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Like all of its counterparts worldwide, the Reserve Bank of Australia would always characterize itself as ‘data-dependent’. It doesn’t have a fixed view on monetary policy and the appropriate level of interest rates. Instead, it watches the incoming economic numbers, offers interesting and thought-provoking analyses of them and adjusts its signaling to market participants as the data themselves evolve.
When reading through the economic numbers of the last week, it will note Thursday’s better than expected Australian international trade figures were followed by a very poor set of retail sales data. We suggested here that better trade numbers told us more about the external environment than they did about the state of domestic demand. And, though they will definitely give a boost to GDP, this wouldn’t necessarily translate into higher employment, wages or spending power in Australia.
This was exactly how it played out. Thursday’s data saw AUD/USD squeeze up to a best level of 0.7724 but it couldn’t even hold onto a US 77 cents handle for as long as 24 hours and ended the week back down at 0.7650. There’s not a lot other than RBA signals to watch this week for the AUD. After Tuesday’s Board meeting, the focus will then shift to the Statement of Monetary Policy (SoMP) on Friday.
GBP / AUD
It was very much a week of two halves for the GBP which was bought very heavily on Monday and Tuesday in anticipation of the Bank of England’s first hike in interest rates for 10 years and was then sold just as hard after the announcement was made. GBP/USD opened around 1.3125 and by Wednesday morning had gained almost 2 cents to a high of 1.3310. After the BoE announcement and Press Conference the pair dumped almost 3 full cents to a low of 1.3030 and even a better than expected set of service sector PMI’s saw the GBP only improve by around 40 pips to end the week in New York at 1.7046.
As if the unfolding Brexit negotiations, Bank of England communications issues and weakening economic data were not sufficient reasons to be bearish of the GBP, the last few days have also seen an unfolding domestic political crisis. The minority UK Conservative Government – which now relies on Ulster’s Democratic Unionist Party to keep it in office – is now engulfed (along with its Labour Party Opposition) by scandals involving allegations of improper sexual conduct. Last Thursday saw the resignation of Defence Secretary Michael Fallon and there is simply no way of knowing how many more revelations are going to appear. Against this background, it would be no surprise if international investors continued to hold underweight positions in the British Pound and its path of least resistance seems very much still to the downside.
AUD / CAD
The Canadian Dollar had a quite lively, and ultimately pretty good week as the incoming economic data swung around from disappointing to quite good. It opened Monday morning at USD/CAD1.2817 but by Wednesday the pair was up at 1.2905 (USD stronger, CAD weaker) after a pretty poor set of GDP numbers. 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. In the second half of the week, the CAD caught a bid despite soft manufacturing PMI data and stood at 1.2828 just before labour market data in both the US and Canada were released simultaneously on Friday. US payrolls and earnings both missed consensus forecasts whilst Canadian employment grew a faster than expected 35,300. USD/CAD hit a low of 1.2734 before ending the week at 1.2763, whilst AUD/CAD tumbled from Thursday’s high of 0.9908 to end the week at 0.9763. The week ahead looks a bit quieter with no major domestic economic data releases on the slate and no BoC meeting until December 6th.
AUD / EUR
Over the past week the EUR/USD exchange rate has managed the remarkable and almost unprecedented feat of staying on the same big figure for every single minute of the 120 hours in which the foreign exchange market was open for business. Thursday’s high was 1.1672 and Friday’s low 1.1602. Mr Draghi and his ECB colleagues have previously complained about unwelcome and unwarranted volatility of the exchange rate and will surely have been delighted by the price action of the past week. Investors have seen a string of very positive economic numbers right across the Continent of Europe but also saw that CPI was a touch lower than expected in both Germany and the wider Eurozone.
