Weekly Market & Currency Developments – From Our Bankers

Investor Signposts: Week Beginning April 29 2018

Australia: Reserve Bank in focus

• In Australia over the coming week, the Reserve Bank takes centre- stage. The Board meeting on Tuesday is followed by a dinner in Adelaide with a speech from Governor Philip Lowe scheduled. On Friday the Bank releases its quarterly statement on monetary policy.

• The week kicks off on Monday with the release of the quarterly State of the States report from CommSec. The report tracks the economic performance of the states and territories.

• Also on Monday the Reserve Bank issues the March Financial Aggregates publication. Private sector credit (effectively outstanding loans) rose by 0.4 per cent in February after a 0.3 per cent rise in January. Annual credit growth held at a 31⁄2-year low of 4.9 per cent. M3 money supply rose by 3.8 per cent over the year, the slowest growth in 25 years. Data on new home sales is also expected on Monday.

• On Tuesday data on home prices, the weekly Roy Morgan-ANZ consumer sentiment survey and surveys on the manufacturing sector are all released in a hectic start to the month.

• Also on Tuesday the Reserve Bank Board meets but no change in the neutral monetary policy stance is expected. Interest rates are firmly on hold until at least year-end due to retail deflation and modest wages growth. Governor Philip Lowe is scheduled to speak at the Board’s dinner in Adelaide.

• On Thursday, local council building approvals data for March is issued. Residential building approvals fell by 6.2 per cent in February, led lower by volatile apartment approvals which declined by 16.4 per cent. However, detached house approvals rose by 1.9 per cent. Surveys on the services sector for the month of April are also issued by both the CBA and AiGroup.

• Also on Thursday Australia’s international trade data for March is released. A healthy $825 million surplus was recorded in February, continuing a solid run of results since late 2016.

• On Friday, new vehicle sales data is issued. Australia’s new vehicle market grew 2.5 per cent to a record-high 1.2 million units over the year to March.

• Also on Friday, the Reserve Bank releases its quarterly Statement on Monetary Policy. As well as being a comprehensive assessment of the state of the economy, the Board also provides updated forecasts.

Overseas: US Federal Reserve meets and US employment report headlines data releases

• All eyes will be on the US Federal Reserve policy meeting on Wednesday. The employment report rounds out a busy week of data releases in the US. Monthly manufacturing and services activity gauges are due in China.

• The week kicks off in China on Monday when the National Bureau of Statistics issues the purchasing managers’ surveys for April. Activity picked-up in March as businesses returned to work following the Lunar New Year.

• In the US on Monday the personal income and spending report is released. The US Federal Reserve’s preferred measure of inflation – the personal consumption expenditure deflator – will be keenly observed. The deflator has been static around 1.5-1.6 per cent since September, but an increase to 1.8 per cent is expected in March.

• Also on Monday US pending home sales are tipped to lift by 0.6 per cent in April following a 3.1 per cent increase in March. Regional manufacturing surveys from the Chicago and Dallas Federal Reserve are issued.

• On Tuesday US manufacturing surveys are released by Markit and the ISM. According to ISM, new orders, output and employment rose at a softer pace in March, decelerating from 14-year highs in February.

• On Wednesday the Chinese private sector Caixin purchasing manager’s index for manufacturing is released.

• Also on Wednesday the US Federal Reserve announces its all-important interest rate decision. No change in interest rates are expected following last month’s increase. Policymakers have an optimistic view that the US economy is strengthening, the labour market is tightening and inflation will gradually rise over the coming months. The ADP survey is expected to show that private sector companies hired a further 200,000 job seekers in April.

• On Thursday the US ISM services sector survey is issued with factory orders and trade. US factory orders are expected to have increased by 0.9 per cent in March after rising by 1.2 per cent in February. A trade deficit of US$56.7 billion is forecast in March – near 9-year highs. Imports continue to increase on strong demand.

• On Friday China’s private sector services sector activity gauge is issued by Caixin.

• Also on Friday the US jobs report for April is released. The unemployment rate is forecast to fall to 4.0 per cent while the data should show an additional 195,000 jobs were created in the month.

Financial markets

The ‘Big Four’ Australian banks start reporting their first half-year 2018 earnings this week. Consensus earnings downgrades are expected on the back of increasing margin pressures from rising short-term funding costs and headwinds from regulatory reviews.

• ANZ kicks-off the results on Tuesday. Investor focus is likely to be on ‘stranded’ costs and guidance on additional capital management plans.

• National Australia Bank reports its earnings on Thursday. Progress on its restructuring and medium-term expense savings will be the key focal points.

• On Friday the composition of Macquarie Group’s earnings, specifically the balance between performance fees, trading and net interest income will be keenly observed.

 

Weekly Global Currency Outlook

• USD can lift further this week.  The loss of momentum in the world economy is supportive of the USD because it is a“counter‑cyclical currency” (chart 1).  In addition, the economic data in the Eurozone and the UK has largely disappointed while US economic data has beat expectations (chart 2).  We expect the world economy to grow solidly this year despite the recent loss of momentum.  However, the data released this week in the US (April ISM and core PCE deflator) and Europe (Q1 GDP) risks being weaker than expectations.  This combination will support further gains in the USD, though the USD may repeat its usual pattern of falling after the FOMC (Thu).

• AUD/USD has decreased by 7% since late January, repeating the episode from September to December 2017.  The likelihood is further downside in AUD this week.  A stronger USD and softening global economic data is part of the weaker AUD story.  Australia’s commodity prices have softened recently, but trended higher for more than two years (chart 3).  The higher commodity prices underline our view that AUD can recover.

• EUR/USD is expected to consolidate this week with risks on the downside. Q1 Eurozone GDP data is the highlight – we predict 0.3% growth.  Slowing economic activity reflects a natural slowdown from above trend growth last year and poor weather in February and March.  We do not anticipate significant EUR/USD declines because exporters will use any dip to buy EUR.

• GBP/USD is expected to consolidate over this week with downside risks.  Last week’s disappointing Q1 UK GDP data and slower March inflation suggest the Bank of England (BoE) may maintain rates at 0.5% at the May meeting.  Pricing for the next BoE rate hike is now for December 2018.

• NZD/USD will face the cross winds of supportive New Zealand data and a rising USD.  Our ASB colleagues expect dairy prices to increase by 1% based on current futures pricing (Tue), supporting NZD.  Our ASB colleagues also expect a solid 0.5% increase in Q1 employment and a decrease in the unemployment rate to a nine‑year low of 4.4%.  However, our ASB colleagues expect a modest 0.4% increase in labour costs, though the risks are tilted to the upside because of the tight labour market.

• USD/JPY has lifted sharply this month. The slump in Japan’s current account supported a lift in USD/JPY.  Japan’s current account surplus halved in February, though we suspect much of the narrowing is statistical noise.  We see more upside to USD/JPY this week, potentially up to 110.26 (200 day moving average).

• USD/CNH is expected to follow USD higher this week.  The official manufacturing PMI is unlikely to generate much volatility (11am Sydney).  By contrast, the visit by a US trade delegation on Thursday and Friday will be closely watched.  A more conciliatory tone could push USD/CNH lower towards 6.3000, and underperform its regional peers.

 

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