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By Nick Parsons

RBA meets on Tuesday, BoC on Thursday. Currencies had a wild day on Friday; will it be calmer this week?


Australian Dollar

AUD

Expected Range

The Aussie Dollar really came back from the dead in the final few hours of trading last week. Whether the economic numbers were poor (consumer confidence) or pretty good (Q3 capex), the AUD edged steadily and continuously lower.<br> <br> AUD/USD opened the week around 0.7610 and by Wednesday morning it was down at 0.7557, having fallen against most of the major currencies. By Friday, AUD/USD had steadied in the mid-upper 0.75’s but GBP/AUD had jumped almost 4 cents to a near 18-month high of 1.79 in the very trading session of the week came the Flynn/Trump/FBI story, which initially slammed stocks and the USD lower. Though stocks recovered most of their losses into the close of business, the US didn’t. With the British Pound also showing some nerves around the survival of the Coalition government, AUD/USD finished the week where it began at 0.7610 whilst GBP/AUD lost almost two cents from its high to finish at 1.7705.<br> <br> For the week ahead, the immediate focus is on Tuesday’s RBA meeting then the big data release of Q3 GDP (which the folks in Martin Place will already have had sight of). Three hours ahead of the RBA will also have October’s retail sales numbers which will give us an idea of how Q4 is beginning to shape up.

British Pound

GBP / AUD

Expected Range

The GBP had the wildest time of all last week, surging to multi-month highs against the ‘Commonwealth Currencies’ and from Tuesday’s low point against the US Dollar, it then advanced more than three cents. The political focus was initially on the possibility that the Brexit Secretary could be held in contempt of Parliament. GBP/USD held steady around 1.3330 but moved sharply lower Tuesday when the Bank of England’s Financial Stability Report highlighted many of the downside risks to the UK economy and its banking system.<br> <br> GBP/USD hit a session low late in the afternoon of 1.3230 before the totally unexpected headlines that “Britain and EU agree Brexit Divorce Bill”. As these allayed fears of a collapse of the negotiations, the British Pound surged. GBP/USD rose to 1.3375 in a matter of minutes whilst GBP/AUD jumped from 1.7370 to just over 1.76. The move extended into Thursday and by Friday morning Sydney time, the GBP hit USD1.3540 and AUD1.7900. We began to sound a note of caution after this move, largely because of talk of some unrest from Conservative MP’s about the size of the Brexit bill, but also because of talk about an Irish border agreement which looked to be unacceptable to the Government’s DUP Coalition partners.<br> <br> Over this last weekend, Theresa May’s Social Mobility heads resigned en masse whilst a group of Conservative MP’s and ex-Ministers calling themselves ‘Leave Means Leave’ have set out a list of conditions upon which they threaten to base their support. The huge optimism of last Thursday already seems a fading memory. We’ll have to see now whether Friday’s late sell-off in GBP (which took it down to USD1.3475 and AUD1.7700 is extended further).

Canadian Dollar

AUD / CAD

Expected Range

The Canadian Dollar just had an incredible week. Ahead of the 173rd OPEC meeting in Vienna, it spent the first three days tracking an ever-lower oil price. There are usually some hints and rumours and leaks about production cutbacks but as none of these were forthcoming, NYMEX crude fell to $57.30, the CAD was sold heavily and USD/CAD reached 1.29 for the first time in 5 months.<br> <br> From 1600GMT on Thursday afternoon, oil rallied 75 cents and by the New York open on Friday was back up at $58.75. This alone was offering some support the CAD, but then came a stunning Canadian labour market report. Consensus expectations were for an increase in November employment of around 10,000. Instead, a total of 79,500 jobs were added, pushing average earnings up from 2.4% y/y to 2.7%. By the end of the North American session, with the US Dollar in retreat on the Trump/Flynn story, USD/CAD had suffered its biggest daily drop in 21 months. The pair crashed from 1.2900 to close at 1.2684 with the CAD surging against every currency. AUD/CAD fell a full cent to 0.9650 whilst NZD/CAD fell 80 pips to 0.8745.<br> <br> The Bank of Canada holds its 8th and final monetary policy meeting of the year on Thursday, though for the CAD it’s hard to imagine much more volatility than we saw at the very end of last week.

Euro

AUD / EUR

Expected Range

The last week was a very frustrating time for those analysing or trading the Single European Currency. It had a whole series of reversals in both directions before ending the week very slightly lower against the USD at 1.1900. AUD/EUR traded an 80 pip range between 0.6380 and 0.6420 and a 60 pip rally off the low on Friday actually saw the Aussie finish higher on the week; something which had looked extremely unlikely when traders in Sydney pulled stumps.<br> <br> The EUR had to contend with the labyrinthine uncertainties around a new German coalition along with conflicting inflation reports across the Eurozone; stronger CPI in Germany but weaker in Italy. Economic indicators were uniformly very positive but the bar of expectations is already set very high and the news wasn’t sufficiently greater than consensus expectations to give the EUR much of a lift. As we described it on Thursday, “Foreign exchange is supposed to be a ‘zero sum game’. Sometimes, though, it just feels there are more losers than winners. For EUR/USD, this is one of those weeks”.<br> <br> Looking forward, Tuesday brings the various PMI service sector indices across the Eurozone whilst Wednesday it’s German factory orders and on Thursday we have German industrial production. Ahead of the Council Meeting on December 14th, we may get a few ECB speakers early in the week but otherwise it all seems pretty quiet. There is no need for the Central Bank to give any signals one way or another and they’ll be pretty happy if traders endure another frustrating week of little net change for the EUR.

