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We mentioned yesterday a few reasons why the Aussie Dollar was struggling; the dominant one being liquidation of stale long positions in a local macroeconomic environment where persistently low inflation is countering any hopes of a lift from higher interest rates. We’ll get a fresh update on the latest RBA thinking at next Tuesday’s Board meeting but for many currency investors this is just too long to wait. Amidst a raft of positive news on rates and/or economic growth in the Eurozone and United States, that dull noise which reverberates around the AUD market is the sound of towels being thrown in. Locally this morning we’ll get a couple of readings on manufacturing activity with CBA’s PMI and the AiG indices both released. Quite why we need two indices to measure pretty much the same thing is a bit of a mystery though at least there’s a 30-minute time difference between the two data releases. As for price action in the FX market, a high of USD0.7696 around 11am Sydney time Tuesday was as good as it got and dealers in both London and NY were steady sellers through their respective days. The month-end ‘fix’ for AUD/USD saw a 13 pip jump to a high of 0.7669 which was subsequently reversed and it remains below all four of its main moving averages (20, 50, 100 and 200 day).
AUD / CAD
We wrote here yesterday morning about the upcoming Canadian GDP figures which Statistics Canada impressively manages to release on a monthly basis. Sadly, the numbers themselves were distinctly unimpressive, managing to miss even very low consensus expectations. Analysts had looked for just a +0.1% m/m increase in August GDP after no change in July. Instead, the outturn was a -0.1% m/m drop as declines in oil and gas and manufacturing more than offset small gains in a majority of other industries. Manufacturing was a particular soft spot, with chemical manufacturing posting its biggest one month decline in 20 years, and other types of manufacturing being down because of planned maintenance shutdowns. The service sector eked out a small gain of 0.1% and has now expanded for 17 months in a row but this was the first monthly contraction for the economy overall since October 2016. The FX reaction was pretty brutal – USD/CAD jumped almost 70 pips to be back once again on a 1.29 handle whilst AUD/CAD managed a 10 day high of 0.9886. NZD/CAD, meantime ended virtually unchanged as investors decided that in the ugly contest for currencies, they were both equally unattractive.
AUD / EUR
Europe yesterday basked in the glow of a sparkling set of economic numbers kicking off with a very solid 0.5% q/q increase in French GDP in Q3. The result was in line with consensus forecasts but upward revisions to the second quarter of this year and the fourth quarter of last year - both by 0.1 percentage point to 0.6% - helped lift the y/y growth rate to 2.2%; its fastest pace since 2011. For the Eurozone as a whole, Q3 GDP was a tenth higher than expectations at 0.6% q/q (or 2.4% annualised as our American friends would describe it) whilst the second quarter was revised up by a tenth from 0.6% to 0.7%. Capping off a very encouraging day for economic news, unemployment in the Eurozone fell below 9 per cent for the first time since the beginning of 2009 and is now down more than 3 percentage points from its 12.1% peak in early 2013. EUR/USD edged marginally higher after the numbers though EUR/AUD jumped over 70 pips to a high of 1.5230 and EUR/NZD shot up to 1.7059. The currency reaction would have been a lot more positive had not Eurozone CPI been a tenth weaker than forecast but the ECB has already set out its stall on QE and rates so slightly lower inflation really ought to be ignored given the strong output story.
Great British Pound
GBP / AUD
Once again, the GBP finished the day as top performer amongst the FX majors with 100+ pip gains for GBP/AUD, GBP/NZD and GBP/CAD. The pound broke above last Thursday’s 1.3274 high just ahead of the 4pm month-end ‘fix’ in London and the regulators might well be pleased to see this wasn’t the type of ‘pump and dump’ price action which has brought the wholesale FX market into such disrepute over the past few years. Instead, the pound held on to its gains for long enough to quell any lingering suspicions and though it subsequently gave back some ground, this can legitimately be explained as profit-taking ahead of a rate-hike decision on Thursday which is pretty much 100% fully discounted. As the new month begins, so it’s that time when we look forward to the release of Purchasing Managers Indices around the globe. China kicked off on Tuesday with disappointing manufacturing and service sector numbers and after Australia first thing this morning, it will be the turn of the UK and US to report on manufacturing later today before the Eurozone numbers on Thursday. The UK has actually been quite resilient over the last few quarters with healthy external demand for UK products offsetting a somewhat weaker domestic picture. The read-across into FX ought to be straightforward (famous last words!) and with a consensus of 55.8 for Octobers survey after 55.9 in September, a beat/miss on the number should push GBP up/down.
