Equity markets ended last week on a soft note; AUD opened higher this morning; there may be some positive knock-on effect to the NZD; USD was stronger across-the-board on Friday

Equity markets ended last week on a soft note amid reports that plans for fresh US-China trade talks had been put on hold.  The big news over the weekend was the surprise victory for the Liberal-National coalition in the Australian election, which will likely see the AUD open higher this morning.  There may be some positive knock-on effect to the NZD, which closed at its lowest level of the year on Friday. 

The victory for Scott Morrison and his Liberal-National coalition over the weekend went against predictions from both pollsters and betting markets (the latter assigned them a less than 20% chance of winning) and is likely give the AUD a boost when markets open this morning.  The opposition Labour party had campaigned on change, including cutting carbon emissions, increasing the minimum wage, and ending some tax breaks for housing and equity investors.  Given Labour’s lead in the polls, the AUD had likely priced-in a reasonable chance of these policies being implemented, and with that uncertainty now removed, the result is likely to be seen as supportive for markets and the AUD, at least in the short-term. 

The AUD ended last week on a soft note, down 0.4% against the USD on Friday, to 0.6870, near its lowest level since 2009.  It was the second-worst performing currency on the week, down almost 2% against the USD.  While the AUD will likely receive a short-term uplift from the election result, the medium-term path of the AUD will be largely dependent on the evolution of US-China trade negotiations, the RBA outlook and commodity prices.  On that note, on Friday, our NAB colleagues brought forward their call for the first RBA rate cut to June and they expect the minutes to the RBA’s May meeting and Governor Lowe’s speech tomorrow to pave the way for a rate cut next month (currently 80% priced).  Working in the other direction, iron ore prices rose above $100 for the first time in five years on supply concerns, after Vale warned that there was a risk another of its dams could collapse. 

The NZD was down 0.3% on Friday, and 1.2% on the week, to close at 0.6515, its lowest level of the year.  There have been a few factors at play behind the recent fall in the NZD.  First, there has been a broad-based strengthening in the USD, with the USD indices approaching year-to-date highs.  Second, growing concerns about the risk of an all-out US-China trade war has seen the CNY weaken towards the psychologically important 7.0 level against the USD (USD/CNY closed last week at 6.92), which in turn has weighed on the NZD (and the AUD).  But there may be some positive knock-on effect to the NZD from the Australian election result when trading opens this morning. 

In terms of Friday night’s trading session, US equity markets closed down by between 0.4% to 1%, with markets concerned by a CNBC report that the scheduling of the next round of US-China trade talks had been put on-hold due to the recent US restrictions placed on Huawei.   Sources told CNBC that the scheduling arrangements were “in flux”.  Semiconductor stocks fared poorly for the second day running, with the US commerce department’s decision on Thursday to place Huawei on its so-called ‘Entity list’ continuing to reverberate.  Huawei is a major purchaser of US semiconductors, and US companies will now need to apply for a special licence to sell equipment to Huawei.  The Philadelphia semiconductor index fell 2%. 

On a more positive note, Trump announced that the US had come to an agreement with Canada and Mexico to remove tariffs on imports of aluminium and steel.  The decision removes one of the hurdles to congressional approval of USMCA, the trade agreement set to replace NAFTA.  The Canadian dollar outperformed on the news and was the only G10 currency not to fall against the USD on Friday.  Analysts were quick to point out that Trump’s decision to remove steel and Aluminium tariffs on Canada and Mexico, as well as his decision to delay auto tariffs by up to six months (which would hit the EU and Japanese economies), creates the impression that he is narrowing his trade focus to China. 

The USD was stronger across-the-board on Friday, with the USD indices up by around 0.2% on the day and 0.7% on the week.  The DXY index finished the week just below 98, close to its highest level since mid-2017.  The USD benefited from a much stronger than expected University of Michigan consumer confidence index, which rose to its highest level in 15 years.  The elevated level of consumer confidence points to the continued resilience of the US consumer, and is another indicator that suggests last week’s soft retail sales release should be downplayed. 

Additionally, the survey’s 5-10 year inflation expectations bounced from 2.3% to 2.6%, leaving it above the 2.5% average since the start of 2017.  This was the preliminary reading of the survey which covers a smaller sample of consumers, and these initial readings on inflation expectations can be subsequently revised when the final survey results, which cover a larger sample, are released early the following month.  But at face value, it suggests that consumers’ inflation expectations have remained reasonably stable, despite the recent fall in US core inflation.  US Treasury bond yields reversed earlier declines after the consumer confidence release, to finish unchanged on the day.  The US 10 year Treasury yield closed the week at 2.39%, with the market still pricing around 30bps of Fed rate cuts by the end of the year.  

The GBP was the worst performing currency on Friday (-0.6% to 1.2725), and the week (-2.1%), after confirmation Theresa May and Jeremy Corbyn had decided to end cross-party talks on Brexit without agreement.  This was seen as further reducing the chances of May getting her withdrawal agreement bill through parliament in early June, which would set the stage for her to step down as prime minister.  May wrote in the Sunday Times that a “new and improved” Brexit deal would be presented to parliament, but commentators think the chances of it passing are slim.  The front-runners to replace May are hard-Brexiteers (Boris Johnson is a 2:1 favourite with betting companies), and the market may start to get nervous that the new leader will seek to take the UK out of the EU without a deal at the end of October.  There is also the lingering risk that a new leader may choose to hold new elections in a bid to break the parliamentary impasse over Brexit and seek a fresh mandate from the electorate. 

NZ rates were little changed on Friday but lower on the week.  The 2 year swap closed at 1.545%, its lowest level on record, and down 7bps on the week.  On the domestic data front, the NZ Manufacturing PMI rebounded to 53 last month (a level above 50 indicates expansion in the industry), although it remains at relatively low levels in the context of the past few years and the underlying detail of the survey wasn’t as strong as the headline (four of the five subcomponents actually declined on the month). 

In the week ahead, there will be focus on the RBA Board meeting minutes and Governor Lowe’s speech, both released tomorrow, which our NAB colleagues expect to pave the way for a rate cut next month.  In Europe, the PMIs and German IFO will provide a fresh read on the European growth pulse.  In the US, the FOMC minutes are released and there are a raft of Fed officials speaking, including Chair Powell tomorrow morning NZT.  The highlight locally is the release of retail sales on Wednesday.  Of course, reports on US-China trade negotiations will remain a major driver of market sentiment in the week ahead as well. 

Get our daily currency email by signing up here:

BNZ Markets research is available here.