AUD: Data doing the RBA’s job for it

Month in Review – In May, the Australian Dollar experienced its most turbulent month to date this year. May started as many thought it might – with the RBA cutting interest rates to 2.00% – a new record low – with Governor Stevens reiterating that “the inflation outlook provided the opportunity for monetary policy to be eased further.” Another key moment in May was the release of the Budget which started the AUDUSD upswing. Iron ore fell back again as the Aussie looked to climb, and this plus positive US data made it clear that we had indeed ‘kicked the can down the road’ as the Aussie fell nearly 7% in the last two weeks of the month.

The Key Trends – The RBA rate cut did not have the immediate desired effect on the Aussie this month as we managed to move higher after the announcement. Markets were clearly under the impression that this was the last tool in RBA’s tool box. As a result, what became a noticeable trend was the steady rise of the Aussie as May progressed with it hit January’s highs against the USD. This however, was more related to poor US data than consistently positive Aussie data and started to reverse toward month end.

What’s Next? If there is a currency pair that we are looking to come lower this month it is AUDUSD. With the Reserve Bank of Australia today deciding to hold interest rates at the record low level of 2%, there remains considerable opportunity for poor news to hurt AUD. Last week saw Q1 business investment collapse by 4.4%, double the market estimates and the 6 June released GDP figure has been marked down accordingly.

Perhaps RBA Governor Steven’s statement released earlier today, best sums up the economic ‘lay of the land’. Essentially, in such economic conditions (limited general economic growth, commodity prices lower etc.) “monetary policy needs to be accommodative.”

Alexander Cook

Phone: + 61 2 8298 4924

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USD: May’s Best Performing Currency

Month in Review –The USD ended May as the strongest performer when compared to the percentage change month-to-date of all other major currency pairs. It was actually a slow start to May with retail sales, consumer sentiment & manufacturing figures all coming in far below expectations. This in fact was a slight flow-on effect from the adverse weather conditions experienced earlier in the year which slowed US growth significantly. With the warmer spring weather came a rebound for the USD, a mostly unremarkable Fed statement by Janet Yellen once again pointed towards the “wait and see” mentality when it came to when an interest rate move would occur.

Following the Fed statement US Inflation came in with a third straight monthly increase (0.3%) & consumer confidence rose to 95.4, up from 94.3 previously. This marked an exceptional turn of events for the USD with investors finally purchasing on the back of strong data, rather than waiting for reasons to sell it off.

The Key Trends –The USD gained 6.70% against the NZD in May, bringing the pair to its lowest level for 5 years. The gains were attributed to the USD simply taking advantage of each bit of positive data, while the NZD remains up in the air as to if/when an interest rate move will occur this year. The USD/JPY also receives a noteworthy mention with the JPY hitting its lowest level against the USD since 2002.

What’s Next? US strength should continue through early June ahead of Greece’s 5th June 300million Euro repayment, with investors likely to stow additional funds in the safe USD.

Victor Erzikoff

Phone: + 61 2 8298 4909

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EUR: Greece is the word

Month in Review –The EUR has been bound to a 2c range between 0.6970-0.7170 for the month of May, highlighting the level of frustration felt by markets over the Grexit situation. Optimism around a deal between Greece and its creditors has been continually battered as discussions between Greece and their European creditors (namely Germany’s Merkel & Frances Hollande) almost viewed as regressive. Greece have been trying to appease markets by saying a deal is just around the corner and they will have the EUR1.6B ready for the June 5th deadline, though both time and investors’ confidence are quickly expiring.

The Key Trends – The USD has returned to favour for the time being, after a solid 4-week sell off combining with the markets take on EU-Greek relations. Dips in the AUDEUR have been bought very quickly as technical resistance sits strongly between the 0.7180-0.72c zone.

What’s Next? As EU Commissioner Moscovici says, “There are no preparations for a ‘Grexit’… There is no ‘Plan B’ … The position of the European Commission is still that Greece has its place in the Eurozone. We work on that basis.” Greece really need to speed up their negotiations (currently occurring in Brussels) if they are to pay the EUR1.6b due June 5th; the longer they delay, the more unlikely the deal looks, and the lower investor confidence dives.

Ellis Taylor

Phone: + 61 2 8298 4903

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GBP: Majority win for Conservatives strengthens the Pound

Month in Review – Leading up to the election, most polls showed a dead heat between the Conservatives and opposition Labour party. The markets most certainly wanted the business friendly Tories over Labour, however this uncertainty sent the Pound lower and it wasn’t until the Conservatives election win that the GBP finally rallied.

After pausing at the post-election high, cable broke the 1.5523 level and continued higher which followed this trend for the rest of the month. The Pound then took advantage of every positive data point – UK manufacturing production rising 0.4%m/m & 1.1% y/y and average hourly earnings up 1.9%, were both key catalysts for the strengthening Pound in conjunction with the unemployment rate dropping to 5.5% as expected.

The Key Trends – GBP/AUD started the month at 1.9505 before falling to a low point of 1.8984 pre-election, and climbing to a high of 2.002. GBP/USD pushed a high of 1.5811 and touched a low of 1.5078 on May 6th.

What’s Next? Manufacturing and construction PMI’s are the early data points from the UK whereby a reading above 50 indicates growth in that sector (expectations stand at 52.7 and 55.1). The official bank rate is expected to stand at 0.5%, however most will be looking at what direction David Cameron takes the Conservative party in after the majority win.

Joe Donnachie

Phone: + 61 2 8298 4915

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NZD: Foggy future for the Kiwi

Month in Review – The NZD has dropped to its lowest levels in more than four years on the back of concerns about the general economic outlook after Fonterra announced a low payout to dairy farmers. The country’s biggest dairy farm lender ANZ see any chance of a sharp rebound in dairy prices as a “distant prospect” and are picking a “tough” forthcoming season This was mainly due to SMP (skim milk prices) being hit hard with aggressive selling from Europe into key NZ markets.

The Key Trends – Wage figures are running at 1.7%, which is below the RBNZ’s targeted 2% inflation rate and is adding some obvious heat to the debate of an excessive cash rate. Unofficially, it’s clear that the RBNZ is scared of pouring the full tank of petrol that a rate cut would be on Auckland’s already incendiary housing market. Lamb and forestry prices are also down sharply, although the strengthening of the Pound post their general election result will help lamb prices as the NZD/GBP cross-rate decreases to 0.4850

What’s Next? Demand across the economy remains solid, yet the reality is that inflation has failed to show up at the growth party. Core inflation has now been below the 2% target for 21 successive quarters. That’s enough in itself to justify OCR cuts, with ANZ, ASB and Deutsche Bank all picking rate cuts next month.

Raphael Alvos

Phone: + 61 2 8298 4925

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