New Zealand Dollar
AUD / NZD
Another day dawns and the past 24 hours have once again seen the NZD the worst performer (just) amongst all the FX majors (though see CAD comment below). Those who like to clutch at straws will doubtless point out that the lows of Friday, Monday and Tuesday were at successively higher levels (USD0.6829, 0.6837 and 0.6839 respectively) but this price action is much too tentative to suggest any real bottom formation has yet been completed. Some comfort might also be taken from the fact that the recent highs in AUD/NZD have also been at successively lower levels (1.1288, 1.1229, 1.1219 and 1.1211) but as we noted in our AUD commentary, this more likely reflects long liquidation of Aussie positions than any new-found enthusiasm for the Kiwi. This morning we’ll get a read on the New Zealand labour market in Q3 but this will probably serve just as the starting point for the as-yet unwritten analyses of the similarly not-yet announced policies of the new Labour government. In any case, a quarterly snapshot is by definition only a slow-moving measure of a more dynamic economic variable and it’s unlikely that we’ll see anyone rushing immediately to change their outlook on the currency.
United States Dollar
AUD / USD
Fast forward another 24 hours in the ‘Trump-Russia’ story and it really still doesn’t seem much clearer than it did yesterday, though it has served to reinforce prejudices even further. The President’s supporters love him just as much as they did previously and his detractors hate him perhaps even a tiny bit more (if that is possible without moving the needle off the dial). Financial markets, meantime, continue their search for correlation and causality, parsing information across asset classes which might give them a trading edge. Unfortunately, with virtually no change in 10-year US bond yields or cash equity indices, there was no great directional indicator for the currency and the USD index spent all of Tuesday in a very tight range from 94.25 to 94.40. The next economic data point to be watched for interest rates, asset markets and the USD will be the ISM report on manufacturing. September printed at a fresh cycle high of 60.8; signaling the fastest pace of expansion in 13 years. This was driven by a jump in new orders to 64.6 whilst production was back close to its best level of the year and prices paid surged to 71.5. Expectations for the October number centre on a median forecast of 59.4 for the headline index.
As we had feared, Monday was indeed a very quiet session for the Australian Dollar in both local and offshore markets. Weekly data from the CFTC (Commodities and Futures Trading Commission) in the US shows that net speculative long positions in the AUD had risen from near-zero in early June to a peak on September 29th of around +77,200 lots. Over the last four weeks, some of these long positions have been gradually liquidated and the net balance stands now at just +57,300. This so-called Commitment of Traders report, released each Friday at 3.30pm ET is still a decent – though far from perfect – guide to investor positioning more broadly. Monday’s price action where the AUD was unable to capitalise on general US Dollar weakness was entirely consistent with further long liquidation and we note that both the 100 and 200 day moving averages (AUD/USD0.7662 and 0.7693 respectively) are still falling. It should be noted, too, that the AUD/NZD cross rate has now fallen below all four of its main averages (20, 50, 100 and 200 day) which may at the margin also begin to weigh down on the AUD. The local economic data vacuum will only be very partially filled by the weekly consumer confidence index, new home sales and private sector credit numbers this morning and there are far more important numbers on retail sales and international trade to wait for later in the week.
Canadian consumer confidence numbers released yesterday were pretty much in line with consensus expectations, but nonetheless showed a very modest second consecutive decline. The headline index fell from 58.3 in September to 57.6 in October but the sub-index tied to perceptions about the economy and housing had the lowest month-end reading since January. On a generally poor day for the US Dollar, USD/CAD was thus able to eke out some very modest gains; reaching a session high in New York of 1.2850 having begun the week in Sydney yesterday around 1.2825. Canada is one of the very few countries to release GDP figures on a monthly basis (Australia and New Zealand can’t even calculate CPI monthly!) and though it’s expected that the latest figures will show only a slight moderation in the annual rate of growth to 3.6% from 3.8%, much of this growth came earlier in the period before the BoC moved to twice hike interest rates. Monthly GDP in July was unchanged and the August numbers out tomorrow are expected to be up just 0.1% m/m. Who says monetary policy doesn’t work quickly?
