AUD: closes the month on a high
Month in Review – It has been a turbulent month for the AUD. Notably, we surged towards the back end of April where iron ore rallied and chances of an Australian rate cut in May were reduced. Further reasons behind our jump came from the U.S where consumer confidence declined and the voices supporting a longer waiting period for the next rate rise strengthened. Outside of our commodity recovery, April saw better employment data for March as well as a slight improvement in inflation. All of this leads to the conclusion that the RBA is probably less convinced of the need to stimulate the Australian economy with a rate cut in May.
The Key Trends – After another month where there was an almost unanimous consensus that the RBA would cut rates, we have arrived in May where the bets are once again waning. On the jobs market, unemployment fell to 6.1% from 6.2% – this had a significant impact on gauging the health of the economy, as unemployment was predicted to rise to 6.3%. The employment change is also worthy of note as 22K more jobs than expected were added. The biggest drivers of the AUD did not disappoint again in April, where commodity prices and talks of rate cuts stole the headlines. Despite talking down the AUD and promoting the possibility of a rate cut, the AUD managed to climb in April. No doubt on Tuesday, the theme of the talks will revolve around a “willingness” to cut rates in the imminent future.
What’s Next? The markets will be closely monitoring commodity prices over the coming months. Although commodity prices and the Australian job market improved over April, the long term sentiment concerning the AUD is negative. Looking ahead to June, the focus will turn to the U.S where rates were, at the start of the year, predicted to be raised. This notion has faded rapidly in recent weeks where mid-month soft US economic data and a general slowdown in US economic growth saw predictions of a rate rise move to September.
Alexander Cook
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USD: have the wheels come off?
Month in Review –The USD saw its strength become its weakness this month. ISM Manufacturing figures released early in April were disappointing, coming in below expectations for the fifth month running – worrying stats. This decline in growth has been attributed to recent challenges that the strong USD is having on international business, with the cost of US exports significantly increasing. Overall, April saw a series of key data releases miss expectations, leading economists to wonder if the wheels had fallen off for the US economy. With March retail sales falling month-on-month, industrial activities showing that the strong dollar has become a serious drag & initial jobless claims seemingly indicating that the labour market has stopped improving, it is indeed a worrying period for the U.S economy.
The Key Trends –The labour market had been performing well enough to encourage the Fed to consider hiking rates by June this year. In anticipation, the USD has rallied over 12% through Q1 2015. But, after the release of March key figures, the market appears to be having second thoughts, with the employment report posting 126,000 new jobs, significantly lower than the 245,000 expected by economists & the weakest monthly gain in 15 months. This caused investors to speculate as to a September rate hike, rather than the anticipated June increase.
What’s Next? The Federal Reserve’s monetary policy statement maintained an upbeat stance. Looking closer into the statement there is a hint as to why the Fed is leaning to the hawkish side: “growth in household spending declined; households real incomes rose strongly, partly reflecting earlier declines in energy prices and consumer sentiment remains high.” With blame on poor releases being placed on the weather, the Fed has worked itself into a position where it is now free to act. It will be interesting to see if May’s releases reinforce the Fed’s stance & spur a turnaround for the USD.
Victor Erzikoff
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GBP: election uncertainty helps push GBP/USD to 5 year low
Month in Review – GBP/USD hit multi-year lows down to 1.4622, the lowest since June 2010, which experts believe to be down to 3 key reasons:
- Recent polls towards the May 7th elections show a tie between the Conservative and Labour parties and it is this uncertainty which makes it worse for both parties as they are far from reaching a majority. UK GDP figures also posted a disappointing +0.3% q/q & 2.4% y/y. These numbers certainly took the wind out of Conservative leader David Cameron’s sails, main point being the UK economic recovery doesn’t look so robust any longer.
- FOMC minutes released saw members of the central bank hint towards a rate hike in June.
- Weak British data also sent the GBP lower, with both industrial output and manufacturing production missing expectations.
The Pound did bounce back from these lows as minutes from the last Bank of England monetary policy committee cut a hawkish tone.
The Key Trends – GBP/USD fell 5.8% from 1.5536 to a multi-year low of 1.4622, before bouncing back up to 1.5428 by the end of April. Against the Euro the fluctuations included a low of 1.3544 mid-month then coming back to 1.4045. GBP/AUD maintained an average of 1.93 and still looks very attractive for pommies intending on making the move to warmer climes.
What’s Next? All eyes will be on the election in early May with the current prediction being a hung parliament, leaving the Conservatives as the largest party with 279 seats. Historically GBP weakens in the last couple of weeks before an election, which is evidently due to an increased risk premium being priced in.
Joe Donnachie
Phone: + 61 2 8298 4915
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EUR: Greece skating on thin ice
Month in Review – The EUR has dodged the market scrutiny it was getting so used to for the month of April as all eyes have been on the USD consolidation. That being said, the Eurozone is still of course far from stability as negotiations between Greece and its counterparts are worsening. Moody’s have also further downgraded Greece’s debt into “junk” territory (Caa2) due to the “high uncertainty” over Greece and the EU reaching a suitable agreement over repayments.
The Key Trends – Purely thanks to the USD slide, the EUR has enjoyed a resurgence against the AUD, rising from the 0.6930 zone up to a monthly high just shy of 0.73c (5% rise – largest monthly rise of the year). Commentators are suggesting that May-July will be a very volatile time for the USD & AUD due to potential interest rate movements, and when you sprinkle in the June 30th Greek debt-repayment deadline, the 5% monthly move could seem insignificant.
What’s Next? A compromise is needed soon! Media reports suggested that Greece had around EUR7bn cash available at the end of February. With monthly debt repayments believed to be around EUR1.3bn, Greece could effectively be out of cash by the end of May or the beginning of June. June 30th is the deadline for a deal. If a deal doesn’t happen, Greece could exit the Eurozone – the so-called ‘Grexit’. I maintain that the probability of a Grexit is less than 30%.
Why? Greece would need to walk away from a deal or be driven away by unrealistic demands from creditors. On top of that, no-one wants to see a European ‘break-up’.
Ellis Taylor
Phone: + 61 2 8298 4903
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NZD: Close, but no cigar…
Month in Review – Amid much anticipation the Kiwi did not reach the AUD parity goal that it had hoped for. Commencing April with high hopes, hitting all-time highs of 0.9975, the NZD came to a crashing halt by month-end, closing at 0.9510. This can be attributed to a combination of factors, including the RBA’s decision to maintain rates, low inflation and falling export prices.
The Key Trends – Inflation may now be the key indicator of future Kiwi movements, as we are now at a 15 year low. Super low inflation numbers for the March quarter will now only intensify the debate as to whether short-term rates should be reduced, increased or maintained over the next 12 months. Many argue (particularly exporters) that a rate cut would be good for the economy (lower NZD value, borrowing becomes cheaper), which in turn would raise inflation numbers. The range the RBNZ likes to see inflation in is 1-3%, although the NZD is now at 0.1%. An OCR cut would also add fire to the already red hot property market. As always, there is no single answer to the current dilemma that the RBNZ finds itself in.
What’s Next? New Zealand’s economy continues to grow at an annual rate of around 3%; however, lower dairy incomes, lingering effects of the drought and the high exchange rate are weighing on the outlook for growth. “The appreciation in the exchange rate, while our key export prices have been falling is unwelcome” RBNZ Governor Wheeler said. The risk of RBNZ intervention forcing the NZD lower on its own accord is therefore elevated, although they yesterday decided to keep the interest rate on hold once again.
Raphael Alvos
Phone: + 61 2 8298 4925
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