The USD weakened overnight, in a night of focus on Europe with the US out for its Independence Day holiday. Despite further ructions in UK politics and soft data (admittedly second tier), Sterling managed a slight gain in a session also marked by some support for the EUR.  Sterling and the EUR dipped, but only briefly, after a weak UK Construction PMI (the sharpest contraction since 2009, and for June, pre-Brexit) and for the Euro, the EC’s Sentix Investor Confidence Survey for July revealing a sharp decline in expectations.

Seemingly at his moment of political triumph, UK Independence Party leader Nigel Farage, resigned saying now he has his “country back”, “I want my life back”. Meanwhile, in a FT interview, the Chancellor of the Exchequer, George Osborne had set a goal of further reducing the company tax rate from 20% to 15% to support businesses investing in the UK.  (The rate is already scheduled to fall to 17% by 2020.) The GBP/USD sits just below 1.3300 currently, having briefly spiked to 1.3340 in the early hours of this morning.

The AUD and the NZD sit at the top of the overnight major FX leader board, the AUD trading toward the mid 0.75s this morning and the NZD comfortably over 0.72.  In fact, the NZD, AUD, CAD and NOK have all traded higher since the start of the week, despite a drift lower in oil and base metals overnight, though iron ore rose 3.48% to $56.22/t, the highest since May 18. The AUD/USD had opened lower, given the overhang of the undecided Federal election, but the impact proved temporary. Not even sterner words yesterday from S&P could hold the AUD back, S&P saying that “we could lower the rating if parliamentary gridlock on the budget continues and Australia’s budgetary performance does not improve broadly as we expected a year ago”.  Moody’s commented that short-lived political uncertainty would have limited implications for Australia.

Coming up

The focus will be on retail sales (and international trade) for May at 11.30, followed by the RBA at 2.30.  For retail sales, our stronger 0.5% pick (market 0.3%) is based on some expectation higher clothing/department store sales from increased discounting to reduce inventories.  (The arrival of the colder weather (and continued rains) did not really gather force until June and could have boosted clothing sales further.)

For international trade, NAB looks for a similar deficit as in April with higher iron ore and coal loadings likely offset by a monthly pull-back in gold exports in May, after two very strong months in March and April.

As for the RBA, it seems unlikely to us that not only will the RBA would include any explicit easing bias given 1) the non-mining economy has been performing reasonably well over the past month, and 2) immediate post-Brexit volatility evident in global markets looks to have dissipated with capital markets showing signs of re-opening, providing issuers with access again to financing.  The July 27 release of the June quarter CPI remains the upcoming event risk as far as the RBA is concerned and whether it will change, or put at risk, the RBA’s inflation forecast track, including the return to surplus in 2018.  The current RBA track embodies a forecast for underlying inflation of around 0.4% for Q2.

Tonight, the US markets re-open after the Independence Day holiday long weekend.  There is no major US data but influential NY Fed President Bill Dudley is speaking.  There will likely be some more focus on Brexit with the five nominations for leadership of the Conservative Party being narrowed down to two tonight.  There is also another GDT dairy auction tonight, our BNZ colleagues suggesting that it could be affected by negative Brexit sentiment.

Overnight

US markets were closed.  The Eurostoxx 600 index fell 0.74%; German 10 year bund yields eased 1.5 bps to -0.141%. In commodities, Brent crude oil -0.50% to $50.1, gold+1.1% to $1,354, iron ore +3.5% to $56.22. AUD is at 0.754 and the range since yesterday 5pm Sydney time is 0.7504 to 0.7543.

Good luck.

For full analysis, download report:

• Markets Today: 5 July 2016 (PDF, 1MB)

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