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There are 11 RBA Board meetings each year. Very sensibly, it takes January off, considering that people would rather be at the beach or away on vacation than be disturbed by such matters as the cost of borrowing and mortgage rates. As well as the 11 monthly Statements which essentially summarise the Board’s immediate decision on one sheet of paper, there are four Quarterly Statements of Monetary Policy (the clue is in the name!) which explain in detail the numbers and assumptions which underpin its immediate interest rate decision as well as offering a medium-term view on the economic conjecture.<br>
By tradition, the Board meeting is on the first Tuesday of the month with the SoMP on the Friday of the same week. After its’ warning that, “The higher exchange rate is expected to contribute to continued subdued price pressures in the economy… and is also weighing on the outlook for output and employment”, the market spent most of Tuesday selling the Australian Dollar.<br>
For no particularly obvious reason, it then spent most of Wednesday buying them back and at one stage reached a high of 0.7682 before closing in NY around 0.7672. For currency traders, it threatens to be a long wait until Friday…
GBP / AUD
The British Pound continues to react nervously to the very fragile political situation in the UK and is by some distance the worst performing of all the major currencies overnight. Fortunately for Prime Minister Theresa May, the UK Parliament has just risen for a week’s holiday and she avoided the danger of once again coming off second-best to Opposition Leader Jeremy Corbyn in the weekly pantomime that is Prime Ministers’ Questions.<br>
Unfortunately, having suffered the resignation of her Defence Secretary last week, Press reports throughout the London day suggest the International Development Secretary might now be forced out after revelations about unauthorized meetings whilst on holiday in Israel. As Oscar Wilde might have put it, to lose one Minister looks unfortunate, but to lose two begins to look like carelessness...<br>
We wrote in our overnight commentaries for London and New York (OFX never sleeps!) that “the path of least resistance for GBP still appears to be to the downside” and this is exactly how it turned out. GBP/USD touched a low of 1.3091 after a high in Sydney yesterday of 1.3174. GBP/AUD, meantime is down 143 pips at 1.7075 whilst GBP/NZD is 142 pips lower at 1.8934.<br>
The day ahead for GBP will again be dominated by UK politics and the upcoming economic data – house prices and industrial production – are unlikely to offer much respite for the beleaguered pound.
AUD / CAD
The Canadian Dollar enjoyed another good day on Wednesday, falling to a low against the USD of 1.2724 compared to a high the previous day of 1.2797. It was helped in this by much better than expected numbers on housing starts which rose at an annualized pace of 222.8k against the consensus expectation of 211k and by building permits which rose 3.8% m/m versus forecasts of a more modest 1.0% m/m gain. This helped the CAD keep pace with gains in the Aussie and Kiwi Dollars to end the New York session at AUD/CAD0.9770 and NZD/CAD0.8837 respectively.<br>
Oil prices were little changed on the day with NYMEX crude at $56.79 per barrel and natural gas futures around three-tenths of a percent higher. The day ahead is quiet in terms of scheduled economic data with only new house prices to be released and it would be a surprise indeed if the CAD was the stand-out performer in either direction over the next 24 hours.
AUD / EUR
Just when you thought it couldn’t get any quieter, the EUR/USD exchange rate has spent the past 24 hours trapped in a 22 pip range from 1.1586 to 1.1608 and opens in Sydney this morning at 1.1598. The technical picture continues to exert some downward pressure on the currency pair. It is now below its 20 day moving average of 1.1688, the 50 day average of 1.1782 and the 100 day measure at 1.1787.<br>
In another bearish chart development, the 50 day average has also crossed down through the 100 day one. In the very big picture, we should look to the much slower 200 day average for support but unfortunately this does not come into play until we get all the way down to 1.1410.<br>
The ECB’s Sabine Lautenschlaeger on Tuesday said, “I would have liked to see a clear exit [from QE]” and on Thursday in Europe it is the turn of Bundesbank President Jens Weidmann to speak. Analysts will again be looking for any differences of opinion between him and ECB Chief Mario Draghi. For the day ahead, there’s little in terms of Eurozone economic data (unless Lithuanian CPI and the Estonian trade balance really excite you) though at 10am GMT the European Commission will be releasing updated economic forecasts.
