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By Nick Parsons

NZD surges after new RBNZ Governor announced. USD steady, GBP lower after more Brexit confusion, AUD awaits NAB Survey


Australian Dollar

AUD

Expected Range

The Australian Dollar had a decent day on Monday in the Northern Hemisphere. Having stabilised in the low 75’s against the US Dollar Friday afternoon, it traded better right from the off and once it broke through Friday’s 0.7528 high, an improving technical picture helped lift the pair up to a best level in New York of 0.7542.<br> <br> Though it is in technically somewhat better shape, the Aussie still needs some better fundamental news if it is to build on yesterday’s gains. With the Reserve Bank of Australia clearly in no rush whatsoever to tighten monetary policy (and now not having another Board meeting for almost two months), the incoming economic data in Australia have been disappointing recently. Last week saw GDP and trade data fall shy of analysts’ expectations whilst the previous week saw softness in consumer confidence, wages and house prices. <br> <br> This morning brings the widely watched NAB Business Survey. In October, Business Conditions jumped fully 7 points to +21; the highest level since the Survey began almost 20 years ago. The puzzle a month ago was that Business Confidence was unchanged at +8; only barely above its long-term average. The way in which this divergence is unwound will hold the key to the Aussie Dollar’s immediate future: will conditions ease or confidence jump?<br> <br> England cricket fans travelling to the WACA in Perth for the third Ashes Test would have done well (and certainly better than their team…) if they’d converted their GBP into AUD last Friday morning. At that point, GBP/AUD was trading at 1.7990 compared to just 1.7720 at last night’s London close. It won’t make a huge difference to the price of those consolation beers but every little helps in a crisis!<br> <br> For today, AUD/USD opens in in Sydney around 0.7530. The two notable technical levels to watch are the 20-day moving average at 0.7577 then last Tuesday’s RBA high of 0.7650.

British Pound

GBP / AUD

Expected Range

As we had suspected it might, the British Pound had a poor day on Monday falling against all the major currencies we track here.<br> <br> Over the weekend, the Minister for Exiting the European Union, David Davis, had described the Irish border agreement as a “statement of intent” which was not legally enforceable, suggesting that the government could walk away from the deal. He also said that Britain would not pay a divorce bill without securing a trade deal with the EU in return; in contrast to the chancellor who said last week it was “inconceivable” that Britain would fail to honour its international obligations. Mr. Davis said of the bill, “It is conditional on getting an implementation period. Conditional on a trade outcome. No deal means that we won’t be paying the money.”<br> <br> Investors are struggling to know what weight to ascribe to policy announcements which seem to be made up, announced, then quickly rescinded. Indeed, only yesterday morning, the Brexit Secretary was forced to issue ‘clarification’ of his comments; none of which left observers any wiser but reinforced the notion of a policy vacuum at the heart of Government. As the week progresses, there’s a busier economic data calendar than we’ve seen recently. Average earnings and retail sales are all due before Thursday’s BoE MPC meeting whilst today brings the November CPI figures. If consensus expectations of an annual inflation rate of 3.0% prove correct, the Governor of the Bank of England will narrowly avoid having to write a letter of explanation to the Chancellor. If it is above 3% (and our own back of the envelope projections suggest higher petrol prices might outweigh Black Friday discounting) then the UK Press will also be full of stories about a worsening squeeze on real incomes. <br> <br> After Monday’s slide, the GBP opens in Asia this morning at USD1.3345 with GBP/AUD at 1.7720.

