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By Nick Parsons

FOMC brings no surprises but USD suffers sharp sell-off. AUD and NZD best performers, UK Government defeated in Brexit vote.


Australian Dollar

AUD

Expected Range

The Aussie Dollar had a good day on Wednesday, getting back on to a US 76 cents big figure for the first time in just over a week even before the FOMC Statement. This was partly because traders didn’t want to be caught short of AUD ahead of today’s Australian labour market report, and partly because the takeover of Sir Frank Lowy's Westfield Corporation - in a deal said to be worth AUD$32.7 billion – has prompted thoughts of some ‘pre-hedging’ of the foreign exchange transactions associated with the deal.<br> <br> Founded in Sydney in 1953, Westfield currently has interests in 35 shopping centres in the US and the UK and its chairman received a knighthood from the Queen at Windsor Castle just a few days ago for his contribution to the British economy. French company Unibail-Rodamco will acquire Westfield for a combination of shares and cash, and though the 35% cash element won’t be paid until next year, there could be some early structured purchases of Aussie Dollars, whether in the spot, forward or derivatives markets.<br> <br> Looking forward to today’s Australian economic data, consensus estimates are for a +15k increase in employment with the jobless rate steady at 5.4%. Unlike many countries elsewhere in the world, Australia doesn’t produce monthly earnings data alongside the labour report; instead the wage price indices are available only quarterly and we’ll have to wait until February for the latest updates.<br> <br> Having reached a pre-FOMC high of 0.7612, the Aussie Dollar extended its gains to a best level just above 0.7630 (the highest in 8 days) which is where it opens in Asia this morning with AUD/NZD at 1.0870.

British Pound

GBP / AUD

Expected Range

The Pound had a very mixed session on Wednesday ahead of a key Parliamentary vote that would require the Prime Minister to write the terms of her Brexit deal into a law that would have to be passed by Parliament. Just as we publish this morning note in Sydney, it has been announced that Prime Minister Theresa May suffered a defeat with 12 of her own backbenchers joining with Opposition MP’s to defeat the Conservative/DUP Coalition Government. We will have to wait until the start of the UK morning on Thursday to assess the implications of this in a little more detail.<br> <br> The latest UK economic data had something for everyone but on balance were a bit disappointing. The total jobless number fell by 26,000 in the last 3 months to 1.43m, taking the unemployment rate down to a 42-year low of just 4.2%. But, the total number of people in work fell by 56,000 in the last quarter; the biggest drop in more than 2 years. The simultaneous fall in employment and unemployment is possible because there has been a large increase (115,000 over the quarter) in the number of economically inactive. As for wages, the 3-month average measure of total pay rose to 2.5% but is still below the rate of inflation. Real wages in the UK have now fallen for 8 consecutive months and show few signs of picking up any time soon.<br> <br> Ahead of the FOMC Statement, the pound rose against the USD and CAD, but fell once more against the Australian and New Zealand Dollars. With the USD generally in retreat after the Fed, GBP/USD extended its gains to 1.3410, though the Pound fell further against the relatively buoyant Australian and New Zealand Dollars. GBP opens this morning at USD1.3410 with GBP/AUD at 1.7565 and GBP/NZD1.9085.

Canadian Dollar

AUD / CAD

Expected Range

There’s been so much to keep the foreign exchange market busy over the past few days that the Canadian Dollar has largely been overlooked. For most of Wednesday, USD/CAD was trapped in a very narrow range from 1.2845 to 1.2875 even as oil prices fell quite sharply during the North American morning. NYMEX crude fell almost a full dollar to $56.74; its lowest level since last Friday morning even though industry data showed a larger-than-expected drawdown in U.S. crude stockpiles.<br> <br> Sometimes, the CAD is correlated almost 100% with intra-day and day-to-day swings in oil prices, yet at others it seems to have no impact whatsoever. It’s certainly frustrating both for those investors seeking to set trading rules and the analysts who are trying to explain the changes in the external value of the currency.<br> <br> We’ll finally get to hear what issues are keeping Bank of Canada Governor Stephen Poloz awake at night when he speaks at lunchtime in Toronto today. The consensus amongst analysts locally is that he’ll focus more on the negatives for the economy as the positives would presumably allow him to sleep soundly!<br> <br> With the US Dollar in a broad-based sell-off after the FOMC, USD/CAD opens at 1.2795 with AUD/CAD at a 6-week high of 0.9775.

