The WorldFirst Team take a look at the key trends of August and consider the many diverse events set to shape global currency markets throughout September.
AUD – kicked while down
Month in Review
Another losing month for the AUD with both international and domestic politics reinforcing and driving this downward trend. With Trump and the China hawks continuing down their path of combating the economic rise of China through a raft of fresh tariffs, the AUD found no support. As Australia’s fortunes are very much tied to the demand coming out of China, any economic policy that stagnates this growth will be priced into the AUD. The farce that is Australian domestic politics also helped to kick the AUD whilst it was down. Another leadership spill late in the month, resulted in further declines as uncertainty surrounding the future direction of economic policy put pressure on the AUD. With treasurer Scott Morrison elected as the new PM, volatility faded given his likely continuity of policy.
Data also weighed on the Aussie. US preliminary GDP came in at a beat (4.2% against an expected 4%), further indicating the strength in the US economy and reinforcing the view that another rate hike out of the Fed is guaranteed next month. On our side, Capex missed at -2.5% against a forecast 0.6% highlighting business investment is cooling as confidence in the domestic economy fades.
With a rate hike out of the Fed for September almost a foregone conclusion and another likely in December, the increasing interest rate differential will continue to put pressure on the AUD. With neither Trump nor Jinping likely to back down, the dollar will remain exposed to China growth concerns and a continued deterioration in sentiment. The correlation with the CNH will likely continue as Australia’s economic fortunes remain tied to Chinese demand. Given all of this we expect the RBA to once again maintain rates for their next decision in October.
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Connect with Tim MacDonald on LinkedIn
USD – An emerging market bloodbath
Month in review
The US dollar continued its bull run during August, with the USDX (US Dollar index) hitting a YTD high at 96.61 and its highest level since May 2017. Against the G10 currencies, there were significant gains against all risk on currencies gaining the most against the AUD (2.78%) & SEK (2.38%). There were moderate losses in the safe havens JPY (-0.2%) & CHF (-2.7%). The biggest gains, however, were in emerging markets where there was a huge unwind in the carry given the higher rates in US treasuries and elevated external financing needs and political instability in EM. The USD was up against the Turkish Lira by 23.23%, the South African Rand by 9.35% and the Brazilian Real by 8.59%.
Stalled conversations with China, brought no positive news on the Sino-American trade war front, and as expected the US imposed a 25% tariff on $16bn of imports from China, following the first batch of tariffs on $34bn of Chinese imports on 6 July. China retaliated immediately by imposing a 25% tariff on $16bn of US imports.
US President Trump and Mexican President Pena Nieto, communicated that both countries have reached a preliminary agreement that solves many remaining open bilateral issues and focus turned towards re-opening negotiations with Canada on broader NAFTA issues.
At the annual gathering of Central Bank leaders in Jackson Hole, US Fed Chairman Powell reiterated the committee’s outlook for a gradual removal of monetary policy. The statement was much of what the Fed has communicated over the past year and the market continues to expect two additional 25 basis point rate hikes this year, one in September and a second in December.
Markets will be looking towards how talks are progressing between the US and EU/Canada and most importantly China. The US trade representative is holding a public consultation period regarding President Trump’s tariffs on an additional $200bn of imports from China this week. While many US firms have registered complaints, tariffs on $200bn could take effect in late September. In that case, China has already announced a retaliation of 5-25% tariffs on another $60bn of US imports. Whilst the Fed is priced in to raise rates this month the market will be looking towards increased speculation that the Fed may slow the pace of rate hikes next year, given the flattening of the US yield curve & trade tensions.
Phone: + 61 2 8298 6963
Connect with Harry Balasuriya on LinkedIn
NZD – What goes up, must come down
Month in review
On August 10, the Australian dollar reached a high of 1.1173 against the New Zealand dollar. This was the strongest that the Aussie has been against the Kiwi since October 2017. August 9 was also the most volatile day for the New Zealand dollar in quite some time. There was a big sell-off in the kiwi, off the back off the New Zealand rate decision and report. The dovish nature of the report included statements such as:
– “The New Zealand economy is experiencing a slowdown, which is expected to be temporary, but could be more prolonged.”
– “The next move in rates is not expected until 2020 and could be up or down.”
The first key piece of data for August, was the ANZ business confidence survey, keeping in mind, zero represents optimism and anything less represents pessimism. The report came in at -44.9, which is the lowest level for this report since 2008. Then, to many peoples’ surprise, the same report came in at -50.3 on August 30.