Canadian Dollar

AUD / CAD

Expected Range

The Canadian Dollar was pretty much sidelined throughout Monday, after a week in which it reversed all its prior strength after the really good employment report on the very first day of the month. Last Tuesday morning it reached a best level of USD1.2644 as investors anticipated the possibility of a hawkish surprise from Wednesday’s Bank of Canada policy meeting. This did not materialize. Instead, BoC noted that, “While higher interest rates will likely be required over time, the Governing Council will continue to be cautious, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation”. <br> <br> USD/CAD jumped up to 1.2800 almost immediately and by the New York close on Friday it was up at 1.2850; pretty much exactly where it was just before the jobless report. For the whole of the last 24 hours, USD/CAD has been trapped in a very narrow 30 pip range from 1.2834 to 1.2864 even though crude oil rallied more than half a cent during the New York session to take MYMEX up from $57.20 to $57.86.<br> <br> The week ahead is pretty light in terms of economic data with just new house prices on Thursday and the monthly survey of manufacturing on Friday. Bank of Governor Stephen Poloz has a fascinatingly titled speech “Issues keeping me awake at night” on Thursday lunchtime in Toronto.

Euro

AUD / EUR

Expected Range

The euro’s low last week came right at the open of North American trade on Friday morning when it hit USD1.1735 before rallying 40 pips or so into the New York close at USD1.1775. On Monday in the Northern Hemisphere it extended gains up to 1.1801 but couldn’t sustain a 1.18 big figure to the end of the day, finishing at USD1.1790 and AUD/EUR0.6390.<br> <br> There was some talk at the weekend that the euro’s poor performance might have been linked to the European banking sectors’ seasonal demand for USD financing ahead of year-end; a phenomenon which has seen the cross-currency basis swap move sharply lower (USD more expensive to borrow) in each of the last two calendar years and which seems to be repeating again in 2017. The very last working day of 2016 proved to be especially painful for many international bank funding desks and there may be a willingness to pay up early for year-end money rather than suffer the extreme and very expensive volatility of end-Dec 2016. If this explains last week’s EUR weakness, however, it still doesn’t solve the puzzle of why the EUR rallied on Monday. It certainly wasn’t due to any incoming Eurozone news.<br> <br> Over the next few days, there’s an ECB Council Meeting at lunchtime on Thursday at which new staff economic projections will be unveiled. Before that, today its Germany’s ZEW survey of professional investors and we’ll get the ‘flash’ December PMI’s on Thursday morning. On Wednesday, European Commission President Juncker and European Council President Tusk are scheduled to brief members of the European Parliament about Brexit negotiations ahead of the EU Economic Summit in Brussels on Friday.

New Zealand Dollar

AUD / NZD

Expected Range

After a very choppy week, the volatility of the NZD continued on Monday and it was way out at the top of the FX pile; up against every major currency. This time at least, after the frustrations of last week, there was some genuine news to explain the move: the appointment of a new Governor of the RBNZ. Finance Minister Grant Robertson announced Adrian Orr – a well-respected and highly experienced professional economist, former head of financial stability at the RBNZ and currently head of the NZ Superannuation Fund - will take up the post in the New Year.<br> <br> The new Labour-led government in New Zealand wants to add full employment to the bank’s inflation-fighting mandate and change its governance structure, including the appointment of outside experts to its policy committee. The appointment of a classically-trained insider to be the new Governor will help calm investor fears about a too-radical shift of direction which have weighed on the NZD since the election on September 23rd.<br> <br> Monday’s price action for the Kiwi Dollar was little short of spectacular: NZD/EUR rallied 55 pips, NZD/USD was up 80 pips, NZD/CAD rose 100 whilst GBP/NZD plunged more than 2 ½ cents. The NZD opens in Asia this morning at USD0.6915 with GBP/NZD down 5 cents from last Thursday’s high at 1.9290.

