WorldFirst takes a look at the key trends of September and considers the many diverse events set to shape global currency markets in October.
AUD: Swimming upstream
Month in review
Weak US data was a major contributor to the AUD’s strength this month, even against feeble domestic data. On the 8th September, we missed the mark on retail sales (actual: 0.0%, expected: 0.3%) due the impact of low wages and high household debt taking their toll on Australia’s retailers. The trade surplus also narrowed, posting $460 million, which was a far cry from the expectations of a surplus of $1 billion. Despite this, we saw AUD/USD hit September’s high of 0.8120. This was largely due to President Trump’s deal with the democrats, and 13.33% less than expected for US non-farm payrolls. The RBA, however, has been vocal in subduing the effects of a high exchange rate on its local economy, the major concern is if the AUD continues to strengthen more than the other agri-exporting countries, (Canada, Europe and New Zealand) then Aussie farmers could be in trouble.
At the start of the month, we saw North Korea and US tensions step up a notch, with their 6th and biggest nuclear test yet, reportedly a hydrogen bomb. North Korea has now accused President Trump of declaring war, based off his tweet stating the North Korean leadership would not “be around much longer” if they continued their rhetoric. The US firmly deny declaring war, however North Korea stated they reserve the right to shoot down US bombers – even if they are not in their airspace.
US Federal Reserve Chairwoman, Janet Yellen’s, continued support of another rate increase in 2017, in combination with iron ore continuing its downward slide from $77.77 US/t to $70.94 US/t, has brought AUD/USD back down to this month’s lows of 0.7872. This is still fractionally higher than the lows of August.
Janet Yellen once again cemented expectations for another rate increase in 2017 and we are likely to continue to see investors pricing this in to the AUD/USD. If North Korea and US tensions continue to rise, it would be expected to see a flock to safe haven currencies, (Japanese Yen and Swiss Franc) particularly if either the ‘rocket man’ or the ‘mentally deranged dotard’ continue with the name calling or act on any of the aggressive promises they have already made.
Phone: +61 2 8298 4982
Connect with Daniel Damarra on LinkedIn
USD: What goes up must come down
Month in review
The US dollar had its first positive 4 weeks in 6 months. The USDX (US Dollar Index) bottomed out at 91.35 and closed up 1% on the month – gaining against all currencies, with the exception of the Yen. The US Dollar performed best against the “commodity” currencies, gaining the most against the AUD, CAD & NZD.
The main economic data points for the month:
- US Q3 GDP tracking up one-tenth, to 2.3%, on stronger than expected real spending data for August
- US initial jobless claims rose on storm-induced increase in Florida
- The Fed kept the door open for a December FOMC meeting rate rise
Renewed expectations of a December Fed hike, and the prospect of US tax cuts, have seen a revival of USD strength, however, investors will likely want to see more details on the tax plan and gauge the political viability of the proposals. The outline was similar to previous GOP proposals, yet left all the relevant details to be worked out by Congress. The framework now moves to the committee level, where the specifics should take shape in the coming weeks. After the initial market excitement, the USD will likely take a pause as markets assess the viability of the proposals.
Phone: +61 2 8298 6963
Connect with Harry Balasuriya on LinkedIn
GBP: Pound surges on rate hike expectations
Month in review:
The sterling was one of the top performing currencies in August, making gains against most of the other majors. In particular was the GBP/USD, reaching a post Brexit high above 1.36 – although some of these gains have since retraced coming into month end. The GBP/AUD is up 5% for the month, taking the rate above 1.70 for the first time since early July, while the GBP/EUR has hit a 10-week high, easing any talk of parity between the pair. The catalyst for this out-performance was the monthly inflation report recording its highest level in more than five years, fuelling speculation of interest rate hikes by the ECB in the coming months. Inflation rose to 2.9% in August from a year earlier, more than forecast and above the BoE’s 2% target, as households paid more for fuel and clothing. A speech by Mark Carney did slightly dampen expectations, with the Bank of England Governor stating any coming interest rate rises would be limited and gradual.
