The Dollar, which in trade-weighted terms had weakened to a 5-week low on 11 June, has clawed back 0.4% in the past three sessions ahead of today’s release of US retail sales data for May. The Dollar has appreciated against all major currencies and is up about 1% versus the Euro, Sterling and Australian and Kiwi Dollars.
While markets have upped their pricing of Fed rate cuts for 2019 from 63bp (on 11 June) to about 70bp, markets have becoming even more dovish with regards to other central banks. They are now pricing the RBA to cut rates 25bp to 1.00% at its August meeting and have increased their pricing of another RBNZ rate cut.
A number of local banks are forecasting policy rates in Australia and New Zealand to remain on hold in coming months but signs of slowing Chinese growth and mixed Australian labour markets data are likely fuelling markets’ dovish view of the RBA and bearish stance on the Australian Dollar. Industrial output growth in China, Australia’s main trading partner, slowed to a 17-year low of 5% yoy in May. The Australian economy created 42,300 jobs in May – a 9-month high – but only 2,400 of those were full-time jobs, only a modest improvement from April when full-time employment fell by 6,300.
Sterling is being buffeted by domestic political developments, specifically the race to succeed Theresa May, who officially resigned on 7th as leader of the ruling Conservative Party and Prime Minister. There are now six candidates left after the first round of internal voting (and one candidate pulling out). Former Foreign Secretary Boris Johnson is still the clear front-runner at this stage but is under increasing pressure to participate in a number of planned televised debates. The second round of voting by Conservative MPs will take place on 18th June with additional ballots scheduled for 19th and 20th June until there are just two candidates left. Conservative Party members will then vote in a ballot to elect their party leader and the de facto prime minister.
