August 13, 2018

Australian Markets Weekly – NZD & AUD at the whim of Trump

The weekly highlights the outlook for the NZD and AUD.

For the full details, download the full report: Australian Markets Weekly 13 August 2018


  • Markets open the week adjusting to the sharp fall in the Turkish Lira over the past three days (a drop of circa 25%). This has seen a bid tone return to bonds, lowering yields in spite of the continuing drift higher in US inflation revealed on Friday night, while emerging market currencies and equity markets have weakened. The AUD, a favourite emerging-markets proxy, is also sharply weaker as a result, while the traditional safe-haven currency, the JPY has strengthened modestly.
  • The JPY would likely have strengthened further had the USD not been so strong. The broad USD trade-weighted index, the DXY, rose to the highest levels since mid-2017 as the higher US inflation print on Friday cemented expectations for a further US interest rate rise to occur in September.
  • This week, we highlight how we have become increasingly nervous about the outlook for the NZD and AUD. Our working assumption made at the beginning of the year of no major impact from trade wars is becoming increasingly challenged, notwithstanding the pressures from weakness in emerging market currencies and the continuing widening trend in Australian and NZ interest rates compared to US interest rates.
  • The scale of recent tariffs imposed has been modest to date. But if the US goes ahead and imposes another 25% tariff on $200b of Chinese imports, then that’s a whole new level of risk for the global economy to consider. Any final decision might come early-mid September and that will be crucial for the NZD and AUD outlooks. A US tax on all Chinese imports is the next possible threat to be actioned.
  • The NZD and AUD both currently trade below our short-term fair value estimates (6% and 2% below respectively), suggesting growing discounts reflecting the more uncertain outlook. We’d expect to see another lurch down in these currencies on any fresh tariffs of the scale proposed. Stress-testing our models, a move sub-0.65 for the NZD and sub-0.70 for the AUD couldn’t be ruled out in that event. On the other hand, a de-escalation of trade tensions could see modest recoveries in both currencies. The outlook has become binary.
  • On the Australian data front this week, it’s a big week with the latest NAB Business Survey (Tuesday), Q2 Wages data (Wednesday) and Labour Force data (Thursday) along with the RBA Governor’s semi-annual testimony (Friday). NAB sees slight downside risk to Q2 wages (+0.5% q/q, but Q3 wages is likely to print more strongly). On the other hand, we look for another stronger-than-market print on employment (+25K) that, depending on how the participation rate fares, produces some risk of a 5.3% unemployment rate. The latter would show some of the progress the RBA is looking for on the unemployment front to support a pick-up in wages, which is required to sustainably return inflation to the midpoint of the target.
  • Of interest in the media, the Government remains behind in the polls, which would seem to increase the likelihood that the next Federal election isn’t held until May next year.