Euro

AUD / EUR

Expected Range

In a pre-FOMC session in which the dollar generally struggled after the core CPI numbers, the euro found it difficult to capitalise. In part this is due to renewed uncertainties around Italian politics and Press reports locally that President Sergio Mattarella will dissolve Parliament this month and set a March 4 election date. Under the Italian Constitution, the vote has to be held before May 20th. <br> <br> Paolo Gentiloni on Monday celebrated his one-year anniversary as Italy's Prime Minister, an office he took after Matteo Renzi resigned following a humiliating defeat in a national referendum. A new electoral law known as “Rosatellum” had to be passed in October because Italy’s two houses of Parliament had different election systems. Under the Rosatellum law, there will only be a clear-cut winner if one party or bloc receives over 40 percent of the vote. <br> <br> Recent opinion polls show a centre-right coalition ahead, followed by the Five Star Movement and Gentiloni's Democratic Party, but all of them several points away from the 40% bar. Given this uncertainty, 10-year Italian bond yields yesterday jumped 10bp. Although there was no contagion into other peripheral Eurozone bonds, investors haven’t recently needed much of an excuse to sell EUR and the Italian news was the trigger for its latest underperformance.<br> <br> Away from the serious but sometimes very tedious business of politics, there’s an ECB Council Meeting at lunchtime on Thursday at which new staff economic projections will be unveiled. With Eurozone monetary policy likely to be on hold for a very long time, the main interest amongst analysts is the colour of Draghi’s tie. Yes, honestly!! If we look back over the last three years, there have been 5 announcements on QE. On four of these he wore a blue tie, the first three being the same blue tie he wore when he famously vowed to do “whatever it takes” to save the euro”. October was a light purple. Since January 2015, he has never announced a policy easing whilst wearing a red tie. So, if you’re at your screens for 2.30pm Frankfurt time, watch to see how EUR/USD reacts as he walks into the Press Conference…<br> <br> With the FOMC Press Conference now behind us, EUR/USD opens in Asia at 1.1818 with AUD/EUR at 0.7635.

New Zealand Dollar

AUD / NZD

Expected Range

The Kiwi Dollar had held on to a US 69 cents big figure ever since 01.00am New York time on Monday morning and reached a 3½ week high of 0.6995 even before last night’s Fed Statement. After Janet Yellen’s final FOMC Press Conference, the US Dollar suffered a sharp and broadly-based sell-off. NZD reached US 70 cents for the first time since October 19th and opens in Asia around USD0.7020.<br> <br> Yesterday in New Zealand, the latest data on food prices matched the consensus of analysts’ forecasts, falling -0.4% m/m in November. Lovers of economic data always have plenty to feast on from NZ’s official statisticians. We learned that lower fruit and vegetable prices were driven by a 6.5% fall for vegetables. Tomatoes, broccoli, and lettuce led this fall. Fruit prices rose 3.7%, driven by higher prices for nectarines and apples, slightly offset by lower strawberry prices. Elsewhere, and as shoppers around the world will be painfully aware, annual butter prices increased 48% to reach another record high. The average price of the cheapest available 500 gram block was $5.74 in November 2017, compared with just $3.88 a year ago. <br> <br> Let’s see if the official number-crunchers can make today’s data on agricultural production and Friday’s vehicle registrations just as interesting…

United States Dollar

AUD / USD

Expected Range

After seven days without a fall (six up and one unchanged) the USD was arguably ripe for a bit of a correction ahead of last night’s FOMC Statement and Press Conference. Having touched 93.81 on Tuesday, its index against a basket of currencies was already slipping back as the CPI figures were released. Headline CPI came in as expected at 2.2% y/y but the core ex-food and energy number fell to 1.7%.<br> <br> Fully three-quarters of the increase in the all-items CPI from 2.0% to 2.2% was due to energy prices whilst car insurance, new and used vehicle prices also increased. The core measure excludes these items and was depressed further by a 1.3% m/m drop in apparel; the biggest monthly decline since September 1998. Immediately prior to the Fed announcement, the USD index was down almost 0.4% from Tuesday’s high at 93.46.<br> <br> The Fed Statement noted, “the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong.” In its new economic projections, it revised up 2018 GDP forecasts from 2.1% to 2.5% with further more modest upgrades to the outlook in 2019 and 2020.