United States Dollar

AUD / USD

Expected Range

After last week’s 5-day winning streak, the USD gave back some of its gains on Monday. This was largely because a 20 pip rise in the EUR/USD exchange rate outweighed a 20 pip fall in GBP/USD. If we look in detail at the US Dollar’s narrow trade-weighted index against a basket of currencies, the EUR has a 57% weight. The Japanese Yen has a 14% weight, GBP 12%, CAD 9%, with the Swedish Krone and Swiss Franc both at 4%.<br> <br> The Fed begins its two-day FOMC meeting today and it is a near-certainty that rates will be raised 25bp. First up on this week’s US economic data calendar was the so-called “JOLTS” report out yesterday; the Job Opening and Labour Turnover Survey. This is often said to be one of Fed Chair Janet Yellen’s favourite indicators of labour market activity though it hasn’t gotten much traction with currency or interest rate analysts. For the record, the total number of job openings dropped from 6.177m to 5.996m, well below the 6.135m estimate; the biggest monthly drop and the lowest job openings number since May.<br> <br> The NFIB Survey of small business optimism comes later today, CPI is released Wednesday, Thursday brings retail sales and Friday is industrial production. If the stock market can withstand higher rates and a new set of interest rate projections for 2018 (the S+P 500 index managed another 5-point gain yesterday), the US Dollar ought to find some support though we wouldn’t rule out a move down to 93.00 in the meantime.

By Nick Parsons

It’s a busy week of Central Bank meetings in the US, UK and Eurozone. Thursday’s labour market report will be key for AUD.


Australian Dollar

AUD

Expected Range

The Australian Dollar begins this morning after a week which wasn’t dramatically bad but nonetheless saw the currency slide to 6-month lows against the US Dollar and its worst level in almost 18 months against the British Pound. <br><br> It began last Monday clinging on to a US 76 cents big figure as it awaited the final RBA Board meeting of the year and the high of the week at USD0.7650 came as investors scoured the Statement for clues about monetary policy. In truth, there were only some very minor tweaks to the Central Bank’s language. Wednesday’s GDP figures pushed the AUD down to 0.7560. Most analysts’ forecasts had pinned Q3 GDP growth around 0.7-0.8% q/q so the headline gain of just 0.6% was a clear miss, whilst the annual rate of printed only at 2.8%. Thursday’s trade numbers were yet another disappointment, falling to a surplus of just $105 million in October from $1.6 billion the previous month. AUD/USD broke through technical support at 0.7540 and with pressure continuing on Friday, it reached a low of 0.7503; the weakest since early June. <br><br> For the busy week of international events ahead which includes Central Bank meetings in the US, UK and Eurozone, the main focus locally will be Thursday’s Australian employment report and before then the NAB business survey on Tuesday.

British Pound

GBP / AUD

Expected Range

For the British Pound, the last week was once again dominated by Brexit and the three-way discussions between Dublin, London and Ulster’s Democratic Unionist Party. Having opened at USD1.3450, the pound jumped to 1.3512 then fell half a cent 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 than rallied in the belief that a form of words would somehow be found to bring the Government’s DUP coalition partners back with their support. By Thursday morning it was down at the week’s low of 1.3333 before then rallying sharply on rumours of a deal. Friday was the day of highest drama. The Prime Minister flew to Brussels at 4.30am and at 6am it was announced that enough progress had been made on the Irish border, the divorce bill and the rights of EU citizens to move on to the second phase of Brexit talks and a 2-year transitional trade deal. The pound moved exactly back to Tuesday’s 1.3512 high and then fell almost 1 ½ cents into the New York close. <br><br> This classic “buy the mystery, sell the history” price action came as investors reflected on what seemed a poor and expensive deal for the UK and whether indeed all the Government’s own MP’s would agree upon its terms. For the week ahead, the focus for currency markets may switch batch to incoming economic data with CPI, average earnings and retail sales all due before Thursday’s BoE MPC meeting.

Canadian Dollar

AUD / CAD

Expected Range

The Canadian Dollar had a much calmer week, even if calm doesn’t necessarily mean good. It opened at USD1.2704 and by Tuesday morning reached a best level of USD1.2644 as investors anticipated the possibility of a hawkish surprise from Wednesday’s Bank of Canada policy meeting. <br><br> There was nothing too troubling in its review of the domestic economy though the CAD was hit by the line that, “While higher interest rates will likely be required over time, the Governing Council will continue to be cautious, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation”. <br><br> USD/CAD jumped up to 1.2800 almost immediately and by the New York close on Friday it was up at 1.2850; almost exactly where it was just before the stunning Canadian employment report 10 days ago. The week ahead is pretty light in terms of economic data with just new house prices on Thursday and the monthly survey of manufacturing on Friday.