New Zealand Dollar

AUD / NZD

Expected Range

The New Zealand Dollar had a pretty wild time last week. AUD/NZD broke down on Monday from the relatively tight 1.1060-1.1120 range which had contained it for 3 or4 days previously. The break triggered a series of NZD buy orders across a whole range of currencies and it finished the day by some distance the best performer of all the majors.<br> <br> NZD/USD moved up from 0.6855 on Monday to a high of 0.6940 on Tuesday as the positive momentum continued. Wednesday’s Financial Stability Report and the comments by Acting RBNZ Governor Spencer came and went without drama but the big shock for the NZD came Thursday with a very weak ANZ business outlook report. This showed New Zealand business confidence has tumbled to its weakest since the global financial crisis amid uncertainty over the policies of a new center-left government. A net 39.3 percent of firms expected the economy to deteriorate in the next 12 months; down from 10.1 percent in October and the lowest reading since March 2009. NZD/USD tumbled half a cent to 0.6835 then on Friday it extended losses to 0.6828. When the Flynn/Trump/FBI story broke in New York, however, the pair jumped to 0.6890 and – as with the Aussie Dollar - it ended the week almost exactly unchanged.<br> <br> Looking forward, its still a very long wait to the Q3 GDP figures on December 21st (more than 2 weeks after Australia) but in the meantime we’ll have some of the ‘partial’ data which then feed into the number. Tuesday is Building Work, Thursday is Wholesale Trade and Friday is the Manufacturing Survey. It will be tough to repeat last week’s dramas for the NZD but in Foreign Exchange, we learn never to say never!

United States Dollar

AUD / USD

Expected Range

After a poor Thanksgiving holiday on FOMC concerns about an upturn in inflation, the USD did a bit better last week. The earlier negative momentum dragged its index down to a low of 92.20 on Monday morning but this proved to be the low of the week. Stronger economic reports (house prices and consumer confidence) and fresh all-time highs for the US stock market helped lift the Dollar index to a high of 93.1 on Friday morning.<br> <br> Fed Governor Jerome Powell’s Senate Confirmation hearing proceeded smoothly on Tuesday whilst outgoing Chair Janet Yellen then sounded a bit more certain about the economy and inflation. The closely watched PCE numbers were exactly in line with consensus expectations at 1.4% y/y and the S+P 500 index hit a high of 2653 on Thursday. If the week had finished on Friday morning, it would have been a success for both the USD and the equity market.<br> <br> Instead, as the Trump/Flynn story broke, the USD index fell half a percent and at one point the S+P was 25 points lower. Every stock trader now knows that dips are for buying: the market regained all its losses in the last couple of hours and though some way off its best levels, the USD finished a net three-tenths of a point higher on the week at 92.57. The Fed is about to enter radio silence ahead of the Dec 12-13 FOMC meeting so the immediate focus for FX markets this Monday morning is Trump/Flynn and tax reform before attention shifts to the delayed payroll numbers at the end of the week.

By Nick Parsons

NZD tumbles, AUD edges lower, GBP still bid on Brexit news but can it last?


Australian Dollar

AUD

Expected Range

The very last day of the month of November saw the Aussie Dollar go up and down, but not necessarily in that order, and without any particular fresh sense of direction. It reversed direction at least four times over the past 24 hours and opens in Sydney this fine December morning almost exactly where it was this time yesterday around USD0.7570.<br> <br> At no point over the intervening period has it been back on a US 76 cents handle, with a high of 0.7593 and a low of 0.7569. Overall, this must be considered a pretty disappointing performance as the US Dollar itself fell against both the GBP and EUR. Against that backdrop, it requires few mathematical skills to work out that the AUD is down against both these currencies with GBP/AUD now on a 1.78 big figure for the first time since June 2016.<br> <br> One notable – and somewhat worrisome – feature of the session, was the lack of support the AUD received from a pretty decent set of economic data. There was little to find fault with in the Q3 Capex numbers which confirmed the RBA’s view in the November Minutes that it saw a pick-up in non-mining investment. It’s a pretty good trading maxim that, “a currency that doesn’t go up on good news is a currency that isn’t going up”. Today gives us a chance to test that adage with the release of Australia’s two competing purchasing managers’ indices early this morning. November was a very poor month for the AUD; will the last month of the year be any better?

