Weekly Market & Currency Developments – From Our Bankers

Weekly Global Currency Outlook

• The downgrade of the outlook for global economic activity will likely be a major theme driving currency markets this week. Softer global growth prospects, including the downgrade of global economic growth by the IMF this week, can benefit the USD mostly against the commodity‑sensitive currencies (like AUD, NZD and CAD).

• The IMF July World Economic Outlook Update is released at midnight Tuesday in Sydney (Monday, 3pm London and 10am New York). The IMF currently projects above‑trend world GDP growth of 3.9% in 2018 and 2019. But leading economic indicators suggest the IMF will revise lower its global growth projections. We forecast global growth of 3.6% (2018) and 3.5% (2019). In China, GDP growth picked‑up more than expected in Q2 (actual: 1.8%/qtr; consensus: 1.6%/qtr) but over the year the economy slowed in line with consensus at an annual pace of 6.7% in Q2 from 6.8% in Q1.

• USD will also take some of its cue from Fed chair Jay Powell testimony before Congress (Wed‑Thu). Powell is expected to reinforce the Fed’s commitment to a gradual pace of interest rate hikes which is USD supportive. But it will be interesting to see if Powell provides more colour regarding concerns around the flatter US yield curve and low US inflation expectations. To a certain extent, these two developments can limit the ability of the Fed to raise the funds rate significantly higher.

• In Australia, the July RBA meeting Minutes (Tue) and the June employment report (Thu) are the focus. The Minutes will continue to suggest that any increase in interest rates still looks to be some time away which remains a major headwind for AUD/USD. Meanwhile, Australian employment conditions remains encouraging and CBA economists project 15k rise in jobs in June (consensus: 16.5k).

• NZD/USD will trade on the defensive. In line with consensus, our ASB colleagues expects Tuesday’s New Zealand headline CPI inflation to accelerate at an annual pace of 1.6% in Q2 (or 0.5% over the quarter) from 1.1% in Q1. However, despite inflation lifting in Q2, the RBNZ is expected to leave the Official Cash Rate on hold for a substantial period of time (until November 2019 in our view) in part because core inflation remains relatively subdued. This means New Zealand real two‑year bond yields can narrow from 70bps to just 20bps this week if we are correct about annual headline CPI inflation lifting to 1.6% in Q2.

• GBP will be driven this week by European leaders’ response to the UK Government’s White Paper, as well as UK wages and inflation data. Faster UK average weekly earnings (ex‑bonus) growth (Tue) and/or headline CPI inflation (Wed) can raise the probability of 25bps Bank of England rate hike on 2 August, and bode well for GBP.

• USD/JPY is vulnerable to more upside because of: (1) higher US two‑year bond yields; (2) broad weakness in CNY and Asian currencies; (3) the recovery in US and advanced economies equity markets; (4) broad‑based USD strength.



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