Euro

AUD / EUR

Expected Range

The Euro opens in Sydney this Monday morning after a bad week which - even with the benefit of 20:20 hindsight – is not easy to explain. There were no ECB speakers resetting or finessing investors’ monetary policy expectations and the incoming economic data were almost without exception positive. EUR/USD began at 1.1875 but this proved to be its best level of the whole week even though surveys of confidence and activity showed the economic recovery in the Eurozone to be broadening and deepening. None of this helped the EUR at all. It traded sideways on Monday, lower on Tuesday with accelerating downside momentum dragging it to a low of 1.1737 on Friday morning before closing in New York at USD1.1775. <br><br> For the week ahead, there’s an ECB Council Meeting at lunchtime on Thursday at which new staff economic projections will be unveiled. Before that, on Tuesday its Germany’s ZEW survey of professional investors and we’ll get the ‘flash’ December PMI’s on Thursday morning. On Wednesday, European Commission President Juncker and European Council President Tusk are scheduled to brief members of the European Parliament about Brexit negotiations ahead of the EU Economic Summit in Brussels on Friday. It will be interesting to see if the incoming data can be more help to the EUR than they were over last week.

New Zealand Dollar

AUD / NZD

Expected Range

The New Zealand Dollar ended the week lower on net, but with some pretty large intra-day volatility which was never fully explained by the incoming economic data. NZD/USD began at 0.6880 and ended at 0.6837 but it jumped around from top to bottom of each day’s performance tables in what at times looked quite a random fashion. After Monday’s tumble to USD0.6840, the NZD then jumped to 0.6902 on Tuesday and on to a high for the week on Wednesday of 0.6907. Economic data on job vacancies, construction work done, and wholesale trade were all pretty good but Thursday saw the NZD down to USD0.6824 and it recovered only marginally into the close on Friday evening after the performance of manufacturing survey was published. <br><br> According to the Financial Times, the NZ government will this week publish legislation to ban foreigners from buying existing homes; what the newspaper describes as, “the first plank in a suite of policies designed to tackle a chronic shortage of affordable homes that has sparked a homeless crisis”. Quoting Grant Robertson, New Zealand’s minister for finance, as saying, “The market for housing in New Zealand is completely broken,” it cites a recent report by Yale University which concluded the country is suffering the highest rate of homelessness in the developed world with 40,000 people, nearly 1 per cent of the population, living on the streets or in emergency housing or substandard shelters. <br><br> If the very real concerns about housing availability and unaffordability are spun into an anti-foreign capital message, then it would be reasonable to expect the NZD to remain somewhat pressured this coming week also.

United States Dollar

AUD / USD

Expected Range

The US Dollar last week rose for five consecutive days. Friday’s gain might need the aid of a magnifying glass to be accurately observed, but the USD index ended the week at 93.50 having begun around 92.80. The stock-market sell off 10 days ago proved to be very brief and by last Monday’s close of business, the S+P 500 index was at a fresh all-time high, talk of a Presidential impeachment had disappeared and the dollar’s troubles were behind it. <br><br> A decent US service sector PMI report on Tuesday was followed on Thursday by the third straight decline in weekly jobless claims and was the 144th consecutive week that claims remained below the 300,000 threshold. Friday’s employment report showed non-farm payrolls rose 228k versus expectations of a more modest 195k increase whilst the unemployment rate remained at a post-GFC low of 4.1%. This seems only a pause in a downward trend; if payrolls continue to rise at the average pace of the last 3-6 months, then the unemployment rate will fall around one-tenth each quarter. <br><br> It is against this backdrop that the Fed begins its two-day FOMC meeting on Tuesday. It is a near-certainty that rates will be raised 25bp and, if the equity market holds up, then so too could the US Dollar. On this week’s US economic data calendar, CPI is released Wednesday, Thursday brings retail sales and Friday is industrial production.