British Pound

GBP / AUD

Expected Range

The pound has continued its remarkable run higher which has seen it rise almost 4 cents against the US Dollar and 6 cents against the Aussie Dollar in the space of less than three weeks. In our overnight commentaries for clients in the UK and North America, we made the observation that, “For the moment, the GBP seems only to want to hear good news, but with September’s highs for USD/GBP within touching distance, it may soon be time to question whether the recent strong rally has gone far enough”. This morning we’d repeat that comment for our Aussie and Kiwi audience.<br> <br> The great currency investor/speculator George Soros (like him or loathe him) coined the term “reflexivity” whereby price action itself determines the way that incoming news is viewed. If the market is falling, traders look for the bad news. In a rising market, all news is good. We’re tempted to wonder whether the GBP is currently a good example of this phenomenon? A combination of a Eurosceptic Conservative rebellion over a £50bn Brexit divorce bill and an Ulster Unionist Party who will not accept a hard border with England and Scotland certainly has the potential to halt and reverse the recent exuberance for the British Pound. If the DUP don’t like what’s being proposed, the Coalition Government will fail: the DUP exists only to protect the Union. The clue is in its’ name. For the moment, of course, the FX market is not in the business of ascribing nuanced probabilities. The pound is going up so the news is good. Let’s see if the exuberant mood lasts through December…

Canadian Dollar

AUD / CAD

Expected Range

We’ve said all week the Canadian Dollar would be driven by oil prices and news from the OPEC meeting. That’s pretty much how it panned out. In talks which seemed to go on until the last minute, both OPEC and non-OPEC producers led by Russia agreed on Thursday to extend oil output cuts until the end of 2018 as they try to finish clearing a global glut of crude while signaling a possible early exit from the deal if the market overheats. Kuwaiti Oil Minister Essam al-Marzouq told reporters the Organization of the Petroleum Exporting Countries and non-OPEC allies had agreed to extend the cuts by nine months until the end of 2018, as largely anticipated by the market. OPEC also decided to cap the combined output of Nigeria and Libya at 2017 levels below 2.8 million bpd. Both countries have been exempt from cuts due to unrest and lower-than-normal production. That’s the deal but traders were distinctly unimpressed. NYMEX crude fell from a European high of $57.92 to a low of $57.05 before settling at $57.30 whilst USD/CAD jumped to a 5-month high of 1.2905. Thankfully for those driven to tears by the sheer tedium of following OPEC and a near 1:1 correlation with the currency, the focus now shifts to Canadian economic data with Q3 GDP and the October employment reports released later today.

Euro

AUD / EUR

Expected Range

Sometimes foreign exchange can be a very frustrating asset class – how many times recently have we seen a move become established, gain traction and then reverse as quickly as it developed? The EUR is a very good example of this. On Wednesday it rose due to higher German CPI. On Thursday morning European time it fell due to softer Eurozone CPI (driven largely by Italy) and just as it seemed likely to test the recent range low around USD1.1825, it promptly surged almost a full cent before ending the month at 1.1900; a net gain of around 250 pips from Halloween’s USD1.1650 close.<br> <br> Over the last 4½ weeks since “Trick or Treat”, AUD/EUR has tumbled from 0.6580 to 0.6355, whilst NZD/EUR is down from 0.5925 to 0.5740. The new month begins, unusually, without US payrolls on the first Friday. The US national holiday for Thanksgiving on November 23rd has delayed publication of the US employment report until December 8th so the main data focus for the EUR/USD pair today will be final Eurozone PMI data. Spoiler alert: the ‘flash’ estimates showed manufacturing growth at a 17-year high. Beyond that data release, currency traders will have eyes firmly on the weekend. Foreign exchange is supposed to be a ‘zero sum game’. Sometimes, though, it just feels there are more losers than winners. For EUR/USD, this was one of those weeks…

New Zealand Dollar

AUD / NZD

Expected Range

The Kiwi Dollar has gone from hero to zero. Monday’s technically-driven squeeze higher against all the major currencies has been fully reversed by incoming fundamental news. On Thursday the NZD was by some margin the worst performer of all the major currencies we follow here. The culprit was a very weak ANZ business outlook report which showed New Zealand business confidence has tumbled to its weakest since the global financial crisis amid uncertainty over the policies of a new center-left government. A net 39.3 percent of firms expected the economy to deteriorate in the next 12 months; down from 10.1 percent in October and the lowest reading since March 2009.<br> <br> A separate gauge of expectations for their own activity also fell to an eight-year low and it appears that political uncertainty and a slowing housing market are hurting investment and consumption and threatening to curb economic growth. This incoming data is at odds with the OECD’s very upbeat assessment of the NZ economy in Wednesday’s semi-annual report but it has certainly taken the wind out of the Kiwi Dollar’s sails. NZD/USD ended November at USD0.6840 with AUD/NZD at 1.1065; a frustrating and perhaps expensive month for those who have sought to pick the bottom of the Kiwi’s 10-week decline.

United States Dollar

AUD / USD

Expected Range

At the beginning of November, the Dollar’s index against a basket of major currencies stood around 94.3. It has since been as high as 94.8 on November 7th with a low of 92.2 on Monday 27th; a relatively narrow range of just over two points before finishing around 92.70. Four weeks ago, the Dollar was being driven higher by hopes of tax cuts, a Budget boost to infrastructure investment and a stock market which stood at an all-time high. Here we are today, with the Budget still not passed but equity markets which are even higher still; the S+P 500 has added 75 points in the space of just over 20 trading days. Interest rate expectations have barely shifted over this period. A 25bp rate hike on December 14th still looks a done deal barring any external shock, whilst incoming Fed Chair Jerome Powell seems unlikely to deviate from the monetary policy path set out by his predecessor.<br> <br> What has changed a little is the economic and political outlook elsewhere in the world. The UK seems to have made some progress with Brexit negotiations whilst the European economy is growing at its fastest pace in almost 20 years. As all currencies are relative prices, the adjustment to this incoming news flow has made the GBP and EUR a little more attractive than they previously were. We’d characterise the US Dollar as “down but not out”. Plenty could still happen in December to change that view.

