Trouble in Oceania

The Swiss franc nudged the USD out of first place last week despite the news that Switzerland's economy shrank in Q1 by 0.2%, which may foreshadow a brief pause in the USD’s rally after strong advance since mid-May. A combination of month-end flows and a six point drop in Friday’s release of the May Chicago PMI, to contraction territory at 46.2, encouraged USD bulls to take profits ahead of this week’s busy economic calendar. The releases include a central bank meeting in Australia, the UK, and Europe as well as OPEC's semi-annual meeting. The key economic events are the monthly global PMI readings, Eurozone flash CPI, and the U.S. nonfarm payroll report.

The worst performing currencies last week came from the two main countries in Oceania, Australia and New Zealand as their currencies fell 2.7% and 2.38% respectively. Both economies are dealing with the reduced demand from China for their main export product, iron ore for Australia and milk for New Zealand. Both currencies are being pulled down against the USD by the divergence in monetary policy. 

The AUD was weighed down by Wednesday’s release of private capital expenditure which came in at -4.4% versus -2.3% that was expected. The data reveals that Australia’s transition away from a mining-dominated economy remains challenging and is still some time away. The capex data is the weakest in five years and supports the Reserve Bank of Australia's decision to cut the official cash rate in February and possibly at this week’s upcoming meeting.

The NZD fell to a five year low against the USD on Friday and has shed about 6.5% since mid-May as investors wagered that interest rates in New Zealand and in the U.S. were set on a diverging course. The catalyst for the move was the release of the ANZ Business Outlook Survey which fell to 15.7 in May from April's reading of 30.2. The survey showed that inflation expectations were at an all-time low of 1.6% in May, which is below the Reserve Bank of New Zealand's (RBNZ) 2% target midpoint. The string of poor data and dairy price indications has increased pressure on the RBNZ to cut rates. The central bank’s next meeting is on June 10th.