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By Nick Parsons

More Brexit nerves for GBP; NZD now top of the pile with AUD mixed after RBA Statement


Australian Dollar

AUD

Expected Range

We said here yesterday about the RBA Board meeting that, “Re-reading the November 7th Statement, it is not obvious which paragraphs need much of a tweak either way”. Putting the December Statement side-by-side with it, you’d need a magnifying glass to discern much of a difference.<br> <br> “Recent data suggest that the Australian economy grew at around its trend rate over the year to the September quarter. The central forecast is for GDP growth to average around 3 per cent over the next few years. Business conditions are positive and capacity utilisation has increased. The outlook for non-mining business investment has improved further, with the forward-looking indicators being more positive than they have been for some time… Employment growth has been strong over 2017 and the unemployment rate has declined. Employment has been rising in all states and has been accompanied by a rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead.”<br> <br> The Aussie Dollar did well through Tuesday’s Sydney session but the day’s high of USD0.7650 came just before London traders arrived at work and it was downhill all the way from there against a generally better-bid US Dollar. By the New York close, the pair was struggling to hold on to a 76 cents handle though the AUD had made net gains against the CAD, GBP and EUR.<br> <br> The big number today will be Q3 GDP with most analysts’ forecasts centering on a 0.7-0.8% q/q increase to leave the year-on-year rate at 3.0%. Famous last words, but the read-across to the AUD should be quite straightforward and we can get on with the serious business of watching the cricket.

British Pound

GBP / AUD

Expected Range

The volatility in the British Pound shows no sign of abating. Though the Kiwi Dollar goes up one day and down the next, the GBP does it both in the same day! It jumped then plunged on Monday on news that UK Prime Minister Theresa May was unable to offer an agreement on the Irish border issue to European Commission President Jean-Claude Juncker. On Tuesday it fell further then rallied in the belief that a form of words would somehow be found by the end of the week to bring the Government’s Ulster Unionist coalition partners back with their support. GBP/USD fell to lows during the London morning of USD1.3384 and AUD1.7505 but by the New York close it had recovered to USD1.3440 and AUD1.7685.<br> <br> The London-Dublin agreement on so-called “regulatory alignment” post-Brexit may have looked a clever form of words but Arlene Foster, the DUP leader, said that they spent five weeks trying to get hold of a draft text of the UK-EU Brexit deal and that, when it finally saw it yesterday, it was a big shock. “When we looked at the wording and had seen the import of all that we knew we couldn’t sign up to anything that was in that text that would allow a border to develop in the Irish Sea.” When it was put to her that the Irish Government has said it would not budge on the substance of these matters, she said, “The Irish prime minister can be as unequivocal as he likes. We’re also unequivocal in relation to these matters.”<br> <br> Somewhere, it seems, there’ll be tears before Friday and they might well be shed as much by foreign exchange traders as by angry politicians. It’s a big call but the GBP could move as much as 3-4% in either direction depending on whether there’s movement to a transition Brexit deal or the collapse of the Coalition Government and a fresh General Election.

Canadian Dollar

AUD / CAD

Expected Range

After a 2-day surge, the Canadian Dollar had a more mixed performance on Tuesday; rising against the GBP and CAD but falling against the US, Kiwi and Aussie Dollars. It finally decoupled from the oil price somewhat, rising as crude fell during the European morning and reversing course thereafter. Its’ early strong performance was related to comments from Prime Minister Justin Trudeau that he and his counterparts in China have made good progress on a free trade deal, though no details about substance were forthcoming.<br> <br> Looking forward, the Bank of Canada holds its 8th and final monetary policy meeting of the year on Wednesday. Compared to the economic situation at its last meeting in October, retail sales, the labor market, housing market, manufacturing activity, trade and oil prices have all improved somewhat though inflation has eased a bit lower. Before last week’s stunning employment numbers, markets were pricing around a 47% probability of a rate hike in January. This has now risen to a little over 50% and the Canadian Dollar opens in the APAC time zone this morning at USD1.2692 and AUD/CAD0.9655.

Euro

AUD / EUR

Expected Range

The euro had a poor day Tuesday, losing almost half a cent to the USD to finish around 1.1813 and falling against every other currency to take the wooden spoon in the one-day performance table. This came despite figures which confirmed the eurozone service sector registered quicker output growth in November, with the final PMI matching the flash estimate of 56.2.<br> <br> The final Eurozone composite index was also confirmed at 57.5 with the Press release noting breathlessly, “The rate of euro area economic expansion moved up a gear in November. Output growth accelerated to the fastest in over six-and-a-half years, while rates of increase for all of the main survey indicators covering demand, employment and inflation also hit multi-year highs… Growth was again led by a resurgent manufacturing sector. Manufacturing production rose at the quickest pace in almost seven years in November and the headline index from the manufacturing survey – the Manufacturing PMI – posted a level bettered only once in its 20-year history.”

