AUD: the great fall of China
Month in Review – The Australian Dollar enjoyed a fairly stable start to the month, trading in a nice two and half cent range. Unfortunately, this did not last. With the fall of the Chinese Stock Market came the descent of the AUD, as it once again hit six year lows and crept closer to the sixty levels. The big fall came as the Shanghai Composite Index began to steadily decline. While falls in China’s equity market have previously occurred, they can no longer be written off due to their larger impact on risk sentiment in global markets. Further bad news came from additional collapses in the commodity market and a subsequent fall in business confidence.
The Key Trends – Falling demand, rising production and faltering growth in China sent the AUD into levels of despair for importers. From China’s poor stock performance came a collapse in the commodity market, with many hitting their lowest level since 2009. Base or industrial metals were hit the hardest, with copper and aluminium hitting six year lows and iron ore enjoying another rocky ride. The Yuan was also devalued and China cut its interest rates twice. The reason for the Chinese fall has come from a slowdown in trade and exports during the first half of this year. Markets are jittery over China, and as our largest trading partner, this does not bode well for the Aussie Dollar.
What’s Next? The two cards which Australia has left to be dealt before the year is out are the possibility of a U.S. rate hike and whether or not China will manage to stabilise its market. Currently, with so much trepidation prevalent in the market, the chances of a rate hike have been largely voiced down, but not silenced. Jobs strength and sustained economic growth over September will put the possibility of a rate hike high on investors’ radar. For China, it will be key to watch how the devalued Yuan is handled, how stable the Stock Market remains, whether the Chinese property market remains strong off the back of a growing urban population. The final item that needs careful consideration concerns China’s ability to hold unemployment in check should the economic slowdown continue.
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USD: turbulent times for the USD
Month in Review –The final week of August brought to an end one of the most tumultuous periods for US stocks since 2011. The huge fall, sparked by The Shanghai Composite Index plummeting 8.5 percent first thing on the 24th August, caused a global sell off in stocks. The uncertainty around both Chinese & US stock markets, mixed with China’s troubled economy as a whole have led the expected US rate hike to be mulled over once again. The long awaited rise to 0.25 percent by the US Federal reserve now appears to have been put on hold, as although the US economy is demonstrating signs of growth, the inevitable strengthening of the US dollar would have an impact on overseas revenues, namely the aforementioned Chinese market.
The Key Trends –The US economy added more than 200,000 jobs in August and the unemployment rate remained at a seven-year low of 5.3 percent. A 5 2percent probability that the Fed will raise interest rates in September is being priced in by traders, showing the uncertainty around the decision. CPI for July came in at 0.1 percent, and despite CPI having risen by 0.2 percent over the last 12 months, a slowdown was seen in July largely reflected in the biggest drop in air fares in nearly two decades. As stated by the US Fed, they need to feel reasonably confident that inflation is moving back to its 2 percent goal before they will raise interest rates, and the slowing for July, after two previous months of gains dents this slightly.
What’s Next? The first week of September will bring ISM manufacturing, non-farm payrolls & an address from FOMC member Jeffrey Lacker, which should all shed some light on next steps for the US Fed. Lacker’s speech is titled ‘The Case Against Further Delay’, which should provide strong clues as to the approaching monetary policy decision.
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EUR: can Tsipras take Greece back to the Parthenon?
Month in Review –The Euro had its strongest month in recent memory despite a range of difficulties within the Greek government. Alex Tsipras, the leader of the ruling Syriza party, managed to gain agreement to the most recent bailout package of 86 Billion EUR, however created a schism in his own party which has since split and given birth to a rival ‘Anti Bailout’ Popular Unity Party. He then proceeded to resign and call an early snap election on September 20th to shore up power, although at the time of writing the polls put them at only 1.8 percent ahead.
The Key Trends – So why has AUD/EUR fallen by 10.4 percent to its lowest point in the last month, at one point touching a six-year low of 0.6075? The Aussie has been sold-off across the board due to a general global risk aversion and troubles brewing in the Chinese economy. On top of this AUD/EUR is known as a strong ‘carry trade’, where a trader will borrow funds at near 0 percent levels in Euros, then buy AUD and earn a much higher interest rate. The risk of this trade is if the Euro strengthens by a margin greater than the interest differential, the trade will lose out. Thus traders will place ‘short’ positions against the currency pair, which when triggered by a weak Aussie, forces the rate down further.
What’s Next? All eyes will be on the polls leading up to the Greek election on the 20th. Regardless of whether Tsipras can win and verify his mandate, it is clear that continuous re-financings will have a long way to go. Christine Lagarde commented this week that a “form of restructuring rather than outright forgiveness should enable the country to cope.” Germany however, has consistently and completely ruled out a write-down. Something has to change, and whilst the Greek people may have thought that they had spoken when they voted against bailout conditions in the recent referendum, this time they may send Tsipras a much stronger message.
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GBP: following Uncle Sam
Month in Review –The Pound further confirmed that its movement is tied to the US dollar at the end of this month, moving gradually down, though up against the Euro. GBP is certainly tracking the USD’s movements with more directness due to the implicit tie to the Bank of England’s (BoE) planned rate hike to that of the Fed. Many economists continue to push back the timing of the BoE’s hike to spring 2016 because of US stock market jitters.
The Key Trends – GBP has kept its end up against most of its G10 counterparts, and certainly against its friends in emerging markets. While most crosses have been up and down like the proverbial yoyo, GBPUSD has been relatively quiet. The reason is more a dollar story than a sterling story.
While the market is focused on China and headlines that scream that “so many trillions have been wiped off global markets,” they are not focused on the Federal Reserve raising rates in September. Many economists still believe that the BoE will not feel comfortable raising rates until the Federal Reserve has led off, and even then only six months or so afterwards. As a result, GBP and the dollar are locked together; beating the emerging markets into a pulp, but getting hit hard by a newly resurgent Euro.
What’s Next? Given this month’s huge swings, many have moved my expectation of a Fed rate hike from September to December 2015 and a similar rise from the Bank of England from February 2016 to June 2016. I still don’t think that the Fed should wait, but likely will now.
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NZD: glass (of milk) half full
Month in Review – As the old adage goes, ‘when China sneezes we catch a cold’; and this has certainly proven to be the case as the world’s second biggest economy is demonstrating clear signs of an economic slowdown. ‘Commodity-linked’ currencies have been major underperformers after China’s surprise move to lower its currency in an effort to boost its economy.
The Key Trends –The NZD has three main drivers WMP Prices, NZ interest rates and US dollar movements. At the current record low market prices of USD1,500/MT the probability of stability or recovery upwards in the price starts to outweigh the chance of further reductions. Current Forward Futures prices for WMP are USD 2,100. The latest GDT auction saw WMP up 14.8 percent which was the first rise in the last 11 auctions, this could hopefully be a turnaround for the massive slump we have seen in WMP. Money markets are pricing in a 100 percent chance of a rate cut in September – this should be already priced into the current rate. If it transpires that the RBNZ does not decrease the OCR as much as the current pricing, the NZD would start to recover upwards (and vice versa).
What’s Next? Looking forward to the next global dairy trade auctions (1st & 15th Sept) will be a signal as to whether or not we can call the recent lows the “bottom”. The RBNZ is due to speak on the second Wednesday of September, signalling current economic conditions for their OCR decision. This is an important announcement as it gives direction as to where the RBNZ sees the economy heading. Huge focus will also be applied to the widely anticipated September rate decision. The current NZD/USD has already priced in the 0.25 percent hike, so if the Fed decides not to raise the rates then we may well see the Kiwi gain some ground
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