By Nick Parsons

AUD and NZD tie for bottom spot on Thursday; GBP rallies on hopes of Irish border solution


Australian Dollar

AUD

Expected Range

The Aussie Dollar is having a bad week, though unlike the random walk of its Kiwi cousin, there is plenty of fundamental justification for the currency’s weakness. Poor GDP figures then a disappointing set of trade numbers have pulled the rug from under the AUD at a time when we’re already seeing signs of softness in consumer confidence, wages and the residential property market. That’s a pretty long list of negative factors even before we factor in an inquiry into the country’s major banks; it’s a good thing the cricket is offering a welcome diversion.<br> <br> During Sydney time on Thursday, AUD fell from 0.7566 to 0.7545 when the trade figures were released. London walked in at 0.7540 and hit the pair down to a low of 0.7515 just before the New York day began. It then traded sideways through the North American day but couldn’t get back above the old 0.7540 support level and finished the Northern Hemisphere day at a 5-month low of 0.7507. The AUD/NZD cross was flat around 1.1000 as traders couldn’t decide which of the two currencies they disliked least, whilst GBP/AUD has just broken above last week’s near 18-month high to open this morning at 1.7940.

British Pound

GBP / AUD

Expected Range

The British Pound rose on Thursday on a belief that somehow a deal on the Irish question must and will be reached before the end of the week. This may well turn out to be an over-optimistic assessment. The Irish Deputy Prime Minister speaking in the Dublin parliament said, “We are in a position where we still need to find a way forward but, let me be very clear, the core issues that Ireland got agreement on at the start of this week are not changing”. The BBC Political Editor tweeted she was hearing, “DUP and Tory Chief Whips in negotiations this afternoon” but nothing was forthcoming as reporters door-stepped MP’s in Whitehall.<br> <br> The history of EU negotiations – think back to Greece and the sovereign debt crises – is that deadlines are moveable and even final deadlines prove quite flexible. The price action in the GBP suggests a belief that a compromise deal will be agreed at some point over the weekend. If the opposite were the case, then the pound would already have fallen further than it has over the last few days. A lack of agreement could well bring down the Coalition government and a market facing the prospect of a Jeremy Corbyn-led Labour administration would not look on with equanimity.<br> <br> GBP/USD bounced more than a full cent off the day’s 1.3333 low to leave it a net 70 pips higher over the past 24 hours and though Friday brings the welcome distraction of some UK economic data (manufacturing production, construction output and the trade balance) it is politics and Ireland which will again dominate the whole day ahead.

Canadian Dollar

AUD / CAD

Expected Range

The CAD fell again on Thursday as local media reflected further on the more dovish comments in the BoC Statement. It drew no support from an oil price which rallied around 70 cents on the day with NYMEX crude finishing around $56.70 per barrel. Nor did it benefit from the latest data from the construction sector. A 3.5% m/m increase in October building permits far exceeded consensus forecasts for a gain of 1.5% whilst September was upwardly revised to 4.9% from a previously reported 3.8% rise. Non-residential building permits jumped 5.5%, led by intentions for commercial buildings, as Quebec and Ontario planned more warehouses and office buildings.<br> <br> Both provinces have seen their unemployment rates fall as their economies have picked up. Permits for industrial buildings also rose 14.2 percent on construction intentions for factories and plants in Alberta, which is recovering from the oil price shock two years ago.<br> <br> As for the purchasing managers survey, this shrank only very modestly from 63.8 to 63.0 in November whilst the gauge of employment rose to an adjusted 53.9 from 52.0, boding well for further job gains. As with the New Zealand Dollar, the Canadian Dollar did what it did on Thursday despite the data, not because of it. It opens in the APAC time zone this morning at USD1.2860 and AUD/CAD0.9655.