By Nick Parsons

GBP extends gains on Brexit talk, Aussie Dollar has few friends


Australian Dollar

AUD

Expected Range

The Australian Dollar continues to trade lower and against the USD has now given back all of its gains of the past week. It now stands at just 0.7570 having spent the whole of the last 12 hours back on a 75 US cents big figure and been as low as USD0.7556 during the London afternoon. It has lost ground against all the major currencies apart from the already-weak Canadian Dollar and appears generally friendless in foreign exchange markets. This lack of love comes despite a generally upbeat semi-annual OECD report on Australia: “The economy will continue growing at a robust pace.<br><br> Business investment outside the housing and mining sectors will pick up, with exports boosted as new resource-sector capacity comes on stream. The strengthening labour market and household incomes will sustain private consumption, and inflation and wages will pick up gradually”. That said, their analysis also reflecting the concerns we outlined here yesterday about the housing market: “The prolonged period of low interest rates has fuelled high house prices in large metropolitan areas. Substantial mortgage borrowing has resulted in households being highly indebted. To contain risks associated with potential large house-price corrections and financial stress, macro-prudential measures should be maintained. Australia is also vulnerable to “too big to fail” risks, due to its highly concentrated banking sector”.<br><br> This morning’s Q3 capex numbers are going to have to be pretty robust if the prevailing negative sentiment around the AUD is to be reversed.

British Pound

GBP / AUD

Expected Range

The pound’s remarkable Tuesday was followed by an equally impressive Wednesday as it made further upside progress against every major currency. GBP/USD has been up to 1.3436 whilst GBP/AUD is now on a 1.77 handle and GBP/NZD is close to making a fresh high for 2017 above 1.95.<br><br>The two sticking points in Brexit negotiations thus far have been the size of the payments the UK will make to leave the European Union and the Irish Border question. Financial markets were beginning to fear that failing to agree the Divorce Bill would increase the risk of a disorderly Brexit with no trade deal and be GBP negative. The UK had initially suggested €20bn whilst the EU demanded €60bn. According to news reports in London on Wednesday, the final figure will be €45-55bn though it will not be confirmed in writing and will not be settled as an upfront bill. According to one EU negotiator quoted in The Times, “All we need is four extra words.... At Florence Mrs. May said, ‘the UK will honour commitments we have made during the period of our membership’. All we need is the phrase, ‘when they fall due’, added to the end of the sentence. That’s it. No numbers, just those words.” This sounds straightforward – and indeed is what the UK has basically offered – though it remains to be seen whether Parliament will get more details or even a vote on the final settlement. <br><br>For the moment, anything which is seen as keeping Brexit negotiations alive but whilst prolonging or postponing the process through a ‘transitional’ arrangement on trade is viewed as a clear GBP positive.

Canadian Dollar

AUD / CAD

Expected Range

The Canadian Dollar has tracked oil all this week and a full dollar off the price of crude on Wednesday to $57.10 had a very predictable impact on the currency which ended the day as the joint-weakest (with the CAD) of all the major currencies we follow here. USD/CAD hit a near 4-week high of 1.2865 AUD/CAD was unchanged at 0.9732. Ahead of the OPEC meeting, it was reported that Saudi Arabia and Russia (which is not an OPEC member) are trying to reach agreement on extending production cuts into 2018. <br><br>An agreement first struck a year ago and set to expire in March was aimed at reducing a global oversupply of oil caused in part by US producers and it is said the Saudis want to extend this until the end of next year. Moscow, however, prefers a shorter agreement which would allow it to increase output if prices rise, rather than see all the benefits go to North American shale producers. The Saudi oil minister is quoted on newswires saying it was “too early to talk about a disagreement” and said “a solution” will be reached during talks Wednesday and Thursday in Vienna, where OPEC is based. <br><br>With few, if any, monetary policy clues in Tuesday’s FSR and with the week’s main economic data in Canada (GDP and the employment report) not out until Friday, the CAD will most likely once again be driven by oil prices and headlines from Vienna.

Euro

AUD / EUR

Expected Range

The EUR had a better day Wednesday after Tuesday’s rather disappointing price action and is up against the AUD, NZD, CAD, and USD though unable to keep pace with the still-soaring pound. It began to move higher in the European morning after the botched release of German CPI numbers about which an inquest seems to be in progress. The stronger than expected numbers of 1.8% y/y were printed by Bloomberg some 3-4 hours of scheduled release then removed from their system in what was claimed to be either a misprint or a wrongly reported number from one of the German States which report their inflation numbers separately. <br><br>Whatever the case, the error became fact at 2pm European time when the 1.8% number was confirmed. Later in the afternoon, Bundesbank President Jens Wiedmann said German economy is roaring ahead and there are no signs that difficulty in forming a government is noticeably affecting business sentiment. Calling German economic growth “exceptionally good”, he said that the expansion would continue for some time, thanks to solid business sentiment and the highest rate of employment since German unification in 1990. “Updated (euro zone) forecasts come out in two weeks, in December as usual, on the basis of detailed country projections… Indications are that the economic outlook will be at least as good (as previously), if not better. Many short-term indicators have surprised positively”. The Bundesbank head, who also sits on the ECB Governing Council, repeated his long-standing criticism of the ECB’s loose monetary policy, saying that a less expansive stance would be justified. “One thing is clear: even after the end of net asset purchases, euro zone monetary policy will continue to be very expansionary”.<br><br> The EUR opens this morning around USD1.1850, with AUD/EUR some 25 pips lower at 0.6385 while NZD/EUR at 0.5810 is around 15 pips down from yesterday’s open.