Since the pair hit its high, momentum has been with the Kiwi and it has ended the month essentially flat from where it opened. The big piece of data that came out providing support to the Kiwi was New Zealand’s retail sales. Quarter on quarter predicted growth was 0.4%, however, it came in at 1.1%. Rarely does this piece of data come in as expected, however, it generally has the power to move markets.
Rate statements, both from Australia and New Zealand, have been moving markets more than any other piece of data for this pair, looking into the months ahead we don’t expect that trend to change. Australia’s cash rate and RBA held rates steady yesterday (September 4) and New Zealand’s official cash rate and statement is on September 27.
On September 30, New Zealand has its GDP print which is also closely watched by the market, and is expected to come in at 0.5%.
Phone: +61 2 8298 4906
Connect with Clay Cook on LinkedIn
GBP – 206 days and counting
Month in review
206 days and counting and it feels we are as close to a result from when the process started in 2016. Last week did show some glimmer of hope off the back of comments from Michael Barnier, the EU’s Chief Negotiator indicating that a deal was possible. He also mentioned that leaving the single market was ‘not an option’.
This piled in support for the pound against all majors in hope that a deal was indeed possible before the March 2019 deadline. However, in typical Brexit fashion, comments over the weekend sparked a war of words between the Britain and the EU with Theresa May insisting that Britain would not bow down to a deal that was not good for Britain. She also reiterated the point that a second referendum was out of the question.
Politics aside, it’s been a relatively positive month for the UK. All three major sectors, construction, manufacturing and services all showed positive signs of growth. Construction in particular showing robust expansion in the sector, positive given the sector was in compression back in April of this year.
GDP growth continues to slag as predicted by the Bank of England in their inflation report. As you can expect, this is an adverse effect of Brexit and one which is sure to continue right throughout the negotiations. On the downside, inflation has ticked up to 2.5% year on year which is well above the Bank of England’s 2% target range. Of a larger concern was the Average Earnings index dropping to 2.4% for the month, below the Bank’s guided 3% target. If the gap between inflation and wage growth continues to expand, this could lead to bigger problems for the Bank of England, with the only plausible action being more interest rate hikes, something the bank does not need in this current market condition.
Looking to the month ahead, focus will turn to the inflation report hearing this week where Mark Carney and his Monetary Policy Committee will testify in front of the Treasury Select Committee, outlining their report on future guidance in the economy. The outlook does not look fantastic, according to the report, but Brexit continues to play a big part in this. PMI figures have been revised to the down side for the month of September, but I am not overly concerned with this, as they continue to show growth (over 50) which is positive. The Bank of England meet on September 13 with no change expected in the current Bank rate of 0.75%.
As always, any commentary from the Bank of England’s Governor post this decision will be closely watched by market participants. On the currency front, surprisingly sterling was the real winner of August. The range for the last couple of months has showed lows of 1.73 and highs of 1.84 against the AUD, showing the true adverse effect Brexit has on the market. As we trade up towards 1.80s, support continues to hold fast, though this might well be short-lived. As we now get into the crucial stages of Brexit negotiations, expect the volume to be turned up from both sides. We know one thing for sure – the UK will be leaving come March 2019, but the main question on everyone’s mind is, on what terms?
Phone: +61 2 8298 4928
Connect with Conor Power on LinkedIn
EUR – Trump claims euro manipulation
Month in review
Political turmoil took centre stage during August, with AUD/EUR rising to its highest point of 0.64 cents, only to finish the month at sub 0.62 cents. Last time the Australian dollar saw these levels was earlier this year in March. Germany being the powerhouse of the EU continued to drive the EU economy, which held up largely the same during the month; however some instability is looming as a result of certain political events including President Trump stating the Euro currency is being manipulated as a way to fight the trade war. In addition to this, many investors are concerned with a no-deal Brexit seemingly becoming more imminent.
Coming into September, any signs of a hard Brexit are slowly fading. Michel Barnier, the EU’s Chief Negotiator stated the EU are “prepared to offer Britain a partnership there never has been with any other third country.”
Furthermore, traders are watching closely on how the European Central Bank policy will react to the Turkish Lira breakdown, as Turkish borrowers owe European lenders $194 billion. This major event has given light to the concern that Turkey’s crisis could potentially spread to other emerging economies and potentially Europe itself. Items that traders will be looking out for during the coming month will be the progress of a no-deal Brexit and how Trump will go about with his ongoing trade tariff discussions with the EU.
Phone: + 61 2 8298 4915
Connect with Joe Donnachie on LinkedIn
These comments are the views and opinions of the author and should not be construed as advice. You should act using your own information and judgement.
Whilst information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed.
All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice.
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