Euro

AUD / EUR

Expected Range

The euro continued to grind lower in Thursday’s European morning session without getting any support from further strength in incoming economic data. The morning brought the final estimate of third quarter Eurozone GDP which fleshes out the provisional numbers in a little more detail. The very encouraging feature of Q2 had been a 2.2% jump in investment spending. Q3 has added to this with a further 1.1% gain. Household consumption and investment both contributed around 0.2% to the 0.6% q/q total, with net trade and government both contributing +0.05% and inventories 0.1%.<br> <br> Within the Eurozone, the fastest quarterly growth rates were registered in Malta (+1.8%) Slovenia (+1.0%) and Cyprus (+0.9%) whilst the slowest were Belgium, Estonia and Greece (+0.3%). Broadening the analysis to the EU 28, Romania grew a hugely impressive 2.6% q/q whilst at the other end of the table, Denmark was the only economy which contracted in Q3. From its low point at lunchtime of USD1.1778, the EUR then rallied 25 pips and got back on to a 1.18 handle in the New York session before giving up all its gains into the close; another very frustrating day for trend and momentum traders and equally difficult for those who place more weight on fundamental indicators. AUD/EUR begins in Sydney this morning at 0.6378 with NZD/EUR at 0.5800.

New Zealand Dollar

AUD / NZD

Expected Range

The Kiwi Dollar continues to frustrate and defy analysis, swinging from top to bottom in the daily performance tables almost at random. On Thursday it shared with the AUD the wooden spoon for worst performing currency, even though the economic data has actually been pretty solid. The job vacancy numbers Tuesday were sound and Wednesday we learned that building activity in the Wellington region grew strongly over the past year.<br> <br> Yesterday, Stats NZ reported that seasonally adjusted total wholesale trade sales value rose 1.1 percent in the September 2017 quarter, after rising 1.6 percent in the June 2017 quarter. This was the sixth consecutive quarterly rise, driven mainly driven by fruit exports and grocery wholesaling. With a half decent dairy auction too, after 4 consecutive declines, it would have been reasonable to expect the NZD to outperform the AUD but that’s not how it turned out.<br> <br> NZD/USD ended the New York session at its low of the day at USD0.6825. Today we’ll get the last of the so-called ‘partial data’ which feed in to the GDP data as Stats NZ release the survey of manufacturing for the September quarter at 10.45am local time. GDP itself isn’t released until December 21st; more than 10 weeks after the end of the quarter.

United States Dollar

AUD / USD

Expected Range

The USD Dollar very marginally extended its gains for a fourth consecutive day on Thursday. It’s index against a basket of major currencies reached a 2-week high of 93.43 late in the London morning before closing in New York around 93.40. It was helped by a stock market which regained its losses of the last two sessions and by a decent set of weekly jobless claims figures ahead of Friday’s November labour market report.<br> <br> Initial claims for state unemployment benefits slipped 2,000 to a seasonally adjusted 236,000 for the week ended Dec. 2, the Labor Department said. Data for the prior week was unrevised. It was the third straight weekly decline in claims and was the 144th straight week that claims remained below the 300,000 threshold. That is the longest such stretch since 1970, when the labour market was of course much smaller. According to a Reuters survey, non-farm payrolls probably increased by 200,000 in November after surging 261,000 in October.<br> <br> Job growth in October was boosted by the return to work of thousands of employees, mostly in low-wage industries like hospitality and retail, who had been temporarily dislocated by Hurricanes Harvey and Irma. The unemployment rate is expected to remain steady at 4.1%. Markets usually approach the monthly US labour market report in a state of eager anticipation but it’s hard to see anything – however dramatic – shifting the Fed from a 25bp hike next week. More of the same hasn’t been a bad backdrop for the stock market in 2017 and equities need to advance less than 1% to be back at fresh all-time highs. The USD should continue to find support if stocks hold up.

