Author: Steve Oram
Trade war developments continue to influence markets and are likely to be the main driver of currencies in the week ahead.
Over the weekend, U.S retail sales data for August showed the smallest gain in 6 months as consumers reduced spending on cars and clothing. While the number was below market expectations, it is still 6.6% higher than the same month a year ago. The signs for the U.S economy are still looking positive, keeping the expected monetary policy tightening from the U.S Fed on track. Markets have almost fully priced in another 1% of rate hikes by this time next year. The USD made gains across the board, as it continued to find support on the back of U.S – China trade war concerns.
Trump Tariff Talk Continues to Support Dollar
President Trump continued on with his tariff threats last week, with reports suggesting he is threatening another $200 billion of tariffs on imports from China. This is despite U.S Treasury Secretary Steven Munchin announcing new talks with China in an attempt to get negotiations back on the table. These developments continue to be the main driver of currencies, lending support to the USD, and weighing heavily on risk based currencies such as the AUD. In further developments, the Wall Street Journal reported over the weekend that President Trump would announce tariffs of 10%, lower than the 25% originally planned, on the $200 billion of Chinese Imports. An announcement is likely in the next couple of days, and there is the possibility that risk assets, including the AUD, could bounce higher on the news of a lower tariff rate.
AUD gets respite after good week of data
Better than expected economic data last week gave the AUD some much needed support. Q2 GDP was well ahead of forecasts, with the annualized rise of 3.4% the best since September 2012, while employment data for August showed job creation was still running hot. However the Aussie still remains under pressure, with the trade tensions between the U.S and China creating a lot of uncertainty for the AUD. It’s a quitter week for top tier data releases in domestic and International markets, locally though tomorrows release of the RBA Board Minutes from the last meeting will be scrutinised as markets try to decipher the boards thinking. Rates will play a gathering influence on the currency with the FED’s own meeting just a week away.
Across the ditch the Kiwi suffers similarly, there is major local data in the form of Q2 GDP growth later in the week. Markets will be looking closely at these numbers for signs on the health of the NZ economy and what influence this may have on the RBNZ and their next move on interest rates. A better than expected GDP number would go a long way to easing recent concerns over business confidence and give the NZD a boost as it struggles at 30 month low levels. Data is due Thursday morning at 8.45 am. The AUD/NZD cross rate has remained fairly steady over the past week with both currencies currently taking more direction from global events rather than local data.
Brexit Developments to drive GBP
The British Pound held on to most of its recent gains, with last weeks economic data, including employment, wages, and GDP, all coming in better than expected. On the data front this week, we have CPI on Wednesday night, with market expectations looking at an annual inflation number of 2.4% .
While the UK economy is ticking along nicely at the moment, it will be Brexit developments that continue to be the main driver of the currency. Both sides appear to be making concessions on previous road blocks, but much work is still needed, and the Bank of England remains cautious as talks continue this week.
EUR Trade Balance Disappoints
The EUR finished the week on a negative note as the EU trade balance in July was quite a bit lower than expected. The European Central Bank continues to aim at ending its QE program in December, and then raising rates middle of next year, however the spotlight has once again been placed on these plans with this worse than expected data. Also weighing on the EUR was concerns over the Italian government’s upcoming budget announcement. There will be much interest in a speech from ECB President Mario Draghi, when he speaks in Berlin on Thursday.
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