New Zealand Dollar

AUD / NZD

Expected Range

In the absence of fresh fundamental news, the Kiwi Dollar was always going to find it difficult to sustain the pace of Monday’s surprisingly sharp squeeze. From the recent highs around USD0.6940, it eased back towards 0.6900 at Tuesday’s New York close and spent the whole of Wednesday in the Northern Hemisphere in a range 0.6883-0.6922 to finish pretty much unchanged on the day against the US Dollar. Elsewhere, it gained against the CAD, EUR and AUD but gave ground against a surging GBP which is now up more than 3 ½ cents from Tuesday’s low. Indeed, the GBP/NZD cross is now within 30 pips of the November 21st high of 1.95 and if this were to break it would be a fresh high for 2017. <br><br>The OECD report on New Zealand was pretty upbeat: “Economic growth should increase to over 3% in 2018-19, reflecting stronger investment and exports. Capacity constraints, high profitability, low financing costs, housing shortages and government demand should support investment, while agricultural exports should recover following adverse weather and temporary price weakness. Inflation is projected to rise to 2.4% by late 2019”. But whereas the RBNZ chose to announce some loosening of macroprudential lending rules after its FSR, the OECD says, “House prices and household debt have soared in recent years to high levels in relation to incomes. Households are highly exposed to interest rate risk. Macro-prudential regulation should be tightened if there is a resurgence of debt-fuelled house price inflation.<br><br> A maximum debt-to-income ratio should be considered if expected benefits exceed costs”. This morning in New Zealand brings business confidence and building permits data with household credit numbers later in the day.

United States Dollar

AUD / USD

Expected Range

The US Dollar index stood at a 2-month low of 92.21 at the beginning of the week but by Tuesday evening had rallied to a best level of 92.98. On Wednesday it extended these gains to a best level of 93.09 before slipping back to 92.85 in the face of a buoyant GBP, rallying EUR and slightly lower US stock markets. In prepared remarks to the Joint Economic Committee of Congress, outgoing Fed Chair Janet Yellen said, “The economic expansion is increasingly broad based across sectors as well as across much of the global economy.” With weak inflation likely to prove “transitory,” she said, “we continue to expect that gradual increases in the federal funds rate will be appropriate.”<br><br>After US stock markets reached record highs, Dr. Yellen remarked that while asset values were “high by historical standards, overall vulnerabilities in the financial sector appear moderate.” On the future course of the US economy, she said there are structural factors that need to be addressed. Among them are an aging population that has translated to slower labor force growth as well as the “unusually sluggish” productivity growth To generate a sustained boost in economic growth without causing inflation that is too high, we will need to address these underlying causes”. Whilst a 25bp rate hike on December 14th is absolutely baked into market pricing, with a further 2-3 hikes expected in 2018, there’ll still be a good test of USD sentiment on Thursday when the latest PCE figures are released. This is the Fed’s preferred measure of inflation. <br><br>Though it has consistently fallen short of Fed forecasts in every one of the past four years, and notwithstanding the note of caution in the November Minutes which pulled the rug from under the USD last week, any number no worse than the 1.6% y/y consensus should be OK as long as asset markets hold on to their recent gains.

By Nick Parsons

GBP falls sharply then surges on Brexit rumours. All-time highs for US stock market help lift USD.


Australian Dollar

AUD

Expected Range

Through the Northern Hemisphere day on Tuesday, AUD/USD traded in a fairly tight range either side of 0.7600 and a closer look at the charts shows it just spent more time above this level than below it. The AUD/NZD cross hit a low of 1.0964 before recovering 20 pips in the London afternoon and into the NY session. Overall, the AUD rose against the USD and CAD, was little changed against the EUR and fell against the GBP after a late surge in the British Pound (see below).<br> <br> In a new opinion poll published this week by Roy Morgan, only 31 per cent of people think 2018 will be “better” than 2017 – the lowest figure recorded since the survey began in 1980. Younger Australians are more positive than older generations, with almost half (46%) of 18-24-year-olds expecting next year to be better, while just 20 per cent of over 65s feel that way. Perhaps the younger respondents feel that housing might at last become less unaffordable; not a problem if existing homeowners have little debt, but potentially a major issue for the economy if they do. Aside from exports of iron ore, the Australian economy is hugely driven by the residential property market which according to a BIS report earlier this month has had a 55-year bull market; the longest of any country in the world. So important is housing that the total value of all properties is around four times the size of GDP.<br> <br> By way of comparison, in the UK it’s around 3.5, in Canada around 2.4 and in the US around 1.6 times GDP. A huge amount of debt has had to be taken on by homeowners to accumulate this property wealth. After Switzerland, Australia has the greatest proportion of household debt to GDP in the world; a little over 120%. What is more, there is more debt held by older homeowners than anywhere else on the planet. This, of course, is all fine and well as long as there’s a steady stream of new entrants to the market, interest rates don’t go up and prices don’t fall. The simple problem for Australia is that it has been actively discouraging overseas property buyers, whilst prices are still too high for locals and the monetary policy debate has shifted to when and by how much interest rates will go up. Bigger picture, keep an eye on property prices for clues to the Aussie Dollar outlook…