The euro gained some support Monday from a very strong report on business, consumer and economic confidence which showed all the indicators at or close to 16-year highs. Also helping improve investor sentiment was a 2.5% daily increase in Spain’s stock market which was taken as an indication that the constitutional crisis in Catalonia might not be taking an immediate turn for the worse. As with the political shenanigans in the United States, it is not intuitively obvious to an outsider what are the implications of each twist and turn in the Spanish plot but the stock market and bond markets are seen as useful barometers of investor sentiment. Madrid’s IBEX index surged almost 250 points yesterday whilst Spanish 10 year bond yields fell 9bp to just 1.48%. If this is indeed a crisis, it’s not having much of a negative impact on local financial markets. Having fallen to a low of USD115.80 on Friday, the euro spend the whole of yesterday on a 1.16 handle and we could be on the cusp of a modestly bullish technical formation in which the 20 day moving average crosses up through its 50 day measure. EUR/AUD, meantime, has consolidated on a 1.51 big figure and it, too, should be able to eke out modest further near-term gains.
The GBP enjoyed a very good start to the trading week and ended Monday way out in front on the FX leaderboard. GBP/USD briefly touched 1.32 whilst there were 100+ pip gains for GBP/AUD, GBP/NZD and GBP/CAD. Two well-respected surveys of confidence and activity will be reported under embargo at midnight local time in the UK and could well set the tone for trading until London dealers arrive to a chilly start around 7am. GfK’s consumer confidence survey is expected at -10 in October after -9 in September and the main interest here will be to see if yet another month of falling real wages and the prospect of an imminent BoE rate hike have dented confidence further. At the same time, the Lloyds Bank business barometer will be released. This measure has fallen steadily throughout 2017 and from a recent high of +47 in April, was down at +17 in August before a very modest rally to +23 in September. No consensus forecasts are available for either of these indicators so their impact on the market for GBP should be a straightforward up/down depending on whether they are better or worse than the prior month’s readings. Last Thursday’s highs of GBP/USD1.3274 and GBP/AUD1.7226 will provide some technical resistance but it is the latter of these which looks most vulnerable should liquidation of stale long AUD positions again be the feature of the day.
A recently rare thing happened on Monday: the New Zealand Dollar didn’t make a fresh low against the USD and didn’t close lower on the day. It is probably premature to hang out the bunting and hold street parties in celebration and we should bear in mind that it’s barely half a cent off the 5 ½ month low of 0.6828 reached at the end of last week. Indeed, the main reason for the modest improvement was all-round weakness in the USD; the NZD still fell against GBP and EUR and only just held its ground against the CAD and AUD. Economic data this morning on building permits, business confidence and household credit are rarely big market movers for FX and in any case, most of the numbers to be released over the next few weeks will be viewed through the prism of uncertainty around the September 23rd election. Arguably the most important local data this week will be the Q3 labour market report on Wednesday but this is a quarterly picture and won’t capture any month-to-month swings in the way that the US non-farm payrolls does. All told, so low are expectations for the NZD currently that another day without a fresh low printed would be considered something of a success.
Traders and analysts spent much of Monday trying to decide whether the latest twist in the Trump-Russia story was something to get excited about or not. It is a fiendishly difficult narrative to follow but by the end of a session in which equities and the US Dollar both ended lower, it was tempting nonetheless to link the two. Lower stocks, lower bond yields and a somewhat weaker USD index (-0.3%) might not endure until the end of a week which sees major economic data releases and a new FOMC statement but as Halloween approaches, they were enough to spook investors yesterday. For Tuesday, the chief focus will likely be on US consumer confidence numbers where the recent string of all-time highs for the stock market is expected to push the index to a fresh cycle peak. It is a moot point whether this alone will be enough to support the USD today as the main feature of trading in the New York session will be the month-end ‘fixing’ of foreign exchange rates and the potential for the re-balancing of portfolio hedges by global institutional fund managers. These flows can be a lottery to predict in advance, but be aware of the potential for plenty of volatility during the Antipodean night.
