AUD: the rate cut that stops a nation..?
Month in Review – Similar to September, the Aussie enjoyed another volatile month, climbing to highs not seen since August. During the middle of the month investors responded positively to the Federal Reserve’s statement that signalled they were comfortable holding rates due to slower jobs growth. That combined with a rise in iron ore helped the Aussie climb to mid-0.73 levels. Much like the spike in September however, it was short lived as atypical jargon from the Federal Reserve’s monthly policy statement caused the Aussie to finish the month on a low as the Fed stated their intent to raise rates sooner rather than later. Moreover, the Aussie was further hurt as China cut their interest rates once again.
The Key Trends – The Fed’s decision to keep rates on hold and their constant jawboning as to when they might be raised, was the AUDs key driver in September. Such predominately negative direction has also been provided by a slowdown in Chinese growth. Additionally, an increase in commodity supply will ultimately keep commodity prices under pressure which, in turn, should place pressure on Australia’s current account deficit, already running at above 4.7 percent of GDP.
What’s Next? Going forward the prospect of higher interest rates in the U.S. as well as the economic slowdown in China may see Asian currencies (excluding the Yen) come under greater pressure and cause a further slowdown in global growth – hindering the AUDs ability to hold on to highs in the future. If we consider the above points with the potential for global FX reserve managers to reduce their exposure to the Aussie, it remains a high chance of being under the pump for the indefinite future. What’s next? Once again it’s the RBA’s Interest Rate decision, this time on Melbourne Cup Day, where investors will look for direction (and a potential rate cut) from RBA Governor Stevens.
Alex Cook
Phone: + 61 2 8298 4924
Connect with Alex Cook on LinkedIn
USD: easing like a Sunday morning..?
Month in Review – The Fed Reserve sent shockwaves through the market with the release of more hawkish than expected FOMC notes. While the Fed’s decision not to raise rates came as little surprise to the market, its statement as to what it will take into consideration at its next meeting reignited speculation of a rate hike by the end of the year – “…the Committee will assess progress – both realised and expected – toward its objectives of maximum employment and 2 percent inflation”.
The Key Trends – US Advance GDP for the third quarter posted a gain of 1.5 percent; although much softer than the final GDP Q2 reading of 3.9 percent, it was still very close to the forecast of 1.6 percent. This equates to a GDP projection of 2.0-2.3 percent for 2015, which will keep it well above desired levels.
The annual inflation rate is on track to meet the US Federal reserve’s objectives, with September’s CPI rate at 1.9%, with an increase seen for four consecutive months & for eight out of nine months in 2015. The key thing to note here is that the underlying inflation picture in the US is pointing to a gradual rise in inflation, not a fall.
What’s Next? A more hawkish testimony from Federal Reserve Chair Janet Yellen will add speculation to the likelihood of a rate hike for 2015. Traders will be looking closely at her language to see if any clues are dropped as to their future monetary policy plans.
Victor Erzikoff
Phone: + 61 2 8298 4909
Connect with Victor Erzikoff on LinkedIn
EUR: Draghi dragging single currency down
Month in Review – The EUR has been smashed throughout October on the back of ECB President Draghi’s hint that even more dramatic monetary policy will be required to aid the struggling Eurozone. The ECB are currently aiming at negative deposit rates and a quantitative easing plan that spends EUR60bn a month on assets and will do until September 2016.
The Key Trends – The VW scandal and the migration situation in the east of the continent plus external global matters (The Fed’s delayed interest rate hike and China woes) have further added pressure to the EUR, which (as mentioned in September’s review) has been quickly stripped of its ‘safe-haven’ status. Many of our clients have been taking advantage of the AUDEUR at these rates as fears over the AUD start to loom.
What’s Next? – A higher Euro is not what the ECB wants. A stronger currency tightens financial conditions and being part of a world in which the slips in oil and other commodity prices have destroyed headline inflation, there is little room for a currency that is also importing deflation.
It is clear that the European Central Bank will amend its policy offering. The question is how.
Ellis Taylor
Phone: + 61 2 8298 4935
Connect with Ellis Taylor on LinkedIn
GBP: remains solid, yet unspectacular
Month in Review – As economists have highlighted for years now in the UK, the recovery has been characterised by a divergence in fortunes of the manufacturing and services sectors. The data only reinforces this problem, with manufacturing contracting by 0.3 percent and services expanding by 0.7 percent. We are still seeing more of a ‘stroll of the shoppers’ than a ‘march of the makers’, so to speak.
The Key Trends – Manufacturing has been damaged in the UK by a strong Pound and weakness in crucial export markets, as a direct result of fears of a hard landing in China. The Bank of England has remained quite optimistic about the impact on the UK economy of the emerging market rolling over, but today’s number will keep the Monetary Policy Committee from doing anything this year.
What’s Next? Once again, the UK is growing solidly, but not spectacularly and concerns must held over the impact of rising inflation without a subsequent pull higher in wages, and the slowing impact this might have on the consumption engine. Until we know what Cameron has to negotiate with, the bickering is all much of a muchness. The uncertainty has yet to bleed through to options markets however; without a date for the actual referendum there is a general increased cost of protecting against sterling downside.
For now, the chatter means little for the Pound.
Joe Donnachie
Phone: + 61 2 8298 4915
Connect with Joe Donnachie on LinkedIn
NZD: strongest performing currency (and rugby team;)
Month in Review – Four consecutive price rises at the Global Dairy Trade Auction have supported the NZD. Further, the NZD has been pushed even higher by market participants delaying their expectations of the first Federal Reserve rate hike. Firstly, the US Non-farm Payrolls reading at the beginning of October came in well below expectations. Also the Fed meeting minutes were more dovish than market participants expected. Combined, these events saw market pricing of a Fed rate hike move well into 2016, suppressing the USD.
The Key Trends –The Reserve Bank has held its Official Cash Rate at 2.75% as widely expected, pausing its sequence of three rate cuts in quick succession. Governor Wheeler said that some further reduction in the OCR seems likely, and the bank would need to run even lower rates if the NZD continues to rebound.
What’s Next? All eyes will be on December’s RBNZ meeting for the next rate cut, as they try to hold inflation at the 2 percent band. NZ along with most of the G10 will also be heavily focused on data coming from the US, which may give some indication of when the much anticipated rate hike may occur.
Raphael Alvos
Phone: + 61 2 8298 4925
Connect with Raphael Alvos on LinkedIn