New Zealand Dollar
AUD / NZD
Just as the Aussie Dollar rose without any obvious catalyst through the European and North American sessions overnight, so too did the New Zealand Dollar. It would be a pleasure to report some insight into this price action, some hitherto unnoticed piece of news, but sadly it is just one of those occasions when we have to note what happened without fully being able to explain why. If there was a large-scale re-allocation of investment flows or a significant corporate deal to be executed, the new era of regulation in wholesale foreign exchange markets simply forbids any discussion of it.<br>
Indeed, it can frequently be the case that close colleagues on a major bank FX desk may have little or no knowledge of each other’s customer flows. There are obvious advantages in terms of client confidentiality, but it does mean that answering the question “why did the rate move?” is nowadays infinitely more difficult. If there are any Latin scholars amongst our readers, they may be familiar with the phrase “post hoc ergo propter hoc”. In plain English, this means “after this, therefore because of it” and it is a trap into which financial journalists often fall when attempting to ascribe causality when in fact it was just coincidence.<br>
The honest truth is that sometimes we just don’t – and can’t – know what moved an exchange rate. Your author is never afraid to hold his hand up and admit this; hoping to be rewarded for honesty, if not for insight! What we do know is the price action: NZD/USD has virtually tracked AUD/NZD tick for tick and the cross rate at 1.1089 is less than 10 pips away from where it closed last night. Let’s hope the RBNZ meeting today brings more obvious catalysts for market movement.
United States Dollar
AUD / USD
Air Force One touched down in Beijing on Wednesday to begin the third leg of President Trump’s five-nation Asia trip. In a reciprocal gesture for hosting Premier Xi at his Mar a Lago estate in Florida earlier this year, the two leaders and their wives enjoyed an opera performance and a tour of the Forbidden City.<br>
Your author first experienced this almost 20 years ago; a wonderful memory from back in the days when a Global FX Strategist actually got to see the world he wrote about. With the serious business part of Mr. Trump’s trip not until Thursday, the US Dollar index remains stuck in its now-familiar 94.40-94.85 range.<br>
It opened in London yesterday almost exactly in the middle of this band at 94.62 and simply didn’t move in North America before closing at 94.59. Of all the tools available to a current strategist or technical analyst, the most useful for analyzing the US Dollar’s movements over the last 18 hours would have been a magnifying glass. A December Fed rate hike still appears very much a done deal and it would take either a huge external shock or a sudden sharp decline in the stock market to make investors rethink their views. Keep an eye on tax reform progress back home, as well as the President’s Asia trip and his Twitter feed for near-term clues on the USD.
Rekindling, ridden by Corey Brown, burst down the home straight at Flemington Racecourse on Tuesday to be only the second Irish horse in 24 years to win the Melbourne Cup. For the Reserve Bank of Australia, however, interest rate expectations were most certainly not ‘rekindled’. Its Statement yesterday noted, “forecasts for growth in the Australian economy are largely unchanged… The higher exchange rate is expected to contribute to continued subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.” <br>
The RBA reiterated its forecast for GDP growth to pick up and to average around 3 per cent over the next few years but currency markets were not slow to take the hint and marked down the AUD exchange rate.<br>
AUD/USD has been on a one-way path lower over the last 24 hours; falling from 0.7690 at yesterday’s Sydney open to a low in London of 0.7628 before a very modest 10 pip rally into the New York close. With no domestic economic data scheduled Wednesday, any move off a US 76 cent handle is more likely to be to the downside than back up on to the 77 cents seen briefly last Thursday.
The British Pound fell for almost the whole of Tuesday’s London trading session, weighed down by soft retail sales data from the BRC and further reflection on the very poor car sales numbers which we highlighted earlier in the week. In another sign that shoppers are cutting back, sales at John Lewis’s department stores fell by 3.7% last week compared to a year earlier. Revenues in the seven days to 4th November fell to £102.03m, from £105.98m in 2016. Homeware sales shank by 7% and electrical and home technology takings tumbled by 8.4% despite the iPhone X launch boosting mobile phone sales.<br>
GBP/USD reached a low point of 1.3111 before rallying around 40 pips during the New York afternoon to end the day only modestly lower than it had begun. Against the Australian Dollar, the GBP fared much better, reaching a high in New York of 1.7225; a level not seen since last Thursday.<br>
As the so-called ‘Paradise Papers’ continue to cast the UK in an unfavourable light over its stance on tax-havens, it is perhaps fortunate for Prime Minister Theresa May that the UK Parliament has just risen for a week’s holiday. This won’t keep politics out of the newspapers, but she avoids the danger of once again coming off second-best to Opposition Leader Jeremy Corbyn in the weekly pantomime that is Prime Ministers’ Questions. Whether the GBP can similarly breathe a sigh of relief remains to be seen…
Bank of Canada Governor Stephen Poloz is one of the more interesting and insightful Central Bank Governors around. Though we [only half] jokingly suggested that the best way to forecast inflation in the short-term is to drive past a gasoline station and look at the price on the pump, his speech yesterday evening to the Montreal Council on Foreign Relations was a more scholarly affair.<br>
Mr Poloz concluded a fascinating speech by noting, “The popular perception that inflation has become inexplicable has been greatly exaggerated. In part, this perception reflects a misunderstanding of the accuracy with which economists can predict inflation, and a misunderstanding of the precision with which central banks can control it. Fundamentally, we know how inflation works - the laws of supply and demand have not been repealed… The bottom line is that inflation targeting has worked, through good times and bad, for more than 25 years. It continues to work today”.<br>