For the week ahead, there’s not much economic data to be released. ECB speakers include Draghi, Lautenschlaeger, Nuoy, and Angeloni on Tuesday whilst it’s the turn of Bank of France Governor de Galhau and Bundesbank President Weidmann on Thursday. Often these speeches are used to ‘reset’ perceptions of policy and to help correct any unwelcome post-ECB movements in foreign exchange and interest rate markets. With price action as it was last week, however, there’s nothing to correct. Expect, instead, to hear the sound of happy central bankers across the Eurozone and be prepared for another quiet few days for the Single European Currency.
New Zealand Dollar
AUD / NZD
In the 5 weeks since the New Zealand elections and amidst the uncertainty surrounding the eventual formation of a Labour-led government, the Kiwi Dollar had been hit hard, losing more than 5 cents against the USD and 4 cents against its trans-Tasman cousin. Last week potentially was the week in which the NZD began to find some support and we’ll soon be able to pass judgment on whether it might actually have turned a corner.
The latest labour market data showed the strength of the economy which Prime Minister Jacinda Ardern inherits. Unemployment for the three months ending September was 4.6 per cent, 0.2 percentage points lower than the prior quarter and the lowest level since the December 2008 quarter, whilst wages grew 0.7% in the quarter to take the annual rate of growth up to a five year high of 1.9%. A short-covering rally pushed NZD/USD to a best level of 0.6935 on Friday before ending in New York at 0.6907; almost 70 pips above its recent closing low of 0.6832. For the week ahead, the key event is Thursday’s RBNZ meeting when we’ll get updated forecasts on interest rates and CPI.
United States Dollar
AUD / USD
With the new Fed Chairman now announced and a fresh FOMC Statement delivered last Wednesday, we’d expect monetary policy this week to take something of a back seat for the US Dollar. Instead, the focus will be on any foreign policy announcements from President Trump’s 10 day trip to Asia and the latest twists and turns in the passage of his domestic tax reform proposals. These formed a central plank of his campaign pledge to “Make America Great Again” but were delayed so much that the hopes of USD bulls were consistently dashed through the first 10 months of his term of office.
From November 9th 2016 to the beginning of January, the USD Index surged from 96.6 to 103.3 on hopes for a substantial fiscal boost, faster economic growth and much tighter monetary policy. None of this materialized and by late September, the USD Index had slid to just 90.9. A subsequent attempt to kickstart the fiscal agenda once again raised hopes of meaningful reform and the index ended last week up at 94.68; its best closing level since mid-July. The President’s 429-page “Tax Cuts and Jobs Act” still has no guarantee of passing any time soon but it is this which is now crucial to the US Dollar outlook.
Courtesy of a generally weaker USD and yesterday’s better than expected September trade surplus, the AUD has clawed its way back on to a 77 cent big figure against the USD. Indeed, in the New York morning it managed to climb as high as 0.7727; its best level in over 10 days. The big story, though (which we write on in more detail in the British Pound section) is the collapse of the GBP/AUD exchange rate. As recently as Halloween when the kids and adult children were out playing ‘trick or treat’, GBP/AUD stood at 1.7350; its highest level since the beginning of June. We warned at the beginning of this week that a UK rate hike appeared fully discounted and that the tone of the Press Conference would be far more important than the 25bp increase itself. This proved a very good call as GBP/AUD collapsed from 1.7180 to 1.6907 during the London afternoon to fully reverse all the gains of the past 10 days. The AUD focus this morning shifts to more domestic matters as the September retail sales numbers are published. August saw a very disappointing -0.6% m/m decline and expectations generally are for a decent rebound to something like +0.5% m/m in September. Even if consensus is correct, the quarterly retail sales volume number which feeds into GDP estimates is likely to be a pretty uninspiring +0.1% q/q. On a day which later is likely to bring a very punchy US labour market report, the AUD might struggle to hold on to US 77 cents.