By Nick Parsons

USD rises for 6th day out of last 7 as stocks make fresh all-time highs. AUD finally catches a bid, NZD pauses, GBP and EUR soft again.


Australian Dollar

AUD

Expected Range

Although the Aussie couldn’t hold on to its best levels against a very strong US Dollar, Tuesday was actually a pretty good day. It held its ground against the buoyant NZD and finished up against every major currency we track here with its biggest percentage gains versus the EUR (+0.7%) CAD and GBP (both +0.5%). Sometimes it helps to be lucky and we’ll humbly thank serendipity for the fact that AUD/USD peaked at 0.7576 after we’d pointed out here 24 hours ago that the first level of technical resistance on the chart came at 0.7577… <br><br> Tuesday’s NAB Survey can take some of the credit for the AUD rally, for behind the headlines on Business Confidence and Conditions, there was stable employment (+7) and the fact that most measures of activity and confidence are still above their longer-term averages. More importantly perhaps, is the fact that offshore traders who have seen the NZD soar don’t want to be caught facing the same way with excessively short positions in the AUD ahead of Thursday’s Australian labour market report. Everyone makes mistakes but the secret is to try to learn from them, not replicate them. <br><br> The diary for Wednesday shows a couple of RBA speakers: Governor Phil Lowe is first up with a speech at the Australian Payments Summit in Sydney but with perhaps more meat for the markets, Deputy Governor Christopher Kent is talking at a Finance and Business Conference on “The availability of business finance”. <br><br> Looking forward to Thursday, consensus estimates are for a +15k increase in employment with the jobless rate steady at 5.4%. Unlike many countries elsewhere in the world, Australia doesn’t produce monthly earnings data alongside the labour report; instead the wage price indices are available only quarterly and we’ll have to wait until February for the latest updates. <br><br> For today, AUD/USD opens in Sydney around USD0.7555; a quarter of a cent below its best level in New York but still a net 20 pips up on the day against a very strong US Dollar. AUD/NZD, meantime, begins at 1.0900; up almost 40 pips from Tuesday morning’s low.

British Pound

GBP / AUD

Expected Range

Tuesday morning’s British newspapers for once weren’t dominated by Brexit but as we wrote in our London morning commentary, “this may well be only a temporary reprieve, both politically and for the currency”.<br><br> For six days, UK MP’s have been debating the Brexit Bill; what is known as the Committee Stage. The trickiest votes have been scheduled for tomorrow and for next Wednesday. Though the Government has either backed down with concessions or narrowly won all of the procedural stuff so far, there is a proposal by the former Attorney General that would require the Prime Minister to write the terms of her Brexit deal into a law that would have to be passed by Parliament. This could well be the moment for a more serious rebellion than the votes thus far which have been on the scale of what colour paperclips to use.<br><br> Amidst the relative Brexit calm, Tuesday brought the November CPI numbers. We had thought that higher petrol prices might outweigh Black Friday discounting and luckily this is exactly how it turned out. CPI printed at 3.1% y/y which will require the Governor of the Bank of England to write a letter of explanation to the Chancellor; the central banking equivalent of being made to sit on the naughty step.<br><br> There is little realistic chance of a near-term rise in UK interest rates so the focus is on the squeeze in real earnings which is worsening as the holiday season begins. UK wages have grown by less than prices for almost the whole of 2017 and there’s no sign yet the squeeze is easing. It’s a very cold and bleak pre-Christmas period.<br><br> The GBP fell 80 pips against both the AUD and NZD on Tuesday. GBP/USD did its usual 50 pip intra-day high-low swing on the CPI release and then slid back to the day’s lows in New York. It opens in Asia this morning at USD1.3310 with GBP/AUD at 1.7605.