By Nick Parsons

AUD ends Wednesday at the day’s lows, GBP still hit by Brexit worries, CAD falls after BoC meeting


Australian Dollar

AUD

Expected Range

The Aussie Dollar had a bad day on Wednesday and is now almost a full cent lower against the US Dollar than Tuesday’s best level of 0.7650. Worse than expected Q3 GDP figures immediately knocked the pair from 0.7607 down to 0.7580 and after stabilizing during the European morning (without ever managing to get back on to a US 76 cents big figure) the AUS was hit for a further 30 pips in the New York session.<br> <br> Most analysts’ forecasts had pinned Q3 GDP growth around 0.7-0.8% q/q so the headline gain of just 0.6% was a clear miss. The annual rate of growth had been expected at 3.0% but printed only at 2.8%. The main culprit was the household expenditure category which struggled to grow at all and rose just 0.1% q/q. This weakness is due to a combination of very soft earnings growth and some nervousness over personal finances and the residential property market. A deeper dive into the GDP figures shows that the savings rate increased from 3.0% to 3.2%; the first increase since Q2 2016.<br> <br> This morning locally, we’ll get the Performance of Construction index and the October trade balance but sentiment internationally towards the AUD is pretty negative and it still seems easier to knock it down than to push it higher. By close of business Wednesday, the Aussie had fallen against everything except a very weak Canadian Dollar. USD0.7540 is now the very important technical support level to watch.

British Pound

GBP / AUD

Expected Range

The British Pound’s volatility continues so for our Antipodean clients, let’s try to summarise the situation as it currently stands. UK Prime Minister Theresa May leads a minority government which has entered into a formal Coalition with Northern Ireland’s Democratic Unionist Party in order to get the 326 seats it needs for a majority in the House of Commons. Before Brexit negotiations can move to a second phase after an EU Leaders’ Summit on December 14, the UK and EU must agree on a customs arrangement, the size of the divorce bill and the rights of EU nationals living in Britain. The last two of these appear settled.<br> <br> However, the question of the Irish border is fiendishly complicated, due to the historical troubles between Northern Ireland and the Republic. The Dublin Government insists on an open border with complete freedom of movement and no physical controls. The UK agrees with this in principle but there will still have to be a border somewhere in the UK. The DUP is implacably opposed to anything which it sees a dilution of the territorial integrity and rights of the United Kingdom. It will not accept a border with mainland Britain. That is its’ whole reason for existence as a political party in Northern Ireland.<br> <br> With the clock ticking down, either something has to give or the Brexit talks could collapse, bringing the UK Government down with it. We said in our London comment yesterday morning that from its opening level of USD1.3425, 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. So far, GBP has moved 0.5% lower and opens in Sydney today at USD1.3370 and AUD1.7675.

Canadian Dollar

AUD / CAD

Expected Range

The Canadian Dollar’s strong run came to an abrupt end on Wednesday after the Bank of Canada’s final monetary policy meeting of the year. Its review of incoming economic data noted they were, “in line with October’s outlook, which was for growth to moderate while remaining above potential in the second half of 2017. Employment growth has been very strong and wages have shown some improvement, supporting robust consumer spending in the third quarter. Business investment continued to contribute to growth after a strong first half, and public infrastructure spending is becoming more evident in the data. Following exceptionally strong growth earlier in 2017, exports declined by more than was expected in the third quarter.<br> <br> However, the latest trade data support the MPR projection that export growth will resume as foreign demand strengthens. Housing has continued to moderate, as expected”. There was nothing too troubling in that assessment. Instead, the CAD was hit by the line that, “While higher interest rates will likely be required over time, the Governing Council will continue to be cautious, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation”.<br> <br> After its recent strong run and with traders positioned for a hawkish BoC surprise, the CAD fell sharply. USD/CAD rose from 1.2665 to nearly 1.2800 whilst AUD/CAD and NZD/CAD rose 25 and 70 pips respectively. The Canadian Dollar opens in the APAC time zone this morning at USD1.2795 and AUD/CAD0.9675.