This week is packed with events offshore and the AUD will likely spend the first half of it buffeted by what’s happening elsewhere. In the United States there’s an FOMC meeting on Wednesday and whilst investors can be confident there’ll be no change in monetary policy, the statement will be watched carefully for clues about a December rate hike. Perhaps more importantly, the White House has said that President Trump will announce his pick for the next Fed Chair before he departs for a trip to Asia on Nov 3rd. Throw the latest US employment report on Friday into the mix and there’s scope for plenty of volatility for the FX majors. Locally, there’s only second-tier economic data in the beginning of the week but Thursday brings September’s Trade Balance (consensus +$1.2bn) and Friday sees Retail Sales (+0.4% m/m). The AUD traded very heavily last week, breaking its 200 day moving average at 0.7705 and falling on to a US 76 cent handle for the first time since July 13th. With the RBA silent ahead of next Tuesday’s Board meeting and domestic politics not helping, the path of least resistance still looks lower with Friday’s 0.7627 low being a key technical support level.
Having surprised financial markets not once but twice with interest rate hikes, the Bank of Canada has subsequently seen a sharp deterioration in most of its main economic indicators. Indeed, the so-called “Economic Surprise Index” has plunged over the past 6 weeks to levels not seen since the fourth quarter of 2016. This may not be solely due to the power of monetary policy: Canada has also suffered from investor concerns about a potential renegotiation of NAFTA whilst there has been a high-profile attempt to curb overseas purchases of property through substantially higher taxes. Whatever the case, the period of outperformance which the Canadian Dollar enjoyed from May to September is now decisively over and USD/CAD has snapped back almost 7 cents higher onto a 1.28 handle. The bounce in AUD/CAD has obviously been less dramatic but at 0.9835 it is almost 130 pips above its October 13th low. Stuck now between its 50 and 100 day moving averages (0.9804 and 0.9870 respectively) it’s very much a case of which currency investors now dislike least. Near-term there are few compelling arguments either way, though for choice we might see a gradual grind higher as stale long CAD positions continue to be liquidated. There are more interesting opportunities elsewhere in FX.
ECB President Draghi will surely have permitted himself a big smile over this past weekend. For much of the past few months, the debate has been how he could communicate a scaling-back of QE without signaling a tightening of monetary policy. Last Thursday’s Press Conference gave him the opportunity to signal a “dovish taper”; a reduction in the pace of bond buying but a commitment that interest rates would not be raised until well after QE finally comes to an end. In plain English this means another 12 months without a rise in Eurozone interest rates, even as the economic recovery becomes more broadly based and the pace of activity continues to pick up. Perhaps Mr Draghi also enjoys plenty of that priceless commodity in policymaking: good luck. The constitutional crisis in Spain could not have come at a more opportune time for the ECB. Had it materialized 6-9 months ago during the period of elections in the Netherlands, Austria and France, the dominant narrative would have been a potential break-up of the EU and its institutions. Instead, the events in Catalonia have helped ease the economic impact of unwelcome exchange rate appreciation. It may well be better to be lucky than clever but Mr Draghi is blessed with being both. A period of relative calm for the EUR should now sustain Mr Draghi’s mood at least until the next Council Meeting in December.