Currency traders will have been a bit disappointed there were no clear signals for the CAD in the speech though USD/CAD did come off its highs of the day to end around 1.2780 with AUD/CAD little changed over the past 24 hours at 0.9768. Canadian gasoline, meantime, Mr. Poloz, is C$1.36 per litre…
It’s recently been quite a rare sight for German economic data to fall short of consensus expectations but that’s exactly what happened Tuesday. After a 2.6% m/m jump in August, industrial production fell -1.6% in September compared to forecasts of a more modest - 0.9% m/m decline. EUR/USD had briefly dipped on to a 1.15 big figure overnight in Asia but then after the economic numbers, it took out the overnight low of 1.1584 to move down to a low of 1.1557; its weakest in almost 10 days.<br>
The ECB’s Sabine Lautenschlaeger told Bloomberg TV, “We have a strong growth momentum, we have growth for 17 quarters and now the labour market has a solid recovery, the sentiment factors are positive, the financial conditions for firms and households are very favourable so I’m very confident that the inflation rate will pick up. I think it was correct to reduce the amount [of QE assets] purchased from January onwards. I would have liked to see a clear exit”.<br>
Draghi’s speech in Frankfurt was about banking supervision rather than monetary policy and he was unsurprisingly quite upbeat about progress made since the financial crisis. During the North American session, the EUR managed to claw back around 30 pips against the USD to 1.1587 but still sits below its 20, 50 and 100 day moving averages. Major support from the 200dma is not seen until 1.1410.
The 52nd Parliament in New Zealand was formally opened on Tuesday in Wellington. Today, another ceremony - the state opening of Parliament - will take place. The Governor General will attend this ceremony and deliver a Speech from the throne which sets out the Government's priorities for the term.<br>
As promised during the election campaign, Finance Minister Grant Robertson has launched a review of the Central Bank’s mandate to include maximizing employment as a monetary policy goal. However, he said there was no plan to include the New Zealand dollar, the world’s 11th most traded currency, in the bank’s revised mandate. Mr Robertson also said he did not expect the proposed alterations to have any immediate impact on monetary policy, but acknowledged that in a situation of high unemployment and slightly higher inflation, rates could be lowered though, “My view is that this shouldn’t have a dramatic impact, certainly in the near-term”.<br>
Whilst the FX market was busy selling Aussie Dollars over the past 18 hours, its Kiwi counterpart held pretty steady against the USD; moving only between 0.6888 and 0.6940. This combination at one point pressured the AUD/NZD cross down to 1.1057; its lowest point in almost three weeks before a very slight recovery in the last hour of NY trading. For local FX markets, however, the next key event is still Thursday’s RBNZ meeting.
As Mr Trump moved on from Japan to South Korea, he spoke at a joint press conference with President Moon Jae-in on Tuesday after private meetings in which the two leaders reaffirmed their nations’ “ironclad” alliance. Mr. Trump said he would not allow Pyongyang to threaten South Korea’s safety and that Mr Kim was “threatening millions and millions of lives so needlessly”. Though he stressed that the US had immense military capabilities, Mr Trump said, “we hope to God we don’t have to use military force”.<br>
With the euro sliding back (see below) the USD index at one point yesterday moved up to 94.85; its best level since last Friday before slipping back to close in New York around 94.66.<br>
In economic data, the number of job openings in the US rose slightly in September to 6.09 million, keeping them near a record high. Job openings have now topped 6 million for four months in a row for the first time ever. A December rate hike appears very much a done deal (the CME online calculator pins the probability of a 25bp rise at 93%) and it would take either a huge external shock or a sudden sharp decline in the stock market to make investors rethink their views. Keep an eye on tax reform progress, though, for near-term clues on the USD.
As the US Dollar turned lower during the New York afternoon, so the AUD was able to regain some of the ground it lost last week, even though with a high of 0.7681 it still wasn’t able to claw its way on to a US 77 cents handle.<br>
It’s been interesting to watch local analysts who wrongly forecast an increase in retail sales blaming their error on the late release of the iPhone X but it is hard to believe the central bank will spend sleepless nights worrying whether the latest smartphone warrants a change in monetary policy. It’s only a short stroll from the RBA head office in Martin Place down to the Apple store on George Street if they really want to check out how busy it is!<br>
More regular economic data scheduled for this morning is the AiG performance of Construction index for October and the weekly Roy Morgan consumer confidence index, though no published consensus is available for either of the two data points. Despite the slightly better performance of AUD/USD in New York, the key AUD/NZD cross edged lower throughout the session and is once again back on a 1.10 big figure. Recall that a couple of weeks ago it was as high as 1.1280…<br>
UK Prime Minister Theresa May’s Conservative Government, which now relies on Ulster’s Democratic Unionist Party to keep it in office, is currently engulfed (along with its Labour Party Opposition) by scandals involving allegations of improper sexual conduct dating back over many years. There was a palpable sign of relief in London on Monday morning that there had been no further revelations or resignations over the weekend and having held in a very tight range between 1.3063 and 1.3078 during the Asian session, GBP/USD was able to press ahead to a best level in New York of 1.3168 with GBP/AUD reaching a high of 1.7142.<br>
The bigger picture for the UK economy, though, still seems to be one of weakness. Latest figures released Monday morning showed total car sales in the UK are down 12.9% y/y; the seventh consecutive month in which fewer cars were sold relative to the same month a year ago. For the first 10 months of 2017, a total of 2,224,603 vehicles were sold compared with 2,330,663 in the same period in 2016. Along with house prices, nothing quite shows consumer confidence as clearly as shiny new cars on the driveway. A double-digit y/y decline is a vivid illustration of the current fragile state of the UK economy.