Euro

AUD / EUR

Expected Range

The euro had another poor day on Wednesday losing around 60 pips from its best level in Sydney of USD1.1844 to trade down to a 2-week low of 1.1781 with AUD/EUR at 0.6412. The drop came despite figures showing German factory orders climbed in October for the third month in a row, confounding expectations of a decline.<br> <br> Factory orders increased 0.5% in October from the previous month, according to the Federal Statistics Office. September’s gain was also revised higher to 1.2% m/m from a previous reading of 1.0%. Details of the report showed orders from companies within Germany increased 0.4%, while international orders were up 0.5%. The international component was led by firms outside of the eurozone, where orders increased 1.6%.<br> <br> Clearly, there’s still plenty of demand for the very high-quality consumer goods, autos and machinery for which Germany is so deservedly famous. Elsewhere in Wednesday’s batch of data releases, Eurozone Retail PMI improved to 52.4 points in November, its highest level since June. The problem for the EUR continues to be that whilst the economic news is almost without exception positive, it is well known and already ‘in the price’. Traders are reluctant either to sell dips or to buy into the rallies so we’re left in a familiar USD1.1750-1.1930 range unless and until some genuine ‘news’ hits the screens.

New Zealand Dollar

AUD / NZD

Expected Range

‘Turnaround Tuesday’ for the Kiwi Dollar didn’t quite morph into Wonderful Wednesday though there was some very good price action against both the Aussie and Canadian Dollars and the British Pound. Just 36 hours ago, AUD/NZD was trading at 1.11 but it spent a fair amount of time yesterday at 1.09 after the disappointing Australian GDP numbers.<br> <br> Locally in New Zealand on Wednesday we saw the ANZ job vacancy numbers inch down 0.1% in November from the previous month. Despite this slip – which was the first drop in four months - job ads remain near historic highs as the country experiences a skilled labour shortage. Annual job ads growth in Canterbury and Wellington eased to 6% and 8% respectively while Auckland is slowly heading towards a broadly flat outturn.<br> <br> Separate numbers released yesterday from Stats NZ (the snappily titled official statisticians) showed Building activity in the Wellington region has grown strongly over the past year. The value of activity rose 27 percent on the previous September year – the largest annual increase ever recorded for Wellington. In the year ended September 2017, the value of building work put in place in the region totalled $1.7 billion (up $0.4 billion), almost tripling the growth rate seen in 2015. Though the NZD lost ground steadily from its overnight best level of USD0.6913, it ended the New York session little changed from this time yesterday at 0.6873, with the AUD/NZD cross down at 1.1000.

United States Dollar

AUD / USD

Expected Range

The USD Dollar rose for a second consecutive day on Wednesday. Its’ index against a basket of major currencies opened around 93.00 and having slipped to 92.85 on worries about the stock market, it then had a steady and pretty much uninterrupted rise to a best level of 93.30 before closing in New York around 93.25 as stocks found some support.<br> <br> The USD at the moment seems unusually well-correlated to movements in equity markets both at home and abroad. The average daily move on the S+P 500 for the last three months has been barely 0.2% either way so although Tuesday’s 0.4% drop was not large by historical standards it was poor in the context of the last three months’ price action. To put this into perspective, the S+P 500 index on average has fallen by at least 5% on three or four occasions every year over the past decade. It hasn’t now done so at all during 2017.<br> <br> But, before jumping to the conclusion that a decent correction must now be imminent, note that December has not been the weakest month of any year going all the way back to 1928. It’s not just US equity markets which are under the spotlight at the moment: Asia’s equivalent of America’s FANG stocks, the so-called TATS (Taiwan Semi, Alibaba, Tencent and Samsung) have been down for 7 consecutive days with a cumulative drop over 10%. Keep a close eye on equities globally as the outlook for stocks (and bonds) is an important element of the investment case for the US Dollar. Technical support on the USD index at 92.5 then last Monday’s low of 92.2 are the key levels to watch.

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.

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