New Zealand Dollar

AUD / NZD

Expected Range

Foreign exchange can be a very frustrating asset class at times. Having ended Monday as the worst performer of the major currencies we track here, it was very much a case of ‘Turnaround Tuesday’. The New Zealand Dollar finished top of yesterday’s FX pile even though arguably very little has changed other than RBNZ Acting Governor Grant Spencer’s speech on “Low inflation and its implications for monetary policy”.<br> <br> He told the Institute of Directors in Auckland a series of factors "may be reducing the leverage monetary policy has over inflation" and said the bank's flexible inflation targeting approach is becoming more flexible and relatively more weight is being attached to "output, employment, and financial stability." The Governor painted different scenarios where both rate cuts and rate hikes might be necessary, but said the central bank is now "assuming greater persistence in low global inflation" and that is contributing to its current flat interest rate track. The RBNZ’s latest forecasts show it doesn't expect to raise rates until mid-2019 at the earliest.<br> <br> The NZD rose from USD0.6860 to a high of 0.6907 overnight during local trading hours Tuesday and though NZD/USD subsequently gave back around 30 pips of these gains to a stronger USD, the Kiwi ended the Northern Hemisphere day up against every currency. For Wednesday, the confidence of NZD traders in predicting movement either way is probably no more than a coin-toss. It could once again just as easily finish top or bottom of the pile…

United States Dollar

AUD / USD

Expected Range

The US Dollar had a good day on Tuesday. It’s index against a basket of major currencies rose from 92.75 to 93.11; its best level in almost two weeks. It gained some support early in the day from a rally in equity index futures but as stock market enthusiasm faded, a weaker GBP and EUR helped the USD rise almost by default. The latest reading on the service sector of the US economy did no harm either, signaling the 95th consecutive month of expansion in activity. The headline index fell 2.7 points to a still-elevated 57.4 whilst the business activity sub-index slipped just 0.8 to 61.4; reflecting growth for the 100th consecutive month. New orders and export orders were at 58.7 and 57.0 respectively whilst employment slipped a couple of points to 55.3.<br> <br> One of the really good but somewhat obscure indicators of the US economy is a model developed by the Atlanta Fed. This takes incoming high-frequency US economic data and updates in real-time its forecast of the current quarter’s GDP number. As Tuesday brought not just the ISM survey, but also the merchandise trade deficit for October, they published a new forecast of Q4 GDP yesterday evening; downgrading their estimate from 3.5% to 3.2%. This is still a pretty decent number; higher than anywhere else in G7 and helps to support bond yields and the US Dollar into next weeks FOMC meeting.

By Nick Parsons

Another choppy day for GBP on Brexit talks; NZD is the bottom of the pile as AUD awaits RBA Meeting


Australian Dollar

AUD

Expected Range

Away from Adelaide, the big event of today is of course the last of the year’s eleven RBA Board meetings. Re-reading the November 7th Statement, it is not obvious which paragraphs need much of a tweak either way.<br> <br> On Melbourne Cup day a month ago, the RBA noted, “The Bank's forecasts for growth in the Australian economy are largely unchanged. The central forecast is for GDP growth to pick up and to average around 3 per cent over the next few years. Business conditions are positive and capacity utilisation has increased… The labour market has continued to strengthen. Employment has been rising in all states and has been accompanied by a rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead”. If that assessment left them to leave interest rates unchanged with no forward bias, it’s reasonable to assume exactly the same outcome today.<br> <br> There’s probably a bigger discussion about what biscuits to have with the morning coffee than what to say about monetary policy. For the first 24 hours of the week, AUD/USD has traded in a range between 0.7584 and 0.7613 and has spent roughly equal amounts of time on 75 and 76 cents ‘big figures’. It finished Monday down against the USD and CAD, little changed against the EUR and a very volatile GBP, but up against the NZD.

British Pound

GBP / AUD

Expected Range

There seems no end to the volatility in the British Pound. It traded lower through Monday’s Asia session on fears that the Brexit talks might stall over the vexed question of the Irish border. The Republic of Ireland says it will veto a ‘hard border’ with Northern Ireland but the UK Conservatives’ coalition partner in Government, Ulster’s Democratic Unionists (DUP) object to any border being placed between them and the rest of the UK.<br> <br> At lunchtime in London, ahead of Prime Minister Theresa May’s meeting with European Commission President Jean-Claude Juncker, EU Chief negotiator Michel Barnier told MEP’s that “a breakthrough is likely. GBP/USD jumped from 1.3423 to 1.3535 with GBP/AUD up from 1.7650 to 1.7790 and a Press Conference was scheduled in Brussels for 4pm. This proved a very short and very tense affair in which Mrs May said a deal had not been agreed. Although no reason was given, it was clear that the DUP had vetoed it and the GBP gave back almost all its gains as quickly as it had earlier made them.<br> <br> Irish PM Leo Varadkar said, “The responsibility of any Prime Minister is to ensure that they can follow through on agreements that they make and we are surprised and disappointed that they haven’t been able to”. Unfortunately for the GBP, the more it looks as though a deal was made in Dublin, the more likely it is to be rejected by the Unionists north of the border. Talks are scheduled to continue later this week and the GBP is likely to be bounced around from one Twitter headline to the next. It opens in Sydney this morning at USD1.3455 and AUD1.7720 but be wary of a great deal on intra-day volatility throughout the next 24 hours and indeed right through to the end of the week.

