Summary on Trade Partner Currency Performance for June
Gary is a Foreign Exchange Dealer, Treasury Dept at HFC Bank
International economic performance, including our larger counterparts, continue to gain a lot of attention over the weeks. In the foreign exchange market, the economic performance of a nation is monitored to draw conclusions on the trading pattern of that country’s currency.
Let us have a look at how our major trade counterpart economies performed over the previous two months during the Covid-19 pandemic and how they have impacted our import forex rates.
USD
Several negative US economic data saw the Fijian Dollar strengthen against the US dollar from US$0.4424 (FJ$0.9615) to US$0.4524 (FJ$0.9832) in the first week June.
The U.S. manufacturing sector contracted at a softer pace in May than it did in April with the ISM Manufacturing Purchasing Managers’ Index (PMI) improving to 43.1. However, this came in slightly worse than market forecast of 43.6.
The U.S. service sector contracted for the second straight month in May with the ISM Non-Manufacturing PMI arriving at 45.4. This reading followed April’s result of 41.8 and came in better than the market expectation.
U.S. companies shed 2.76 million jobs in May, signaling that the coronavirus pandemic’s toll on employment may have peaked and rehiring may be under way.
The result for May is far less bad than the expected decline of 9.25 million.
The job losses in May follow a revised decline of 19.56 million in April, the first and only full month of lockdowns across the U.S. An additional 1.877 million Americans filed for unemployment benefits in the week ending May 30, exceeding economists’ estimates for 1.843 million initial jobless claims during the week.
The report marked the first time that weekly initial jobless claims came in below two million in 10 weeks.
Over the past 11 weeks, more than 42 million Americans had filed for unemployment insurance.
Surprisingly, COVID-19’s devastating assault on the U.S. economy waned in May as the unemployment rate unexpectedly dipped to 13.3 per cent from 14.7 per cent and the U.S. regained 2.5m jobs.
The surprise news follows the loss of 20m jobs in April.
By the second week of June, the Fijian Dollar traded as high as US$0.4558 (FJ$0.9906) and weakened to as low as US$0.4505 (FJ$ 0.9791) at the end of the following week.
U.S. consumer prices fell for a third straight month in May and underlying inflation was weak, as demand remained subdued.
Consumer price index
Consumer price index dipped 0.1 per cent last month after falling 0.8 per cent in April, which was the largest decline since December 2008.
U.S. retail sales rebounded by a record 17.7 per cent in May as American consumers began spending and states gradually reopened their economies following the pandemic lockdowns.
It was the biggest monthly gain on record, dating back to 1992.
The rise surpassed the October 2001 reading of 6.7 per cent and followed a decline of 14.7 per cent in the previous month.
It was also more than double expectations of an 8.2 per cent increase.
The Federal Reserve left its interest rate unchanged at 0.25 per cent and gave a strong indication that it will remain at least until the end of 2022.
Chairman Jerome Powell projected, not forecast, the Gross Domestic Product to contract by 6.5 per cent and core inflation to rise by a modest 1 per cent.
Next week sees the release of U.S. Consumer Confidence, Nonfarm Employment Change and Unemployment Rates all forecast to improve compared to the previous months.
AUD
Trading the start of June at AU$0.6639 (FJ$ 0.9893), the Fijian Dollar weakened against the Aussie Dollar to AU$0.6508 (FJ$0.9698) by the end of the first week.
Australia is heading for its first recession in nearly thirty years after the economy shrunk in the January-March quarter, with a “far more severe” reading expected in the next three months as the effects of the crisis restrictions.
The 0.3 per cent contraction in Gross Domestic Product was the first quarterly drop since 2009 during the global financial crisis and came as the pandemic restrictions exacerbated the impact of a prolonged drought and massive bushfires.
Reserve Bank of Australia
The Reserve Bank of Australia kept its interest rate at 0.25 per cent amid calls for it move below zero.
The central bank declared it “extraordinarily unlikely” that it will embark such a policy and “sees the holding pattern continuing for the foreseeable future.”
The Australian Performance of Construction Index rose to 24.9 per cent in May from 21.6 in April.
The reading below 50 suggests that the sector continues to decline, thought at a slower rate.
Building Permits fell 1.8 per cent in April but the drop was nowhere near as big as the forecast drop of 15 per cent.
AIG Australian Performance of Services Index rose by 4.5 points to 31.6 in May, indicating another serious contraction in activity, though at a slower pace than the previous month.
Restrictions on commercial activity have now been in place since March, to varying degrees, around Australia.
Australia recorded a trade surplus of AUD$8.8billion (FJ$13.11b) in April, a decrease of AU$1.6 (FJ$ 2.38b) on the surplus the previous month.
This was a result of a decline in imports and exports by 9.8 per cent and 11.3 per cent, respectively.
Fijian Dollar
The Fijian Dollar continued to weakened to trade just below AU$0.65 (FJ$0.96) but gained momentum ending the third week of the month at AU$0.6566 (FJ$0.9788).
Consumer confidence rose for a second consecutive month in June to recover all of the historic loss suffered during the peak of the coronavirus restrictions, a promising sign for spending and the economy in general. Confidence climbed 6.3 per cent in June, from May when it jumped a record 16.4 per cent. HIA New Homes Sales dropped 4.2 per cent while the House Price index for the first quarter missed the 2.7 per cent forecast to register a 1.6 per cent increase.