If we might be permitted a modest pat on the back, we wrote earlier in the week that 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”. Yesterday morning we warned that if the Governor in his Press Conference errs on the side of “one and done” and emphasizes a slow and gradual pace of future tightening, the pound could slip back further… Perhaps the least likely outturn is that the pound ends the day unchanged: it could be quite a volatile 24 hours ahead. Don’t say you weren’t warned!! From this time yesterday, both GBP/AUD and GBP/NZD are down more than 300 pips; fully three cents lower on both rates. Our readers in Australia and New Zealand might well be scratching their heads at all this so let’s try and briefly summarise. The BoE has a 1-3% target for CPI and, with the fall in the exchange rate since the Brexit vote in June 2016, import prices have risen sharply pushing CPI to the top of its target band. Though his predecessor had been content to see CPI rise to 5.2% without raising rates, Governor Carney has warned so often of a rate hike - but not actually delivered one - that his own credibility was on the line. So, even though real wages in the UK are falling and there has been a very poor run of retail sales figures, the rate hike duly came with a 7-2 split vote on the MPC. But, in the accompanying Quarterly Inflation Report, the BoE dropped its references to rates having to rise in future more than the market currently expects. It was, to coin a phrase often used to describe the Fed, “a dovish hike”. By the end of the day, the futures market had priced out one of the 2018 hikes, 10-year bond yields fell 10bp and the currency had fallen 2%. The Governor may have felt compelled to raise rates to boost credibility but that doesn’t seem to have worked very well so far…
Everyone knows that the first Friday of the month is when US non-farm payrolls are nearly always released. What tends to get overlooked is that Canada often releases its own labour market report at the same time. Statistics Canada reported last month that Employment was essentially unchanged in September (+10,000 or +0.1%) and the unemployment rate remained at 6.2%, matching the low of October 2008. In the 12 months to September, employment rose by 320,000 (+1.8%), and the number of hours worked increased by 2.4%. However, after two surprise rate hikes from BoC and a sharp slowdown already underway in GDP, we should note that the trends in employment are also slowing down. Overall employment grew by only 0.2% in the third quarter, slower than the 0.6% growth rate in the second quarter and the 0.5% growth rate of the first quarter of 2017. Consensus looks for an increase of 15,000 in employment today but if there’s any disappointment, then the CAD’s gains of the last 48 hours against the USD might be difficult to sustain. For now, USD/CAD is at 1.2809 after printing 1.29 just after GDP whilst AUD/CAD at 0.9883 after a high on Wednesday of 0.9913. NZD/CAD stands at 0.8858 after reaching a high earlier this week of 0.8928.
We know that Eurozone growth ended Q3 on a high note and numbers released yesterday showed the positive momentum carried over into Q4. For the Eurozone as a whole, the final IHS Markit Eurozone Manufacturing PMI rose to an 80-month high of 58.5 in October, up from 58.1 in September. Growth of both output and new orders remained elevated, while the pace of job creation accelerated to a survey-record high. Markit noted that, “the upturn was again led by a strong-performing core of Germany, the Netherlands and Austria. PMI readings were unchanged in Germany and Austria, while the Netherlands PMI rose to its highest level since February 2011. The expansions in Italy (80-month record) and Spain (29-month high) both accelerated, while the France PMI held steady at September’s 77-month high. Growth was also recorded in Ireland and Greece, meaning all of the nations covered registered expansions for the fifth straight month”. EUR/USD still remains stuck on a 1.16 big figure despite these very encouraging PMI numbers whilst AUD/EUR appears nailed on to 66 cents and NZD/EUR is steady on 59 cents.
Great British Pound
In New Zealand it sometimes feels impossible to have a conversation which doesn’t at some point involve house prices. They are amongst the most expensive in the world, with eye-watering prices being paid for very modest properties in the main cities. The average house price in Auckland has risen 90% in the last 10 years to more than one million NZ dollars whilst the average price nationally has risen 56% to $647,000. Latest figures out yesterday from property research agency Quotable Value suggest that the boom might finally be over, at least in the country’s largest city. Prices in the Auckland region fell 0.6% from a year ago; the first annual decline in 6 years whilst the nationwide growth rate has slowed to a 5-year low of 3.9% y/y. The incoming Labour government has already pledged to ban foreign purchases of property and to build 100,000 new homes, whilst also changing the tax code which makes residential property such an attractive investment. Who knows, perhaps there’ll be some different – or at least more interesting - property conversations in future? As for the New Zealand Dollar, it matched the AUD tick-for-tick overnight in London and NY to leave the AUD/NZD cross unchanged at 1.1150. There doesn’t seem much enthusiasm to push it off a 1.11 big figure but the deciding factor will be the Aussie economic numbers rather than any fresh local news.