Canadian Dollar

AUD / CAD

Expected Range

Canadian Dollar traders were able to pause for breath Monday after the enormous swings of Friday afternoon. The good news has been the general resilience of the currency in the face of a 90 cents drop in crude oil prices. NYMEX crude began the week at $58.35 but fell steadily in each time zone to finish in New York around $57.46. Despite this drop, USD/CAD closed barely 20 pips above its opening level in North America of 1.2685, whilst AUD/CAD was almost exactly unchanged on the day at 0.9650.<br> <br> Looking forward, the Bank of Canada holds its 8th and final monetary policy meeting of the year on Thursday. Compared to the economic situation at its last meeting in October, retail sales, the labor market, housing market, manufacturing activity, trade and oil prices have all improved somewhat though inflation has eased a bit lower. Markets are pricing around a 50% probability of a rate hike in January. Though they could react quite sharply to any clear steer from Governor Poloz, it’s hard to imagine much more volatility for the CAD than we saw at the very end of last week…

Euro

AUD / EUR

Expected Range

The euro has traded gradually lower today, though the ranges have been tight and it would be wise to look at the numbers on the ‘y axis’ of any chart before leaping to unwarranted conclusions about its weakness. The facts are that it began the week 24 hours ago at USD1.1865 and having touched a low of 1.1838 during the New York morning, it finished the day within 10 pips of where it started.<br> <br> The only economic indicator of note in the European session was the Sentix Eurozone economic confidence indicator. This slipped more than had been expected in December to 31.1 from 34.0, though it should be noted that November was the highest since July 2007. The assessment of the current situation strengthened to the highest level in more than 10 years, while expectations weakened notably to a 4-month low in December.<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. The simple problem for the EUR at present is that whilst the economic news is almost without exception positive, it is well known and already ‘in the price’. It takes a stunning set of incoming data to produce a genuine shock. Once we get beyond today’s PMI’s the economic calendar is pretty much empty for the rest of the week whilst the ECB falls silent after Wednesday ahead of the December 14th Council Meeting. In the world of foreign exchange, something usually turns up to shatter the calm but for the EUR right now, it’s genuinely difficult to see what that might be.

New Zealand Dollar

AUD / NZD

Expected Range

The New Zealand Dollar had a quieter day Monday, although quiet doesn’t mean good. Having opened around USD0.6870, it traded in a 30 pip range from 0.6841 to 0.6871 before finishing close to the day’s low to be the worst performer of all the major currencies we track here. The AUD/NZD cross rose half a cent, while NZD/USD and NZD/CAD both fell half a cent.<br> <br> This poor day for the Kiwi Dollar came despite analysts at Swiss bank UBS putting out a bullish recommendation on the currency which they described as the cheapest in G10. “As the Chinese economy continues its rebalancing away from investment-led growth and toward increased consumption, the country’s import patterns will change with obvious knock on effects for its key trading partners… New Zealand is a clear beneficiary, given the importance of agricultural products (milk and meat) to its economy and exports. New Zealand exports virtually no investment goods to China, so there no offsetting loss from a deterioration in these exports”. All the major global banks’ ‘2018 Outlooks’ are hitting the street around now, but this is one of the more bullish views from an offshore player.<br> <br> Back to the more mundane incoming economic data locally, this week brings some of the ‘partial’ data which then feed into GDP on December 21st. Today it’s Building Work, Thursday is Wholesale Trade and Friday is the Manufacturing Survey. RBNZ Acting Governor Grant Spencer is delivering what will be a very closely-watched speech tomorrow on “Low inflation and its implications for monetary policy”; the text of which will be released at 1.15pm local time today. NZD/USD opens at 0.6845 with the AUD/NZD cross at 1.1090.

United States Dollar

AUD / USD

Expected Range

The US Dollar had a decent day on Monday as stock markets rallied and some of the more excitable Trump chatter from Friday subsided. Indeed, at one point, the Dow Jones Industrial Average was trading 500 points above Friday’s intra-day low whilst the S&P 500 Index was almost 60 points higher. Against this very positive asset market backdrop, the USD index rose back to 93.0, and gained against most of the major currencies we follow here.<br> <br> In the version of the tax reform bill which passed in the Senate by 51-49 votes on Friday, the proposed cut in the tax rate on repatriation of overseas deferred profits was pretty much reversed. The original proposal had provided for a 10 percent deemed repatriation tax rate for cash and 5 percent for other profits but in a late change, the Senate increased the tax rate on the deemed repatriation of currently deferred foreign profits to 14.5 percent for cash and cash-equivalent earnings and 7.5 percent for other profits, almost matching the House bill’s 14 and 7 percent rates.<br> <br> Going forward, this is a much less USD-positive story than had been previously expected. For the immediate future, the focus for FX markets is on the ISM non-manufacturing index. Any number close to October’s bumper 60.1 would surely be USD positive.

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.

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