Employers shed more jobs as expected in May living an additional 230,000 Australians without work.
Participation rate
The Participation Rate dropped from 63.5 per cent to 62.9 per cent while the unemployment rate by less than 1 per cent to 7.1 per cent for the same month.
Retail sales leaped to a record 16.3 per cent in May, following a 17.7 per cent plunge in April, amid a progressive easing of coronavirus-related controls during the month. Retail turnover in May increased to AU$28.83b (FJ$ 42.97b) and was up 5.3 per cent from May 2019.
The May numbers beat expectations and surpassed even pre-COVID levels from both February and a year ago.
NZD
Trading at NZ$0.71 (FJ$0.98) at the opening of June, the first two weeks saw the Fijian Dollar weaken by NZ$0.02 (FJ$0.027)
New Zealand’s term of trade index dropped 0.7 per cent in the first quarter, which was worse than the forecast 1.3 per cent rise.
This was a result of exports decreasing by 0.2 per cent while imports increase by 0.5 per cent.
Building consents fell to a seasonally adjusted 6.5 per cent after falling 22 per cent the previous month.
Electronic card spending rebounded by close to 80 per cent or NZ$2.3b (FJ$3.20) in May following extremely low levels in April as businesses reopened after the nationwide lockdown.
Consumables and durables
Consumables and durables were the only two retail industries of six to record spending compared to the previous year.
The partial recovery was a direct result of more businesses re-opening during Alert Level 2, which started on May 13, after sales plunged during Level 4.
Before the close of the second week, the Fijian Dollar traded at its lowest for the month at NZ$0.6905 (FJ$0.9628).
However, after the release of GDP figures, the kiwi currency weakened to NZ$0.70 (FJ$0.97).
The New Zealand economy contracted for the first time since late 2010 as it felt the first impact of the COVID-19 pandemic.
Gross Domestic Product fell 1.6 per cent in the first quarter – the largest single quarter drop since 1991.
However, it is expected the current quarter ending this month will produce the biggest single slump in economic activity in more than a century.
JPY
The Fiji Dollar strengthened against the Japanese counterpart peaking at 48.91 Yen (FJ$0.99) only to reverse moment to 47.37 Yen (FJ$0.96).
Japan household spending in April fell 11.1 per cent for a year earlier, declining for the seventh straight month, as the pandemic kept consumers at home.
This was the largest decline since comparable data become available in 2001.
Increase speanding on food items
Meanwhile, spending rose on food items for home consumption and computers as the pandemic forced people to work from home. Japan’s economy shrank at an annualized pace of 2.2 per cent in the first quarter, less than initially estimated 3.4 per cent but the wide impact from the pandemic is still expected to the take country deeper into recession.
The revised data confirmed Japan had slipped into recession for the first time in four and half years, after an annualised 7.3 per cent contraction in October to December. Capital expenditure rose 1.9 per cent while private consumption, which accounts for more than half of the Japanese economy fell 0.8 per cent.
The Bank of Japan kept its interest rate at -0.10 per cent stating it would likely remain ultralow into 2023.
EURO
The Euro was volatile toward mid-June trading as low as EUR0.40 (FJ$97.75) but strengthened to EUR0.4033 (FJ$0.9855) after the announcement of the Eurozone economy contracting by 3.6 per cent in the first quarter.
The Eurozone jobless rate rose to 7.3 per cent in April from 7.1 per cent in March, as member countries implemented coronavirus containment measures.
The number of unemployed increase 211,000 to over 11.9 million in April.
A first peek at consumption in the second quarter confirms that the second quarter will be worse than the first.
Retail sales declined steeply for the second consecutive month in April decreasing 11.7 in April, following an 11.1 per cent drop in March.
The European Central Bank kept its interest rate at zero per cent.
Additionally, the central bank will increase its Pandemic Emergency Programme by 600 billion Euro (FJ$1,466.27) to a total of 1,350 billion Euros (FJ$3,299.11) as it attempts to boost the economy.
It also extended the scheme’s duration until July 2021, or until the bank believes the crisis is over.
The Eurozone economy slumped 3.6 per cent in the first quarter as lockdowns can into effect, slightly beating the previous estimate of a 3.8 per cent contraction.
GDP is forecast to contract by 8.7 per cent this year before rebounding to 5.3 per cent growth in 2021 and 3.3 per cent in 2022.
European Central Bank
European Central Bank President Christine Lagarde explained that the forecasts were dependent on the duration of the pandemic and the effectiveness of policies taken across the region.
Understanding the economic development of our trade partner countries are much more imperative given the direct relation our Fiji Dollar has with our trade partner currencies.
Our Fiji Dollar operates on a pegged exchange rate regime, which is fixed to a basket of currencies that are its major trading partners.
These are the United States, Australia, New Zealand, Japan, and the Euro Zone.
While there has been some sharp movements in exchange rate of the Fiji dollar against the basket currencies over the month due to the volatility in the global market, it is our view that the Fiji dollar will remain steady over the medium term.
In addition, with foreign reserves at just over $2.2b and measures put in place to protect our external position, we do not see any exchange rate adjustment or intervention by the RBF.