With the guessing game over the identity of the new Fed chief now done, attention switches to the far more difficult issue of the President’s much-heralded tax reform. This formed a central plank of his campaign pledge to “Make America Great Again” but was delayed so much that the hopes of USD bulls were consistently dashed through the first 10 months of his term of office. From November 9th to the beginning of January, the USD Index surged from 96.6 to 103.3 on hopes for a substantial fiscal boost, faster economic growth and much tighter monetary policy. None of this materialized. The Fed is still “measured and gradual”, GDP growth will be in the 2-3% range in 2017 and tax reform hasn’t yet happened. By late September, the USD Index had slid to just 90.9. A subsequent attempt to kickstart the fiscal agenda once again raised hopes and the index is now up at 94.4. This is where the real test now comes as the Republican Party releases details of its tax cut plan. These show the 20% corporate tax cut as permanent, and claim that a family of four earning $59,000 will get a $1,182 tax cut. However, the bill also includes the repeal of an itemized deduction for medical expenses, and limits the home mortgage interest deduction. For new home purchases, interest would be deductible only on loans up to $500,000, down from $1 million. The bottom line for currency markets is that the 429-page “Tax Cuts and Jobs Act” still has no guarantee of passing any time soon. Keep a close eye on the politicians for it is they, not the Central Bankers, who are now crucial to the US Dollar outlook.
The past five days have been one of the quietest periods in recent memory for the Australian Dollar. Ever since 2am Sydney time last Friday morning, the AUD has been stuck on a USD 76 cents big figure and the entire trading range has been from just 0.7636 to 0.7696. We’ve spoken here all week about the liquidation of stale long AUD positions and how the local economic data and Central Bank meeting were too far away for global investors being gripped by the Fed, Bank of England, Bank of Japan and top tier economic releases such as PMI Surveys and the US non-farm payroll report. Finally, we get to see some Australian economic data this morning when building approvals and international trade data are released. The first of these is an unfortunately very volatile number month-to-month so most attention will probably be on the trade numbers. Iron ore volumes are seen steady on the month but there are reports of large coal shipments and some strength in LNG exports and consensus expectations are for a seasonally adjusted monthly trade surplus around $1,200m after +$989m in August and +$808m in July. Though the trade balance feeds directly through into GDP, it’s often a misleading indicator of domestic demand (as its obviously mainly an export story) and the mining and LNG sector is not a huge employer so there’s no strong and immediate link back to spending at home. AUD/USD remains below all four of its main moving averages (20, 50, 100 and 200 day) but at some point this sideways range will be broken, perhaps dramatically. Is it today’s numbers, tomorrow’s retail sales or the RBA meeting which will be the catalyst ?
The Canadian Dollar has recovered around one-third of its losses suffered in the post-GDP mauling but it still faces plenty of domestic economic headwinds. The latest of these came with the manufacturing PMI Survey which dipped to 54.3 in October from 55.0 in September. Although continuing to signal stronger business conditions at the start of the fourth quarter, the latest improvement in the health of the sector was the weakest since January. Markit noted, “Both output and new orders rose at slower rates during October. Production increased for the twelfth successive month, but at the weakest pace since January. Where output rose, this was mainly linked to higher new orders. Export sales were particularly subdued, meaning that manufacturers were reliant on domestic demand to drive growth during October.” USD/CAD is at 1.2866 after printing 1.29 just after GDP whilst AUD/CAD is down at 0.9870 from an earlier high of 99.13. NZD/CAD stands at 0.8857 after reaching a high in Europe earlier of 0.8925.