British Pound

GBP / AUD

Expected Range

The pound had a quite remarkable Tuesday, falling quite sharply against every major currency for 18 hours then regaining all its losses and more in the space of just 20-30 minutes. Let us explain… At its’ worst, around the end of the London trading session, GBP losses extended from just over 40 pips against the CAD to 50 versus the EUR, 90 against the USD, 130 against the AUD and a huge 170 pips against the NZD. The day had begun with the release at 7am London time of the Bank of England’s annual Financial Stability Report.<br> <br> It’s fair to say there were some very grumpy journalists: they had been in a locked room in Threadneedle Street from 5am to write up their stories ahead of an 0700 GMT embargo. The seven biggest UK banks passed a stress test that was as tough as if the UK crashed out of the European Union, the BoE said, with sterling slumping, interest rates rising to 4 per cent and a record housing market crash. It is undoubtedly good news that the UK financial system is seen as resilient but the almost exclusive focus on downside risks – the whole purpose of the FSR – nonetheless sowed the seeds of doubt amongst currency investors and pressured the pound throughout the London day.<br> <br> Then, at 6pm local time, a headline appeared on the Daily Telegraph website saying, “Exclusive: Britain and EU agree divorce bill”. The story said – and we quote in full - “British and EU negotiators have reached a deal over the so-called ‘Brexit bill’, opening the door to a potential breakthrough in the talks this December. Sources on both sides confirmed that an agreement-in-principle has now been reached over the EU’s demand for a €60bn financial settlement ahead of a crucial lunch meeting next Monday between Theresa May and Jean-Claude Juncker, the European Commission president. Two sources confirmed that the terms were agreed at a meeting in Brussels late last week after intense back-channel discussions led by Oliver Robbins, the UK’s chief Brexit negotiator. The Telegraph understands that the final figure, which is deliberately being left open to interpretation, will be between €45bn and €55bn, depending on how each side calculates the output from an agreed methodology”.<br> <br> If true – and it’s a big ‘if’ - then it at least means the Brexit talks can continue without the UK crashing out at a very early stage. GBP/USD surged from 1.3230 to 1.3375 with GBP/AUD and GBP/NZD both leaping more than 2 cents in less than half an hour. Whether this story is true, of course, remains to be seen. But it has certainly wreaked havoc in the foreign exchange market.

Canadian Dollar

AUD / CAD

Expected Range

The Canadian Dollar spent most of Tuesday dragged down by falling oil prices. Though a concerted effort to talk crude prices higher ahead of Wednesday’s OPEC meeting in Vienna had been expected, little was actually been heard from the major players about future production cutbacks. NYMEX Crude reached a fresh 2017 high of $58.82 last Friday, fell steadily on Monday to $58.15 and Tuesday morning hit a low of $57.54. USD/CAD rose (weaker CAD) to a one-week high of 1.2816 with AUD/CAD up 40 pips at 0.9740 and NZD/CAD 45pips higher at 0.8870.<br> <br> In its semi-annual Financial Stability Review, the Bank of Canada said, “Our financial system continues to be resilient, and is being bolstered by stronger growth and job creation, but we need to continue to watch financial vulnerabilities closely”. Ho hum…. This could have been written by almost any central bank in the world today. BoC is optimistic that higher interest rates and regulatory efforts to rein in risky borrowing will make the country’s financial system more resilient, though the process “could take time to unfold and the outcome remains uncertain”. There was no meat here for the animals of the FX market to chew on so they got back to the simpler business of watching oil prices and marking CAD up or down accordingly.

Euro

AUD / EUR

Expected Range

The EUR had a very poor day Tuesday without ever being the centre of FX market attention. By close of business in NY, it had fallen against every major currency. There were no fresh economic data or ECB speakers and though the OECD revised upwards its forecasts for the Eurozone economy, this came as a surprise to precisely no-one. It’s semi-annual World Economic Outlook noted, “Growth has continued steadily, broadening across sectors and countries, supported mostly by domestic demand.<br> <br> Improving labour markets and very favourable financing conditions continue to boost incomes and promote private consumption, despite lacklustre wage growth. Investment is becoming more supportive of the recovery and has expanded at a dynamic pace in the first half of the year in most countries, sustained by buoyant business sentiment, the need to upgrade the capital stock, rising profits and easy financial conditions. Exports have continued to strengthen on the back of the rebound in world trade. Business and consumer confidence indicators remain very high.” For the FX market Tuesday, the OECD was a big yawn. Yada, yada, yada… EUR/USD finished the day around 60 pips lower at USD1.1840 with similar losses against the Aussie and Kiwi Dollars.

