Markets have turned yesterday to become risk averse again based on President Trump’s tweet which was aimed at the Iranian President- Rouhani and goes like this:- NEVER EVER THREATEN THE UNITED STATES AGAIN OR YOU WILL SUFFER CONSEQUENCES THE LIKES OF WHICH FEW THROUGHOUT HISTORY HAVE EVER SUFFERED BEFORE. WE ARE NO LONGER A COUNTRY THAT WILL STAND FOR YOUR DEMENTED WORDS OF VIOLENCE & DEATH. BE CAUTIOUS. Fake news and “witch hunt” remarks have followed, The President intents to call a spade a spade and continue with his own personal agenda. The US Dollar Index has bounced off 94.20 over the weekend and pushed higher to 94.60 as Trump’s tweet weighed in on risk assets sending the index higher. The greenback has been the strongest currency this week and may continue to be for the next few days if “tweets” continue to pressure sentiment. As US based equity and commodity based assets are weaker so to are the UK equity markets as Brexit concerns weigh down the British Pound. The Pound was off from 1.3250 late last week falling to 1.2950 before reversing some of these losses with is recovering back to 1.3130. The Lloyds Bank Investor Sentiment index which measures sentiment in asset classes such as equities and UK Properties has declined 7.2% from June 2018 to July 2018 with the most concerning aspect being property. Sentiment towards the UK Government and Govt Bonds has also been affected by Brexit uncertainty dropping over the last month. China has vowed to retaliate soon in response to President Trump’s 200B tariff threat on Chinese products. Even a great start to the second quarter US earnings season has not helped sentiment with more than 90% of US companies reporting surprises to the upside. The (ECB) European Central Bank will announce their cash rate Thursday with no change expected to monetary policy until well into mid 2019. With a reasonably light economic week on the cards direction is expected to be mainly driven by Presidential speak. The New Zealand Dollar remains range bound since late June trading both ways within a cent of 0.6800 against the US Dollar, this week we should see the same with only NZ Trade Balance on the docket.
The Australian Dollar movement last week was largely persuaded by employment data which was well up on expectation after several months of negative numbers. The data represented a jobs forecast which far exceeded the expectations of 14K, adding just short of 51K jobs to the economy for the month of June. This data comes as a relief for the RBA who have repeatedly cited low wage growth as detrimental for meeting higher inflation targets. Interestingly the Aussie was choppy through most of the week with it only stronger against the British Pound. The weekly outlook for the Australian Dollar will lie with the (CPI) Consumer Price Index with the headline data expected to reach the Reserve Bank Of Australia’s (RBA) inflation target of 2-3%. With signs of higher price pressures this may put pressure on the RBA to hike rates if recent data continues to be in line with the Central Bank’s forecast for growth. However, if the CPI numbers are lower along with continued threats of a trade war between the US and China the RBA may stay on the sidelines for a little longer.
Although inflation data out in the early stages of last week provided some domestically led direction for the New Zealand dollar, since then it’s largely been a case of offshore events driving the currency around. As always, President Trump’s twitter account has been front and centre in that respect and his comments regarding his opposition to Fed interest rate hikes, and the resulting strength in the USD, certainly grabbed the markets attention. The President was quick to clarify that the Fed is independent and it makes its own decisions, but you get the feeling the President would love to be calling the shots on monetary policy as well! Although not market moving, we did see NZ migration data out late last week and it showed net arrivals to the year ended June dropped 10% to a total of 65,000. That’s still a very high overall level historically, but at least the trend is now heading in the right direction. Although this week’s economic calendar includes the Trade Balance and ANZ Consumer Confidence, the market will continue to look to offshore (read: Twitter) for direction.
Data from the United States last week confirmed the economy continues to power ahead, keeping the US Fed well on track for another couple of interest rate hikes this year, that is assuming they ignore comments from President Trump. He has made his personal opinion on interest rate hikes, and the resulting strength in the USD, plainly clear in recent days and it’s certainly weighed on the USD. This leaves the USD in an interesting position. Economically, the USD is well supported and all else aside, continued strength over the coming months would seem like a no brainer. But the Trump administration has repeatedly let it known that the “strong dollar policy” adhered to by previous administrations is hurting America’s competitive edge, and where prior president’s went out of their way not to comment on the desired level of the USD, Trump’s verbal interventions into the market are having an impact on current pricing and future expectations. I think the only really safe bet is that we will continue to get tweets on the subject whenever Trump feels it’s necessary. This week we get GDP data from the second quarter and it’s looking like it could be a very strong number. Median expectations are for around 4.3%, but we’ve seen individual estimates as high as 5%.
Last week proved to be a tough one for the UK Pound with a raft of data releases underperforming and weighing on the currency. Softer than forecast inflation data did much of the damage, coming in at 2.4% vs 2.6% expected, but this was also followed up by a surprising decline in Retail Sales. Retail Sales ex Auto and Fuel declined 0.5% vs for the month of June, vs and expectation of +0.2%. On the back of the disappointing data the probability of an August interest rate hike from the Bank of England has decreased somewhat, weighing on the GBP. Brexit negotiations continue to be a shambles with PM May holding onto a very slim majority of support within her own party. May’s political vulnerability comes are the worst possible time for a leader trying to negotiate such an important deal, and with the March 29, 2019 deadline fast approaching, the risk of Britain leaving the EU without any sort of deal continues to grow.
The Euro Was one of the best performing currencies over much of last week with the currency pushing to a high of 1.1750 against the US Dollar where it closed. This week we have the pivotal (ECB) European Central Bank meeting Thursday night which is not expected to give any relief for the depreciating Euro. Mario Draghi already confirming policy will remain in place until at least June 2019. Later Tuesday we see preliminary July PMI print for Germany, this should spark movement in price action, although if the published figure is anything close to June’s final PMI figure of 55.00 we may not have much excitement.
The Japanese Yen made huge inroads last week after retracing lower off 113.00 travelling back to early July levels of 111.00 against the US Dollar with markets seeking the safe haven of the Yen. National Core inflation published at expectations of 0.8% taking the JPY to sub 111.00 levels as we expected, making these levels the lowest since July 9th. The Bank of Japan (BoJ) announced a special operation to buy unlimited Japanese Government Bonds (JGB) with a remaining life of 5 to 10 years with an effective cap of 0.110% for the first time since March hinting at speculation the BoJ could be considering altering the loose monetary policy. This week the US Dollar is back on top, the Yen has lost a little ground as it trades around 111.50 levels.
The Canadian Dollar (CAD) reversed its early week losses across the board late Friday snapping to 1.3110 against the US Dollar. Canadian Core Retail Sales published way above expectations of 0.6% at 1.4% creating a frenzy of buying in the Loonie. Support held at 1.3100 rejecting a break through here as the pair closing the week. This week we have seen Crude continue its decline from levels above 69.30 falling back to 67.20 increasing pressure on the CAD with the pair creeping back to 1.3160 levels Tuesday. A lack of Canadian economic data will give the US Dollar the upper hand, expect some volatility with US Core Durable Goods and Unemployment figures later in the week. I would expect to see a rise back to around 1.3200 this week.
- Trump goes on twitter tirade
- Japanese Holiday Monday- Marine Day
- US Building Permits down at 1.27M from 1.33M
- Australian Employment increased from 16.7K to a huge 50.9
- UK monthly Retail Sales down to -0.5% from 0.1% expected
- Canadian monthly Retail Sales prints well up at 1.4% from 0.6% expected