The Australian dollar weakened today as RBA Governor Stevens said that inflation was still low despite unemployment and growth improving. German quarterly GDP was unchanged at 0.70%, and the UK’s budget deficit narrowed in April.
Today’s Economic events
- RBA Gov. Stevens speech
- Swiss trade balance 2.50 bn. vs. 3.14 bn.
- German final GDP q/q 0.70% vs. 0.70%; y/y 1.30% vs. 1.30%
- UK public sector net borrowing 6.6 bn. vs. 6.3 bn.
- German ZEW economic sentiment 6.4 vs. 12.1
- Eurozone ZEW economic sentiment 16.8 vs. 23.4
- UK Inflation report hearings
Coming up
- US New home sales
- Richmond manufacturing index
- New Zealand trade balance
AUD weakens as Stevens talks about inflation
The Australian dollar continued its declines today, trading at $0.715 at the time of writing. The AUDUSD has been in a steady decline for the past 4-weeks. Speaking at a business luncheon, the Reserve Bank of Australia governor Glenn Stevens said: “growth and employment in the country were solid, but inflation remains a bit too low.”
The comments saw the markets interpreting it as another sign of an impending rate cut with expectations starting to rise that the RBA will cut rates at the August meeting after the second quarter inflation data is released. Sean Callow Westpac Bank’s currency analyst said “the Australian dollar might find its feet soon. Even as the iron-ore price continues to drop, the wider basket of Australia’s export commodities is still higher over the year.”
The RBA cut rates in May by 25bps bringing the interest rate to 2.0% after leaving rates steady for a year. While employment and GDP growth have been better, inflation slipped in the first quarter of 2016, leading the RBA to lower its inflation expectations by a full one percent.
German GDP confirmed at 0.70% in Q1
The first quarter GDP growth in Europe’s largest economy was confirmed at 0.70%, while the annualized growth rate was unchanged at 1.30%, same as the preliminary estimates. Imports to Germany increased 1.40% while exports were up 1.0% during the reported quarter. Most of the GDP gains came from domestic demand. Despite an upbeat report, officials warn that growth might slow down over the coming quarters due to global headwinds. However, the German Chamber of Commerce, in a report today said that it expects Germany to grow at a pace of 1.50% this year, up from its previous estimates of 1.30%. It is, however, lower than the government’s yearly GDP forecasts of 1.70%.
The report said, “Consumers’ buying mood will carry the economy through the year. Trade and consumer-related services companies are particularly optimistic. The construction sector this early summer is extraordinarily optimistic about the future course of the year.”
In a separate report, data from ZEW showed that the German economic sentiment increased 6.4, less than the forecasts of 12.1 and down from April’s 11.2 increase.
UK budget deficit narrows in April. BoE Inflation report hearings
The UK’s public sector net borrowing narrowed to 0.3 billion GBP in April, compared to 7.2 billion last year, data from the UK’s Office for National Statistics showed today. However, April’s deficit was less than the forecasts of 6.4 billion. By the end of April, UK’s public sector net debt excluding public sector banks was equal to 83.3% of the economy’s GDP. For the period of 2015/2016 fiscal year, the public sector borrowing was revised higher. For the fiscal year ending April, UK’s borrowing excluding public sector banks fell 15.70%
The Bank of England officials were also testifying to the UK’s Treasury Select Committee. In the meeting, BoE Governor Carney said that the outcome on whether to stay or leave the EU had unusually impacted the exchange rate. In his testimony, Carney said, “The effect on sterling is unusually identifiable and related to the referendum.” Other BoE members weighed in as well with Broadbent saying “Brexit would leave to period of lower growth” while Vlieghe said that “Brexit likely to cause material slowing in growth and would increase the risk of recession.”
Institutional call of the day – Short GBP/CAD – RBC*
Analysts at RBC noted that GBP/CAD could be the trade of the week. The trade recommendation is to sell GBPCAD at 1.0933 for a target of 1.8660 and a stop loss at 1.9250. GBPCAD is currently trading at 1.9165. The trade recommendation comes ahead of the Bank of Canada’s interest rate decision tomorrow where RBC analysts believe the that the no-change to interest rates will be ‘CAD-positive.’ RBC notes that “the economic impact of the Alberta wildfires as transitory and a somewhat stronger CAD as in line with fundamentals.” On the GBP, RBC notes that the recent GBP outperformance could easily turn around if polls suggest a higher risk of a vote to leave the EU in the June 23 referendum.
* Institutional Call of the day is not a recommendation or an endorsement by Orbex.com to buy or sell