Canadian Dollar

AUD / CAD

Expected Range

The Canadian Dollar had a day of two halves on Tuesday, tracking oil prices both up and down. The early news was that the North Sea Forties Pipeline System – which carries 400,000 barrels per day of oil to Scotland – is being closed for repairs after the discovery of a serious crack whose repair will likely take weeks rather than days. Fortunately (for production rather than prices) the damage is on an onshore section of the pipeline which will be much easier to repair than if it had been underwater but it is still a major disruption to supply. <br><br> NYMEX crude (not a perfect substitute for Brent but still highly correlated to it) jumped 50 cents to a high of $58.55 but then plunged a dollar-fifty in the North American session to $57.20. USD/CAD had moved down from 1.2855 at Tuesday’s Sydney open to 1.2820 at the New York open before the combination of a generally very strong US Dollar and a weaker energy complex (natural gas plummeted 4.2%) lifted USD/CAD by around 60 pips in New York. <br><br> The rest of the week 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 which is presumably not about his list to Father Christmas…

Euro

AUD / EUR

Expected Range

Apart from a brief rally around the release of the ZEW Survey (see below) it was downhill all the way for the EUR on Tuesday. Yet again, it fell against every major currency with its biggest losses against the AUD and NZD (-0.5%) but down -0.4% against the USD and 0.1% against the GBP. Looking at individual pairs, EUR/USD fell to a low of 1.1720; matching its lowest point in 3-weeks whilst AUD/EUR rose 40 pips to 0.6440 and NZD/EUR was up 35 pips at 0.5905.<br><br> The latest ZEW survey of professional investors in Germany was not to blame for the EUR’s drop. The headline expectations index dipped to 17.4 in December from 18.7 in November, marginally below the consensus of 18.0. The current situation index rose slightly to 89.3, from 88.8, very slightly above the consensus 88.7. The details showed that both Eurozone and German inflation expectations increased in December, and short-term rate expectations also rose a little. Expectations for the stock market rose across the major Eurozone countries, and investors also anticipate a slightly weaker dollar versus the euro.<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 and we’ll get the ‘flash’ December PMI’s on Thursday morning. For today, 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

Having finished Monday way out at the top of the FX pile and up against every major currency, the Kiwi Dollar extended its gains even further on Tuesday morning before finally giving back a little of its stellar performance. It still finished the day up against every currency apart from the AUD (against which it was net unchanged at 1.0900 having at one point been to AUD/NZD1.0864) and did best against both the GBP and EUR. <br><br> Why is it, our readers may wonder, that the appointment of just one person to the Central Bank might have such a disproportionate impact on the FX market? There are two parts to the answer: firstly, we always have to take investor positioning into account. After the September 23rd General Election in New Zealand, there were worries about the overall direction of economic policy, the attitude towards inward capital flows into the residential property market and a change in the Central Bank’s inflation fighting mandate. Investors were generally short of NZD, either outright or relative to neutral benchmark weights. Such positions are always vulnerable to a squeeze on unexpected positive news flow. Secondly, New Zealand doesn’t have a monetary policy committee with separate votes for each member. As the RBNZ notes on its own website, “At the Reserve Bank of New Zealand responsibility and accountability for monetary policy rests on one individual − the Governor of the Reserve Bank”. If he or she wants to change interest rates, they are changed. It’s as simple as that. <br><br> After giving back some – but by no means all – of Tuesday’s gains, the Kiwi Dollar opens in Asia this morning at USD0.6935 whilst GBP/NZD at 1.9190, is a more than 5 cents below last Thursday’s highs up around 1.9760.

United States Dollar

AUD / USD

Expected Range

The USD is on a real hot streak at the moment, rising for a 6th day out of seven on Tuesday to take its index against a basket of major currencies up to a high of 93.81; its best level since November 14th. <br><br> US equity markets reached all-time closing highs on Monday and then before Tuesday’s opening bell on Wall Street, futures markets made new all-time intra day highs, keeping up a stream of positive headlines right into the close. Not even the President could contain his excitement, tweeting, “Consumer Confidence is at an All-Time High, along with a Record High Stock Market. Unemployment is at a 17 year low. MAKE AMERICA GREAT AGAIN! Working to pass MASSIVE TAX CUTS (looking good)”. <br><br> The Fed ends its two-day FOMC meeting today and it is a near-certainty that rates will be raised 25bp. The only reason that some of the online calculators show an 88% probability of a 25bp hike is that the residual 12% reflects a 1-in-8 chance of a 50bp move. Now that would be a shock! <br><br> On the US economic calendar this week, 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 US Dollar ought to continue to find some support, at least until all the short positions have been squeezed out…

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.

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