The WorldFirst Team take a look at the key trends of September and consider the many diverse events set to shape global currency markets through October.
AUD – Roughing it
Month in Review
The AUD had a rough month in September, falling to some of the lowest levels in recent years – USD 0.7087 – the last time the AUD has seen that level was back in February 2016.
Continuous external pressure relating to President Trump’s trade war with China was the key issue for September. Trade tariffs coming into effect on Chinese businesses increased the pressure on both parties.
At the end of the month, there was a slight dip in PMI figures for China, coming in at 50.8, 0.4 points lower than expectations. Investors would have been more concerned if the figure fell below 50, though Australia’s heavy links with the Chinese manufacturing sector via our oil, copper and other commodities is always an underlying indicator for the future of the AUD.
Furthermore, reactionary statements and cancelled meetings between the two countries, further increased risk sentiment for investors. President Trump clearly was not going to back down from this tariff war and from the looks of it, neither will China. Effectively this will all fall back onto the consumer with rising prices.
There were some slight jumps after mid-September to increase the AUD back above the USD 0.72 level. This came down to some key economic data that continued to strengthen the Australian dollar. Additionally, central banks pointed towards the economy benefiting from elevated commodity prices.
It will be a slow start entering October, with China celebrating their Golden Week from the 1st to the 7th of the month. The key issue will be how the events unfold around the trade war, which is something investors should be closely monitoring. China is an economic powerhouse ($14 trillion strong), and they have the ammunition to play with the Trump administration. Potentially, China could simply look for other countries to do business with.
Most investors are focusing on the short-term effects, with tax on the end consumer being a key issue.
However, long-term results will mean established companies wanting to continue business, will face ongoing pressures from tariffs. As Australia is linked to the development and economy of China, it will clearly be impacted as much as any other nation for the duration of the trade war.
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USD – Shrugs off trade tensions
Month in review
The US Dollar was once again dominated by geo-political tensions and trade tariffs with China. The US dollar index (USDX) dipped below 94 for the first time in three months before rebounding to 95.28. All G-10 currencies, with the exception of the Swiss Franc and Japanese Yen gained against the USD.
The best performers were the Norwegian & Swedish Krona up 2.45% & 2.34% respectively. The worst performer was the Japanese Yen, which fell 2.31% against the USD.
A decline in risk aversion and market volatility drove this reversal of safe haven flows and USD retracement. The USD also started to shrug off trade war news, as Trump announced $200bn worth of Chinese imports to be tariffed effective September 24. The tariff was levied at 10% increasing to 25% from next year.
The main macro event for the month was The Fed policy meeting in which they increased policy rates as expected and iterated their stance to increase rates gradually leaving out the key word “accommodative” in their stance.
On the data front, the US employment report should continue to show a strong job market, and markets expect nonfarm payrolls to rise 200k. Consensuses unemployment rate to decline 0.1pp, to 3.8%; average weekly hours to hold steady at 34.5; and average hourly earnings to rise 0.2% m/m. Expectations are for the ISM manufacturing index to cool slightly, to 60.5 and the non-manufacturing ISM to hold steady at 58.5 in August. Forecast is that factory orders moved up 2.5% in August and expect the total trade deficit to have widened to 53.0bn in August.
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EUR – Italy joins the list of threats to the EU
Month in Review
Amidst the Brexit tug of war between Theresa May and the EU, the euro managed to strengthen against the Aussie to its best levels since February 2016. Most notably after the European Central Bank expressed satisfaction with the trajectory of Eurozone inflation, leading traders to believe that a September 2019 interest rate rise is likely. For the time being in Frankfurt, the ECB decided to keep its benchmark interest rates unchanged which was widely expected, however during the press conference, President Mario Draghi reaffirmed his confidence in the economic state of the euro zone.
For market investors, these levels were short-lived as the Brexit situation once again reared its ugly head. The EU said it would simply not reconsider aspects of the Brexit agreement that the U.K. had already agreed upon. The prospect of a ‘no deal’ remains alive and well, following a clear souring in relations between the U.K. and Europe, something that could keep the euro’s gains in check going forward. European Council, President Donald Tusk, said the E.E. leaders have agreed May’s Chequers plan for Brexit “will not work” because “it risks undermining the single market.”
Just as the single currency had strengthened to two year highs, this was short lived as Italy’s deficit-boosting budget plan could wreck its economy. The hard-right Northern League, headed by Matteo Salvini, said it would slash taxes whilst the anti-establishment Five Star Movement, led by Luigi Di Maio offered income guaranteed for the unemployed and poor.