November 1st is All Saints Day and was celebrated as a holiday across much of Continental Europe. European stock markets remained open though, and registered solid gains across the Continent, led by a very punchy +235 point increase in Germany’s DAX which stands at a record high of 13,465. French equities were up 0.2%, Italy was up +0.8% and the EuroStoxx index closed 0.6% higher. In foreign exchange markets, however, the EUR has been much more subdued, sliding during the European and New York morning sessions even before the release of the latest FOMC Statement. From a best level in Sydney yesterday of 1.1653, the pair moved down to a low of 1.1612; hardly a dramatic decline but investors appear in no hurry yet to be playing the euro from the long side. This has meant that both AUD/EUR and NZD/EUR have managed to rally 28 and 17 pips respectively over the last 18 hours though we wouldn’t expect selling of the EUR to accelerate unless the post-ECB low of USD1.1580 is broken to the downside. Eurozone manufacturing PMI’s are released Thursday and we should also get a monthly update on the booming German labour market.
Wednesday proved very much to be a day of two halves for the British Pound – up once again in the morning but reversing lower through the New York session to end lower than it had begun. The latest manufacturing PMI data proved to me much stronger than expected with a headline number of 56.3. Markit (who compile the data) noted that, “The UK manufacturing sector started the final quarter of the year on a solid footing. Production and new order volumes continued to rise at robust rates, as companies benefited from strong domestic market conditions and rising inflows of new export business. Price pressures remained elevated, however, with rates of inflation in input costs and output charges both accelerating and staying well above historical series averages”. All of this makes a Bank of England rate hike today a virtually nailed on certainty. The big issue is how the Governor handles the subsequent Press Conference which will be given to present the Bank’s latest Quarterly Inflation Report. If he errs on the side of “one and done” and emphasizes a slow and gradual pace of future tightening, the pound could slip back further. If, instead, he adopts a more hawkish tone, the threat of more hikes in 2018 (which are not yet priced in to the market could set the GBP on another tear higher. Perhaps the least likely outturn is that the pound ends the day unchanged: it could be quite a volatile 24 hours ahead.
Wednesday’s Q3 employment report might not have been a game-changer for the New Zealand Dollar but it certainly helped put a floor under some of those falling knives we had spoken of. Picking the sharpened steel off the ground is a lot less hazardous than trying to catch it with bare hands as it flashes past. NZD/USD jumped 50 points from 0.6846 to 0.6895 as soon as the numbers were released and went on to trade up to a high of 0.6926. In truth this looked and felt more of a short-covering rally than any new-found enthusiasm for the Kiwi and it was interesting to see it give back almost 40 pips of its gains during the London and New York sessions. In the week prior to the NZ Election, NZD/USD was trading around 0.7350 and it has fallen so far, so fast that it would have to rally more than a cent from current levels just to get back to the lowest of its four main moving averages (20, 50, 100 and 200 days). There’s nothing of note on the domestic economic calendar in New Zealand today. The question for longer-term investors (or those looking to pick up some now cheaper Kiwi Dollars) is whether last night really did mark the bottom. The answer, as always in foreign exchange, is that it’s too soon to tell. If you do have to buy NZD, take comfort that its 10% cheaper than it would have been just over 3 months ago.
There was never any realistic prospect of the Fed meeting today delivering a rate hike. We can’t remember it ever doing so in the modern era when it was less than 50% discounted in market pricing and certainly there hasn’t been a rate hike without a Press Conference to explain why. Neither of those conditions were met now though we do at least have a new FOMC Statement to pore over. They key phrase is that, “Hurricane-related disruptions and rebuilding will continue to affect economic activity, employment, and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. Consequently, 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 strengthen somewhat further”. The US Dollar index liked what it saw in the Statement and pushed up towards the top of its daily trading range (94.30-94.56) which was the best level since Friday evening. If the equity market manages to hold in around records highs and Fed officials don’t see any need to start “finessing” the message, then the USD might be able to extend its gains a little further.
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).
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.
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.
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.
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.
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.
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