WorldFirst takes a look at the key trends of August and considers the many diverse events set to shape global currency markets in September.
AUD: Back below 80c
The RBA has done everything in its power to weaken the Aussie Dollar this month by highlighting the risks to the domestic economy through uncompetitive exchange rates – effectively signalling to traders that they believe it is overvalued. Since then we haven’t seen AUD/USD rise back above 80c after hitting highs of 0.8040 on the first day of August.
The AUD dropped mid-month after a combination of China’s missed market forecasts and strong US retail sales saw it tumble down to this month’s lows of 0.7817. China’s July industrial production rose just 6.4%, well below the 7.1% expected gain and June’s healthy 7.6% rise. Overall US retail sales rose 0.6%, against an expected 0.3%, with the various core measures also exceeding expectations.
North Korea has been a hot topic this month with its recent missile test program sending a missile over Japan bringing it well back into the spotlight. Major political events often send traders to the safe haven currencies (Swiss Franc and Japanese Yen) taking currency away from the AUD.
Iron ore managed to pick AUD back up continuing its rise from the low point of June $52.63US/t, now up to $75.05US/t. Combining with building approvals coming in at -1.7% compared to the expected -5%, we saw AUD/USD move as high as 0.7995; however the Aussie was unable to break through to the 80c barrier and ultimately build upon the steep rise July brought us.
What’s next?
North Korea and America tensions are high, with the White House and Donald’s Trump Twitter feed in the spotlight for the next step, one wrong move could potentially have a major impact on AUD/USD. As always, we will likely continue to see iron ore be a major contributor towards the AUDs strength over the coming month.
Daniel Damarra
Phone: + 61 2 8298 4982
Connect with Daniel Damarra on LinkedIn
USD: Climbing out of Jackson Hole
The unwind of the ‘Trump Trade’ is well and truly over, with the US dollar continuing its fall in August and the USDX (US Dollar index) falling to levels not seen since April 2016.
The main macro-economic event was the Jackson Hole meeting of central bankers at the end of the month. USD-positive messaging did not materialise at the Jackson Hole event with the USD falling against all G-10 currencies despite the US economy leading the G10 in the underlying economic recovery. Given the relatively dovish tone by Yellen the main US economic data releases were all positive with:
- US consumer sentiment near post-recession highs with consumer confidence rising to 122.9
- S&P Core Logic Case-Shiller Home Price Index rising to sit annualised at 5.7%
- US Q3 GDP tracking at 2.6%
What’s next?
Minutes of the last Fed meeting revealed that the committee continue to view recent softness in inflation data as reflecting transitory factors. This argues for a sustained rise in policy rates, with only the pace of that hiking cycle in question. Moreover, the Fed’s minutes and recent comments reflect growing concern over asset valuations. The key macro factor here will be looking for a shift in Fed narrative at the September FOMC meeting. The market is currently only pricing in a 33% chance of a hike in December, leading to upside risks for USD. Potential positive surprises in US data – could provide catalysts for a USD rally.
Harry Balasuriya
Phone: + 61 2 8298 6963
Connect with Harry Balasuriya on LinkedIn
GBP: Grounded pound
The GBP has underperformed the majors in August, and in particular the EUR, with the GBPEUR reaching an 8-year low of 1.0750. Against the USD we saw a move back below 1.28, while the GBPAUD has bounced off the 1.62, which is now looking like a significant level of support. The geopolitical situation, and in particular Brexit negotiations, have been the driving factor behind the sterling sell-off. The lack of progress is particularly concerning when you consider how long negotiations have been going, with now just a little over 18 months until the 2019 deadline. Political concerns closer to home have also weighed on the pound, with the possibility Theresa May could be replaced as Tory leader and Prime Minister at the 2017 Conservative Party Conference. Economic data has taken a back seat this month; CPI and GDP figures both came in broadly in line with expectations, while the unemployment rate ticked lower to a new 40-year low of 4.4%.
What’s next?