As another round of Brexit negotiations are underway at the time of writing, the tone coming out of Brussels is more positive. President of the European Council, Donald Tusk, says he is “cautiously optimistic about Theresa May’s constructive, more realistic Brexit tone.” Tusk added the UK’s evolving stance recognised “the philosophy of ‘having a cake and eating it’ is finally coming to an end… and that’s good news.” As more details emerge from the latest round of talks, the GBP may continue to edge higher. Further commentary from BoE members will also be closely watched by the market as we look for any additional insight into rate hikes in the coming months.
Phone: +61 2 8298 4930
Connect with Matthew Cudmore on LinkedIn
EUR: Merkel and Catalonia Referendum muddy the waters
Month in review:
German and Spanish politics took centre stage in September, starting with Angela Merkel who managed to hang onto power, but was forced to form a coalition government after losing support to the far-right. Although Merkel won a fourth term in office, the German Chancellor saw her conservatives haemorrhage support in the face of a surge by the far right. The anti-immigration alternative for Germany (AfD) stunned the establishment by winning 13.1% of the vote, which will bring a far-right party into Parliament, for the first time in more than half a century. Coalition building is now the key and we anticipate a so-called ‘Jamaica coalition’ of the CDU/CSU with the FDP and the Greens to come together following the SDP party’s refusal to take on a grand coalition with Frau Merkel. These talks could take as long as 3 months although we doubt the length will have much impact on the single currency.
The Catalan parliament enacted its own law in a vote on September 6th, whereby under the controversial rule, the result is binding and independence must be declared by parliament within two days of the Catalan electoral commission proclaiming the results. This decision went down like a lead balloon in Madrid, as Prime Minister, Mariano Rajoy, condemned the vote as illegal with Catalan officials involved in organising the vote were arrested and almost 10 million ballot papers impounded. Over 900 people were hurt as Spanish police tried to stop voting going ahead with a Catalan spokesman, stating that more than 750,000 votes could not be counted because polling stations were closed and urns confiscated.
The Euro will be used as a risk barometer over the coming weeks, and while the run of PMI data from the Eurozone could easily be strong, political risks will likely outweigh any economic data. There is an argument that the initial modest Euro sell-off appears reasonable, however the situation in Spain would have to continue to escalate in order to have a more material and lasting impact on the value of the euro beyond the near term.
Phone: +61 2 8298 4915
Connect with Joe Donnachie on LinkedIn
NZD: Close, but no cigar
Month in review:
It was a very busy month for the NZD, but let’s kick things off with the election. The National Party won the most seats, however did not win enough to form a government. A coalition needs to be formed and it is highly likely to see the National Party return for a fourth term with help from NZ First. It could take weeks, however, to form a coalition government and the looming uncertainty has continued the pressure on the NZD. This being said, the impact of the results had a relatively weaker impact upon the currency compared to the disruption seen over the last two years, with the NZD Index falling just under a percent.
We then turn to the last RBNZ meeting this month, the first for acting RBZ Governor Grant Spencer, where as expected, rates were left on hold with a dovish tone to the associating statement. Even with a new RBNZ Governor, we still saw very similar tones to previous meetings this year, with Spencer stating that “Monetary policy will remain accommodative for a considerable period” – from this we can expect little change to the base interest rate for the near term.
Following this month’s election expect some speculation on the possible coalitions that could be made to form government, which will bring some uncertainty until formed; assuming we may not see a formation until the end of the month.
Looking at data releases for the month, we have the Global Dairy Trade Index coming out early in the month, which has seen continuous positive figures over the last 4 weeks. Later in the October, we’ll have New Zealand’s quarterly CPI figures, with the RBNZ commenting on steady growth throughout the global economy, we could possible see a relatively modest growth figure forecast closer to the release.
Phone: +61 2 8298 4925
Connect with Patrick Idquival 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.
Please consider FX derivatives are high risk, provide volatile returns and do not guarantee profits.