1.7050 – 1.7165
The key event this week will be the meeting of the Bank of England’s Monetary Policy Committee on Thursday. BoE Governor Mark Carney – now five years into his term of office – was memorably called an ‘unreliable boyfriend’ by the former Chairman of the influential UK Treasury Select Committee, Andrew Tyrie. This was a reference to his frequent unfulfilled promises to raise UK interest rates but then never to deliver on them. Although the macroeconomic background for post-Brexit Britain is far from encouraging, the Governor and his committee have effectively been boxed into a corner by his recent warnings about the need to raise interest rates to deal with rising inflation. His predecessor Mervyn King had been quite content to allow CPI to rise to 5.2% y/y without raising rates but Mr. Carney’s credibility risks being shot through if he doesn’t deliver on his latest threat. UK interest rate markets currently reflect a 90% probability of a 25bp hike on Thursday and though the announcement might well see a short-term blip higher, this could be very much a case of “buy the mystery, sell the history”. GBP/AUD powered more than 3 cents higher last week but with all the good news seemingly in the price, Wednesday’s high of 1.7222 will be a tough one to crack. With GBP/USD stuck below all of its main moving averages, GBP will need some positive Brexit news to capitalize on a well-discounted rate hike.
1.1100 – 1.1280
The Kiwi Dollar has spent the last couple of weeks as the FX market’s whipping boy; the worst performer amongst all the major currencies with Friday’s close of USD0.6878 the lowest since mid-May. Amidst the post-electoral uncertainty, NZD/USD tumbled through its 20, 50 and 100 day moving averages and its 200dma at 0.7155 was decisively broken after the announcement of a new Labour government. ‘Jacindamania’ has clearly failed to lift currency investors’ spirits and the ‘big figure’ of US 70 cents was easily broken for the first time in almost 5 months. There’s an understandable temptation to view the currency as technically oversold at current levels but unless and until they receive more clarity about the government’s economic policy and its stance on the remit of the RBNZ, investors are unlikely to want to play the NZD from the long side anytime soon. With the AUD/NZD cross still looking well-bid above 1.10, any nascent Antipodean enthusiasm will this week likely be reflected in support for the AUD rather than its trans-Tasman cousin.
Has the US Dollar finally turned its long-awaited corner? Q3 GDP figures last Friday may have been flattered by a positive contribution from inventories but two back-to-back quarters of 3% growth effectively cemented the case for a Fed rate hike in December. With the prospects for tax reform also looking pretty favourable, it seems that the announcement of President Trump’s choice to succeed Dr Yellen at the helm of the Federal Reserve Bank will be received this week in similarly positive fashion. We shouldn’t underestimate the power of momentum in foreign exchange markets and from a position just a few months ago when many investors had thrown in the towel on the USD, suddenly the US Dollar seems to be the only game in town. Latest readings from the ISM on manufacturing and service sector activity should be at or close to cycle highs whilst October’s non-farm payrolls on Friday should see a strong rebound from last month’s hurricane distortions. Thus far, the dollar’s rally has taken it only back to the levels of mid-July and if it doesn’t dampen enthusiasm in equity markets, then neither the Fed nor the White House are likely to worry about it continuing.
The Australian Dollar extended losses through trade on Thursday as downward momentum seems to be gathering pace. Having broken key supports at 0.7730 following Wednesday' soft inflation outlook the AUD tested new 3 month lows and touched 0.7656 and appears to be firmly entrenched within a bearish formation. As focus turns again to monetary policy divergence the Aussie' carry and yield advantage is diminishing and investors look to be correcting recent upside. Having broken a critical bullish and bearish tipping point the AUD is poised to suffer substantial losses should a consolidation of recent downside moves mean a dip below 0.7630. Attentions now turn to US GDP data and the race for Fed presidency as key markers for both US and AUD direction into the weekend.
1.7100 – 1.7220
USD, EUR, JPY
NZD / USD
0.6800 – 0.6900
The Australian dollar collapsed through trade on Wednesday plunging below key technical supports on the back of a softer than anticipated quarterly CPI print. Inflation wrote in below market expectations and all but closed the door on the RBA bringing forward changes to monetary policy as wage growth, consumer spending and price pressures remain stubbornly flat. Diving through key supports at 0.7730 the AUD consolidated the downward move touching intraday and three month lows at 0.7691 and appears vulnerable to further loses with the next support point at 0.7665 and 0.7630. A break below such levels would affirm a deeper bearish channel and open the door for moves back toward 0.75. Attentions now turn to key U.S GDP data Friday and the highly anticipated appointment of a new Fed president as markers that could force the AUD lower still.
1.7120 – 1.7250
0.6825 – 0.6930
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