Markets do not like uncertainty and there is plenty of that surrounding the GBP at the moment. Brexit remains in the spotlight, with the third round of negotiations underway in Brussels at the time of writing. Brexit negotiator Michel Barnier will give his assessment on completion of the talks, and there is a good chance this could continue to weigh on the pound if no progress is made. The EU also seem happy to draw out negotiations, and even be willing to let the Brexit deadline of March 2019 lapse in order to reinforce the message of European supremacy. Given the current trend, parity between the GBP and EUR does not seem out of reach, particularly with the EUR strengthening amid potential QE tapering.
Having said all this, the GBP has found some support against the AUD and USD in recent days, and given the heavy selling off the last few weeks, a bit of good news would likely see a bounce as traders look to take profits and cover their short positions.
Joe Donnachie
Phone: + 61 2 8298 4915
Connect with Joe Donnachie on LinkedIn
EUR: Markets poised for further strength
The Euro has certainly seen two very contrasting halves to the month. The horrific attack in Barcelona on the afternoon of the 17th did little to move markets, however the risk of further attacks could weigh in on sentiment. What did drive the Euro lower was the ECB meeting that followed, whereby the conversation focused more on currency, not on interest rates. What has since become increasingly worrying for the ECB is that EUR/GBP is currently sitting close to an 8 year high and the impact this will have on the Eurozone – as currency appreciates, imports become cheaper and exports less competitive. EUR/USD is also on the cusp of hitting 1.20 for the first time since January 2015 after the Jackson Hole Symposium didn’t hit any real pain points surrounding the EU.
President of the ECB, Mario Draghi, did not use his speech to issue caution against the recent strength of the Euro. Instead traders who wanted to see the single currency drive higher were encouraged by the lack of attention thrown towards the current state of the EU. Drilling into the data, out of the 4 leading economies, Germany is once again the only beacon of light. Unemployment rates for the other 3 are a key issue – France 9.5%, Italy 11% and Spain 17%. These figures are a stark warning for Draghi and the sense of concern that haunts the ECB.
What’s next?
Looking forward, we believe there are two glaring issues that the ECB is going to have to address:
- What can central banks do to create the conditions for enterprise to lift long-term growth?
- How healthy is the Eurozone banking system?
On the first point, growth must come from enterprise as the current political vacuum in the US and the structural imbalances in Europe mean that the political elite are just delivering gridlock at best. Mr Draghi broached the second question by stating that some Eurozone banks “face challenges” and were in a position to reduce the amount of bad loans “in an orderly manner over the next few years”. The issue is that the banks might have difficulty adjusting to an economy with lower growth and interest rates. In part a result of central bank policies which have squeezed bank earnings by narrowing the difference between the rate at which they borrow and the rate at which they lend.
Matthew Cudmore
Phone: + 61 2 8298 4976
Connect with Matthew Cudmore on LinkedIn
NZD: Election looms
After a stellar July for the NZD we saw the Kiwi falling 3.5% from the start of the month under 0.7200. Early in the month the RBNZ left rates unchanged at 1.75%, which was widely expected in markets. It is important to note that the bank reaffirmed that interest rates will “remain accommodative for a considerable period”, similar to its June Statement. It is also interesting to note that the RBNZ still expects to move official interest rates in 2020.
Later in the month we saw RBNZ Governor Graeme Wheeler continue to talk down the currency stating that a lower NZD is needed to support exports and lift inflation (a similar tone has been seen from him over the year). His comments were enough to move the NZD even lower after the release of his speech.
What’s next?
It’s Election month! The New Zealand general election is scheduled for the 23rd this month and we can expect some volatility on the currency moving towards this date. Another key event to note this month is the end of RBNZ Governor Wheeler’s tenure as the central bank chief. Deputy Governor Grant Spencer will be interim Governor for 6 months until the next government appoint a permanent successor.
Patrick Idquival
Phone: + 61 2 8298 4927
Connect with Patrick Idquival on LinkedIn
Disclaimer:
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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