined with continued Chinese woes have further pressured the battling AUD. PM Malcolm Turnbull deposed of PM Tony Abbott after a second leadership challenge and the economic response was broadly positive due to Turnbull’s business-history and focus on sector diversification.
The Key Trends – As highlighted in the RBA minutes for September, China’s flailing demand for Australian exports is thought to “stabilise at a lower level than previously expected” and coupled with their tumbling equity markets, the AUD has been progressively pressured with any rallies quickly sold. Economic data has been quite mixed, though improvements to retail, business and consumer confidence (mainly due to Abbott’s removal) have provided some glimmer of hope for the AUD.
What’s Next? RBA Governor Steven’s openly suggested that Yellen & the FOMC should hurry up and raise rates as global economies need some direction in order to curb market volatility. The AUD therefore awaits this direction as it may allow the RBA & investors to get a better understanding of the next move in local interest rates. Overall, there aren’t too many saving graces for the AUD, as resource and equity weakness’ continue to dictate the downward spiral.
Mitchell Titlow
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USD: Fed works on its long game
Month in Review – Long anticipated as the month wore on that the Fed would finally bring the rate hike drought to an end, September only managed to disappoint those wondering if that day (after 5 years) will ever come. In the end only 2 members of the FOMC felt rates should have been raised. Much of the let-off was down to added pressure from China, with the steep sell-off on the Shanghai Composite & falling manufacturing activity signalling warning signs of the overall health of the US’s biggest trading partner.
The Key Trends – Most economic releases have been in the positive zone however not encouraging enough to convince the Fed that the US path to recovery is tracking as strongly as previously anticipated. Labour, growth, spending & housing data have all enjoyed steady gains, however markets have really been eagerly awaiting a strong September read in order to kick the USD into the next bullish stage.
What’s Next? Janet Yellen has stated that labour market conditions are heavily improved & on the path to full employment, with the main issue being that inflation is still falling below the 2% objective, however she expects that target to be hit in the next 2-3 years. In saying that, the Fed have specified that all members are confident a 2015 monetary policy move will occur. The likely scenario being for the Fed to raise rates in December, followed by subsequent rises in early 2016.
Victor Erzikoff
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EUR: On the road to recovery?
Month in Review –The Euro continued its steady rise throughout the month of September as key decision makers finally instilled a bit more clarity and direction to the embattled zone. ECB President Mario Draghi continued to reiterate that the central bank is very willing to go the extra mile and increase the stimulus that it is prepared to pump into the European economy if needed. ‘Flexibility’ continues to be the key theme in their QE cycle, highlighted by Draghi, “the asset purchase program has sufficient inbuilt flexibility. We will adjust its size, composition and duration as appropriate, if more monetary policy impulse should become necessary.” This sentiment has been well received by global investors.
The Key Trends – Due to the poor performance of global commodities and emerging currencies the EUR has been ‘funding’ these cross trades and has strangely emerged as a temporary ‘safe-haven currency’ due to its strong current account surplus. Similar positive moves had been seen in the JPY and CHF.
What’s Next? A lot can be said for the European Central Bank’s handling of the recent economic slips in the Eurozone. The imposition of a zero interest rate policy and asset purchases seem to have helped, in conjunction with the recent competitive devaluation. If commodity & emerging currencies continue to be pressured by resource prices and general ‘China woes’ then the Euro will benefit further.
Ellis Taylor
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GBP: Interest rate hike pushed back
Month in Review – Despite a Bank of England Monetary Policy Committee member speech that has been taken as hawkish by the markets, sterling has been in relatively poor form this month. I would expect that this decline has been driven by the poor current account outlook combining with an increase in analysts delaying their thoughts on when the Bank of England will first hike interest rates; RBS pushed their expectation out to August of next year from February on Monday.
Ben Broadbent’s speech was a positive one for the UK economy in its appraisal of the country’s jobs market. We know that wage growth in the UK has been poor, whilst employment levels have recovered as the majority of jobs that were created during that time were low-paid, zero hours contracts. Broadbent and the BoE believe that this downturn is coming to an end, however, and that the narrowing of slack in the labour market should continue this. If it does, and the Bank of England begins to see wages boosting inflation, then we are in for an interesting policy discussion.
The Key Trends – If the US were seeing similar jobs industry numbers to the UK, then the decision to hike rates may be a lot clearer. Unemployment fell to 5.5% in July against an expectation of a steady 5.6%, while core wages rose at the fastest level for over six years. Herein lies the inflation problem in the UK – global disinflationary pressures are gathering and wage driven inflation is unable to withstand its downward pull.
What’s Next? Sterling rallied on the announcement and continued to drive higher as Carney told the Treasury Select Committee that if growth continues above trend, and wages continue to grow in the context of accelerating inflation, then “the decision comes into much sharper relief and it may be appropriate to begin a withdrawal of stimulus at that point.” That’s a lot of ‘ifs’ for my money and a lot needs to change before rates can move higher.
Joe Donnachie
Phone: + 61 2 8298 4915
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NZD: cream rises back to the top
Month in Review – As universally anticipated, the Reserve Bank cut the official cash rate by a further 25 basis points to 2.75% and lowered its forecast for short term interest rates to imply one more 25 basis point cut later this year. Wheeler in his latest announcement has said further depreciation in the New Zealand Dollar was appropriate, “given the sharpness of the decline in New Zealand’s export commodity prices.”
The Key Trends – Dairy prices shot up 16.5% as measured by the GDT Index in the latest Global Dairy Trade auction. It was the biggest percentage rise in five years, and the third consecutive gain. It’s very good news for farmers and may well lead to an increase in projections of the forecast payout to farmers for this season
What’s Next? It seems that the foreign exchange markets are starting to recognise that the previously dominating negative for the NZ dollar and economy, plummeting dairy commodity prices, have reversed in direction and the future outlook for international whole milk powder (“WMP”) prices is now much more positive. Eyes will be on commodities giant Glencore in the next month as a drastic sell-off saw an eye watering 29% overnight. If this path continues risk aversion patterns could take place and commodity linked currency may suffer.
Raphael Alvos
Phone: + 61 2 8298 4925
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