The Canadian Dollar yesterday extended the gains it made at the back end of last week, and benefitted in particular from a weaker USD later in the day. Having closed on Friday at USD/CAD1.2762, it printed down at a low of 1.2718 during the New York afternoon.<br>
The weekly data published by the CFTC show that investors have been running net long Canadian dollar positions since the beginning of May. So-called ‘speculative longs’ peaked at 98,079 contracts in the week of October 10th and the latest numbers published over the weekend show they have only been very gradually scaled back to 72,097 contracts. Investors are clearly rattled by the sharp slowdown in the Canadian economy since the BoC’s two surprise interest rate hikes, but these concerns have been offset somewhat by firmer oil prices which are a benefit to its shale oil producers.<br>
NYMEX crude yesterday rose 2.8% to $57.24 per barrel whilst natural gas futures were over 4% higher. BoC Governor Stephen Poloz is scheduled to give a speech Tuesday on “Central Banks’ ability to understand inflation”. We’d humbly suggest the easiest way right now is to drive past a gas station and look at the price on the pumps.
The euro’s remarkable run of being stuck on a USD 1.16 handle finally came to an end in London trading Monday morning, with a low of 1.1594 seen before the EUR bounced back on PMI services data which showed the pace of job creation at its fastest pace in a decade. The New York session saw it slip further to a low of 1.1583 before nervousness around the prospects for US tax reform pulled the rug from under the US Dollar later in the NY afternoon. Nevertheless, the EUR could not get any higher than 1.1613 and struggled on all its major crosses to be the worst performing currency on the day.<br>
Looking forward, there’s not much more 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.<br>
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. The German Bundesbank, as usual, is likely to be the most “hawkish” of the speakers but we’d expect an otherwise fairly relaxed commentary which might not give the EUR much near-term support.
The New Zealand Dollar was knocked back yesterday by the RBNZ’s latest survey of inflation expectations. Whilst year-ahead inflation expectations rose from 1.77% to 1.87%, the more closely-watched 2-year expectations (which align more closely with the RBNZ’s mandate) fell from 2.09% to 2.02%. These figures are quite important given that on Thursday is the RBNZ meeting when we’ll get updated forecasts on interest rates and CPI.<br>
In Monday’s Asian session, the New Zealand Dollar was at the bottom of the pile with NZD/USD slipping from an opening level around 0.6910 to a low of 0.6876. It recovered through London trading on to a 69 cents handle and as the USD began to slip in New York, it has been able to push on to a best level of 0.6924.<br>
The Crown Financial Accounts published this morning will be interesting as, along with last week’s employment numbers, they show the economic starting point for the new Labour administration. For currency markets, however, the key event is still Thursday’s RBNZ meeting.
President Trump is now three days into his ten day, five country, economic and foreign policy trip to Asia and thus far it has passed without much controversy. His first meetings were with fellow golfer Japanese Prime Minister Shinzo Abe and public comments after their 9-holes focused on issues of trade between the two nations. The US has urged Japan to buy more American military equipment and build more cars in the United States whilst the Japanese side countered that 75% of its cars sold in the US are already manufactured there.<br>
The US Dollar index against a basket of currencies held firm though Monday’s Asian and European sessions but then lost a quarter of a percentage point through the North American day to a low of 94.47 from 94.78.<br>
We warned here yesterday that “as President Trump continues his Asia trip with visits to China and South Korea later in the week, it will be important to keep an eye on what the Republican Party are doing back home. Any signs of squabbling and delay on tax cuts will keep a lid on further USD strength”. With House Ways and Means Chairman Kevin Brady telling his panel that it faces a “monumental challenge” this week, investors duly reacting by marking down the USD even as stock markets continue to rally. There’s no major US economic data scheduled for Tuesday so it’s once again all about Trump and taxes.
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.
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.
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.
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.
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.
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.
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