Weaker USD, Global Growth and Commodity Currencies


A weaker USD, looser financial conditions and the Brexit risk event out of the way have meant that there are signs of businesses starting to grow around the world. We are not saying that all is rosy and that growth rates will reach average pre-2007 levels, but we believe that the FX markets right now will respond to changes in economic circumstances and surprises. In fact, the MSCI world equity index has become more correlated with global economic surprises. Economic data divergence between the eurozone and US should help EURUSD to break beyond the previous high at 1.1366, opening room towards our 1.16 target.

Today’s durable goods data will be watched for the USD side keeping 3Q on pace for a fourth straight decline in real equipment investment. The regional Fed surveys have also been pointing towards a flat reading in July. In contrast, eurozone activity has been stabilising, with the WSJ reporting that eurozone companies are planning to raise investment spending even after the Brexit vote. A larger proportion of companies in Germany, France and Spain were planning to increase capital spending relative to the previous survey in February. The ECB’s corporate bond purchases pushing down borrowing costs and money supply data released tomorrow expected to have grown by 5%Y (M3) in July support the case for EUR-USD data divergence.
Economic support in the eurozone should also spill over to Sweden. Today we get the release of the August Economic Tendency Survey, which usually gives a good guide for how the Riksbank is going to describe the economy at its September 7 meeting. We find that the manufacturing sub-component lags the German Ifo expectations index by three months , suggesting upside to Swedish manufacturing data today, which SEK is generally more sensitive to. Surprisingly SEK is less sensitive to consumer data, which could remain weak as the previous population-related consumption boost has started to slow and retail sales growth appears to be on a downtrend.

Similar to the RBA, the RBNZ has found it difficult to use monetary easing to weaken its currency as the global bid for yield continues. NZD may also receive some further support as its main commodity export, dairy, is doing particularly well at the moment. This morning Fonterra, New Zealand’s largest dairy cooperative, unexpectedly announced that it would increase its milk payout to farmers to $4.75/kg from $4.25/kg. Whole milk powder prices have risen 45% since mid-July from $2000-2080/mt, supported by generally lower supply. Removing limits on European production last year was perceived to add to global milk supply volumes but, according to Fonterra, production in the EU has been falling and in New Zealand it was 4% lower.
There are risks now emerging for AUD in relation to iron ore which would further support this trade. The overcapacity in China’s steel industry has barely reduced, with steel production only down 0.5% in the first seven months of the year, which has allowed iron ore prices to rally 27% since June and kept AUD on an upward path. This morning’s data from the Hebei Provincial Development and Reform commission showed that steel capacity is set to be cut by 16m tonnes, double the initial target of 8.2m set at the start of the year.