New Zealand Dollar

AUD / NZD

Expected Range

The Kiwi Dollar has done very well to hold on to Monday’s sharp and totally unexpected gains. In fact, it even managed to extend them during the London morning on Tuesday before finding the air a little thin after its rapid ascent. Its’ best levels against the currencies we follow closely here were NZD/USD0.6944, NZD/EUR0.5841, AUD/NZD1.0964, NZD/CAD0.8881 and GBP/NZD1.9118.<br> <br> Having moved so much in a news vacuum, we’ll now get to see whether the incoming data, speeches and publications validate or contradict the price action. Things really kick into gear locally this morning with the publication of the RBNZ Financial Stability Report and then Acting Governor Graeme Wheeler up in front of a Parliamentary Select Committee. The main interest will likely be on the assessment of the success – or otherwise – of the so-called ‘macro prudential’ controls in the housing market and whether or not these are to be lifted any time soon.<br> <br> On Thursday the ANZ business survey will be closely watched as it’s the first look at a whole fresh month of data since the new Labour-led government was formed. It will be pored over for any sign that the recent sharp fall in the NZD is impacting confidence, activity or inflation expectations. First of all, let’s see what the Governor has to say…

United States Dollar

AUD / USD

Expected Range

The US Dollar steadily extended its gains through the European and North American sessions on Tuesday. From a 2-month low of 92.21 at the beginning of the week, its index against a basket of major currencies touched 92.76 in the London morning and on to a best level of 93.00 in New York. The best word to describe the raft of US economic data yesterday was ‘mixed’.<br> <br> The 20-cities index of home prices rose 6.19% y/y (gotta love those two decimal places!) to show the fastest annual pace of growth since July 2014. All 20 cities in the index showed year-over-year gains, led by a 12.9 percent increase in Seattle and a 9 percent advance in Las Vegas, whilst 8 cities have surpassed their peaks from before the financial crisis. With house prices up and stocks at record levels, consumer confidence comfortably beat consensus expectations, rising to 129.5; its highest level since November 2000.<br> <br> On the other side of the ledger, after 5 consecutive monthly increases, wholesale inventories tumbled -0.4% m/m in October. This number tends not to get too much coverage but it feeds straight through into GDP – remember that from Economics 101? Also, the advance goods trade balance showed a bigger than expected monthly deficit of $68.3bn after $64.1bn in September.<br> <br> Overshadowing the data was Jerome Powell ‘s confirmation hearing at the Senate Banking Committee. In prepared remarks, Powell defended the Fed’s use of broad crisis-fighting powers, and said “We must be prepared to respond decisively and with appropriate force to new and unexpected threats to our nation’s financial stability and economic prosperity.” The stock market loved the sound of more air being blown into the bubble and promptly hit a fresh all-time high, dragging the Dollar higher in its wake.

By Nick Parsons

USD reverses early losses, NZD surges as recent range breaks


Australian Dollar

AUD

Expected Range

Australia last held a referendum on whether it should become a Republic back in 1999, when it was rejected by a margin of 55:45. Opposition Labour Leader Bill Shorten has vowed that if his party wins the next election, "We will put a simple Yes or No question to the Australian people - do you support an Australian republic with an Australian head of state?" This isn’t the place to discuss the relative merits of the arguments for and against, but with another UK Royal Wedding announced yesterday and the birth next year of a baby who will be fifth in line to the throne, it may once again become a talking point.<br> <br> Certainly, there’s not much else that’s fresh on the domestic news agenda: it has been a pretty quiet 24 hours, albeit the Aussie Dollar has managed to hold on to a US 76 cents big figure for almost the entire period. The low of 0.7599 came just as England were finally thrashed in the first Ashes test and the AUD subsequently managed to climb around half a cent to the day’s best level of 0.7643 late in the London morning. It slipped 35 pips in the New York session but overall it wasn’t a bad start to the week for the AUD: up against the GBP and CAD, down against the NZD but steady against the EUR and USD.<br> <br> There are no domestic economic data until Thursday when we get a look at Private Capital Expenditure which will then be plugged into analysts’ GDP spreadsheets. The same day we’ll also see Building Approvals and RBA Credit numbers. Meantime, it’s radio silence as far as RBA speakers are concerned: the next Board meeting is December 5th so there’ll be no clues about monetary policy from Central Bank officials.

British Pound

GBP / AUD

Expected Range

Like all the major currencies, the pound had a quiet day in the Asian time zone Monday but from 6.30am to lunchtime in London time it jumped 60 pips from USD1.3315 to a best level just over 1.3375 before then giving back most of these gains in the afternoon. GBP/AUD hit a high of 1.7545 before giving back 20 pips whilst GBP/NZD finished the day a full cent lower at 1.9292.<br> <br> After a weekend taken up by yet more twists and turns in the interminable Brexit negotiations and then a thrashing in the first Ashes test, it was a relief for the Brits to find something different to talk about: another Royal Wedding. It is only a couple of months since Prince Harry made his first public appearance with his girlfriend, Meghan Markle, at the Invictus Games in Toronto. A statement issued by Clarence House Monday morning said, “His Royal Highness the Prince of Wales is delighted to announce the engagement of Prince Harry to Ms. Megan Markle.” The wedding is to be held next year, with the ceremony conducted by the Archbishop of Canterbury.<br> <br> With Prince William’s wife Kate due to give birth late Spring, the UK’s royal fans will have both a new baby and a marriage to celebrate. Whether the country’s banks will be celebrating or commiserating will probably depend on the results of the Stress Tests published at 7am local time on Tuesday morning as part of the Bank of England’s Financial Stability Report. There has been some chatter than one of the banks may fail the tests and we’ll soon find out if this was a genuine leak or a carefully crafted piece of expectations management…