The two parties ended up forming a coalition government and ignoring Italy’s public debt of almost 132% of GDP, promised a spending spree.
Doing just that whilst defying Brussels, the government has targeted the budget deficit at 2.4% of GDP for the next three years. This news will leave financial markets nervous as its spending plans will boost Italy’s debt, which is already the highest in the euro zone after Greece’s and might well weaken the euro in the months ahead.
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GBP – Divorce date nears
Month in Review
As we get to the business end of the table now, that ill-gutted feeling becomes more and more a reality – ‘did we make the right decision?’ must be on every UK MP’s mind.
Has Prime Minister, Theresa May, who some political analysts feel was handed a poisoned challis from David Cameron, got what it takes to secure a future for the UK that will be beneficial for all?
Well, on paper at present, it seems not.
As the UK draws closer and closer to the divorce date, it seems key topics – such as the Irish-border clearly remain unsolved. The expression ‘treading on eggshells’ couldn’t be more apparent in this scenario. The last thing Theresa May wants to do is awaken troubles that have been put to bed for some time now. A more stringent physical or economic border would be disastrous for both the United Kingdom and the Republic Ireland. So, what positives can we take from the last gathering? Well, not a lot to be frank.
In my eyes, the EU appears to be far more willing to negotiate openly for a soft Brexit, as opposed to the hard stance approach made by the Tories. Europe has indicated that there must be a single market which includes the United Kingdom. What that will look like is still to be decided. The next key dates on the Brexit front are the 14th to the 16th October, as the European Commission delegates meet on the current proposition by UK policy makers. A positive outcome here could see further support pile in for the pound. On the other hand, no result could be punishing for the pound.
On the data front, it’s been another relatively positive month for the UK. Manufacturing figures have just about kept their head above water, coming in above the expansion levels. Nothing to swing from the ceiling about, but certainly moving in the right direction. Construction figures missed estimates for the month, but again, showed growth above 50. On the labour front, average earnings showed an uptick surprise for the month, with growth of 2.6% for the three-month moving average. This will be of relief to the Bank of England, as inflation continues to spiral upwards, currently sitting at 2.7%, far above the BoE’s 2% yearly average.
Unemployment remains low at 4%, however, we did see an uptick in claimant count change – an indicator of numbers signing on to claim benefits. This rose 8.7K for last month.
Finally, on monetary policy, the BoE unanimously voted to keep interest rates unchanged at 0.75%. Given previous commentary, we would not expect any movement on this in the short-term outlook.
Looking to the month ahead, politics looks set to dominate the pound once again, with Brexit negotiations trailing towards the lather end of discussion. Last night showed further strengthening in the manufacturing sector, with construction and services due out on Tuesday and Wednesday respectively.
On the 10th October, we get GDP figures released for the month – the previous months reading came in at 0.3%. On 16th October, inflationary figures are due out – in my opinion, this is the highlight of the month and one market participants will pay close attention to. If current trends continue to prevail, this may put the Bank of England into a precarious positon, as they have stated numerous times, they do not wish to raise interest rates in the short to medium term, but may have to mitigate a strong inflationary figure.
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NZD – Further down?
Month in review
Sentiment continues to remain to the downside for the Reserve Bank of New Zealand (RBNZ) as interest rates were kept unchanged once again. The RBNZ has not moved interest rates since November 2016, and the ambiguous tone, stemming from the central bank, supports that this may continue for some time yet.
The official statement gave little confidence to investors, as the tone remained that of a dovish one. The statement made reference to the robust global economic growth and lower New Zealand Dollar helping support demand for Kiwi exports.
On the data side of things, the manufacturing sector saw a positive expansion for the month, with the Purchasing Manager’s Index coming in at 52 flat from a previous 51.2 (any figure above 50 indicates an expansion in the sector). GDP for the quarter showed a positive uptick surprise, doubling the last quarter and beating estimates, coming in at 1%. This remained in line with Central Bank forecasts and was welcome news to market participants. AUD/NZD remained relatively range bound for the month with highs of 1.10 and current monthly lows of 1.0905, skewed to test to the downside.
Looking to the month ahead, markets will turn their attention to inflation figures released on the 16th of October. The RBNZ Governor made various references to this in recent monetary policy statements, putting more emphasis on this release, with some positive uptick here desired. The key highlight for me this month is the ANZ Business Confidence reading. Of late, this has lagged with some negative releases. If we see some positive uptick here, it may be enough to support the Kiwi and break from the current range we are testing.
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