Canadian Dollar

AUD / CAD

Expected Range

Monday’s trading pattern for the Canadian Dollar was the same as most other FX majors: it strengthened through Asia and Europe then reversed these gains during New York hours. USD/CAD fell from 1.2710 to a low of 1.2682 before jumping almost a full cent to a high of 1.2766. As well as the obvious influence of USD trading more generally, the CAD was also hit by a quite sizeable drop in oil prices. Though a concerted effort to talk crude prices higher ahead of Wednesday’s OPEC meeting in Vienna, little of note was heard from the major players. NYMEX Crude reached a fresh 2017 high of $58.82 on Friday but fell steadily on Monday to be around 65 cents overnight to $58.15.<br> <br> All this volatility comes ahead of a very busy Canadian economic calendar: the Bank of Canada’s Financial System Review is on Tuesday and the labour market report and Q3 GDP figures are released on Friday. Economists are estimating annualized GDP growth of 1.8% in Q3, down from 4.5% in the second quarter. Canada is unusual – indeed it is a world leader – in producing monthly GDP numbers. July was flat m/m whilst in August GDP edged down by 0.1% the first m/m drop since October 2016. The September numbers will be published alongside the full quarterly estimate.

Euro

AUD / EUR

Expected Range

Price action for the EUR on Monday was the simple mirror image of the USD: quiet through Asia, up through the European lunchtime then reversing lower during the New York Day. EUR/USD began around 1.1930, reached a high of 1.1958 immediately before the US new home sales numbers then promptly lost 60 pips to dip back onto a 1.18 handle. It was not a dissimilar pattern against both the Aussie and Kiwi Dollars though NZD/EUR did outperform AUD/EUR amidst the bout of short-covering we described above.<br> <br> There were no fresh Eurozone data or Central Bank speakers on Monday, so it was back to watching the unfolding Coalition talks in Germany. By common consensus, the immediate loser in these talks is SPD leader Martin Shulz, though his party may still be able to extract significant concessions as the price for its ongoing support of the CDU/CSU. It may gain control of the Finance Ministry or it may force Merkel’s CSU partner to abandon the proposed 200,000 annual cap on asylum seekers. For her part, Angela Merkel said only that global challenges such as relations with Russia and the US needed a Germany “able to act… President Macron’s plans for EU reform had led to an “expectation that we draw conclusions and position ourselves”.<br> <br> In words which were widely interpreted as a call for a Grand Coalition, she said, “given the conflicts we have in the Middle East, given the situation in Russia, the situation in the United States of America, I think it is good if Germany is able to act. That is why we believe that such a stable government should be formed, in terms of Europe, in terms of our economic strength, in view of the new challenges we face”. We’ll now have to see if this helps put a floor under the EUR after Monday’s reversal.

New Zealand Dollar

AUD / NZD

Expected Range

It’s been a rare sight recently to see the New Zealand Dollar at the top of the one-day performance charts but this is exactly what happened Monday. Initially, the Kiwi tracked the Aussie almost tick-for-tick and from the Sydney open to lunchtime in London, the AUD/NZD cross didn’t move outside a very tight 1.1064-1.1085 range. When it did break, it did so to the downside and quite dramatically. By the time London traders handed the books over to New York, the pair had fallen all the way down to 1.1005; its lowest level in almost 6 weeks.<br> <br> The big surprise is that this move took place in a total news vacuum. There was simply nothing. No economic data, no political announcement and no big-hitting analyst research report. We haven’t yet had the weekly CFTC Commitment of Traders report on speculative positioning in currency markets as it has been delayed due to the Thanksgiving holiday last Thursday.<br> <br> We do know from the last one released November 17th that the market’s net short of NZD was the largest since the week of May 19th; having turned around 180 degrees from the big net long state of late July. As AUD/NZD fell out of the last week’s trading range, a likely big volume of stop-loss/stop-entry orders were triggered which then fed through into NZD strength against all the other currencies as any available Kiwi liquidity was sucked up. NZD/USD is on a 69 cent handle whilst GBP/NZD is down over 2 cents from last week’s 1.9500 high. A very busy and totally unexpected day – the joys of foreign exchange!

United States Dollar

AUD / USD

Expected Range

The US Dollar had a day of two unequal halves on Monday, falling for the first 15 hours since the Sydney open then rallying through the New York day to regain all and more of its earlier losses. The USD Index against a basket of major currencies opened at 92.50, tumbled to a 2-month low of 92.21 then rallied all the way back up to 92.61. The chief trigger for the rally was the publication of US October new home sales data.<br> <br> Against expectations of a 6.1% fall in sales, the outturn was a stunning 6.2% m/m increase. The numbers aren’t quite as straightforward as they look: September’s outsized 18.9% spike was revised down to 14.2% which meant October started from a lower base. Nevertheless, the annualized pace of 687k was the highest since November 2007 and accompanying data on prices showed the average price of a new house rose above $400,000 for the first time ever to $400,200.<br> <br> Read that and weep if you’re a homebuyer in Sydney or Auckland. Ahead of the Senate Banking Committee confirmation process for incoming Fed Chair Jerome Powell, Tuesday brings more data on house prices, consumer confidence and the goods trade balance. For the US Dollar, the key will be how “Jay” – as he is known – sees strong activity numbers feeding into inflation and affecting future monetary policy decisions.

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