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By Nick Parsons

USD steadies after data but AUD now down to US 75 cents


Australian Dollar

AUD

Expected Range

Writing here 24 hours ago about the upcoming economic data in Australia, we said, “The AUD is unlikely to react well to any number which falls shy of expectations”. Well, the numbers were below consensus forecasts and the Aussie Dollar got trashed; falling against every major currency in the world and most of the Emerging Markets ones too. AUD/USD tumbled to a low of 0.7575with AUD/NZD at one point below 1.10 for the first time since October 18th.<br> <br> We said yesterday, “the risks [for the Wage Price Index] appear very moderately skewed to the downside” but in the event a big miss threw rate hike hopes/expectations completely out of the water. The RBA last week said it wanted to see, “how much wage growth will pick up in response to improved labour market conditions and the associated reduction in spare capacity”. The simple answer from Wednesday’s numbers is “not very much”. This isn’t a specific criticism of the RBA; they are merely guilty of the group-think which has afflicted Central Banks worldwide.<br> <br> The Bank of England and the US Federal Reserve cling grimly on to their models which show that lower unemployment should lead to higher wages. Instead of seeking to explain why it hasn’t happened, they merely reiterate a strongly held belief that it eventually will. It’s quite possible that today’s employment report will show continued job gains. It may even bring a very modest bounce for the AUD. The one thing it won’t do, however, is shift the dial higher on interest rate expectations. Rallies in the Aussie Dollar still seem very likely to be met with heavy offshore selling. Indeed, on a jobs number less than the +18k consensus, a rally won’t even happen.

British Pound

GBP / AUD

Expected Range

The British Pound had another choppy overnight session though the absolute magnitude of its’ moves was much lower than in recent days. GBP/USD ended Tuesday in New York at 1.3160 then in the 20 minutes either side of Wednesday morning’s batch of UK economic numbers traded both at 1.3138 and 1.3197. The peaks and troughs then became progressively narrower during the day and GBP/USD ended the New York session around 1.3173; barley 10-15 pips from where it had opened in Sydney 24 hours earlier.<br> <br> As for the data themselves, the jobless rate was steady at 4.3% though the number of people in employment across the UK fell for the first time in nearly a year. There were 32.06 million people in work in July-September, which is a 14,000 drop on the previous quarter. On wages, meantime, both measures (including and excluding bonus payments) were pretty much in line with consensus expectations at 2.2% y/y.<br> <br> A year ago, the Bank of England forecast earnings would grow 3.0% in 2017 and it continues to believe there’ll be a strong pick up over the next 18-24 months. Unless and until they do, then with CPI of 3.0%, the squeeze on real incomes and consumer spending in the UK looks set to continue for some time to come. The GBP will find it difficult to rally unless there’s some unexpected good news on the political or Brexit fronts and whilst GBP/AUD it a 5-month high of 1.7390, this really tells us more about the Aussie Dollar than the British Pound.

Canadian Dollar

AUD / CAD

Expected Range

We’ve been warning over the last couple of days that the Canadian Dollar’s recent good run could be coming to an end and Wednesday was indeed a poor day for the CAD. The currency was hit by a combination of lower energy prices and a generally poor set of domestic economic data. House prices in Canada fell another 1.0% m/m in October after a -0.8% decline in September which took the annual rate of growth down from 11.4% to 10.0%; a number which we can be virtually certain will fall much more sharply over the next 6-9 months.<br> <br> As prices fell, so too did the pace of transactions with existing home sales up just 0.9% m/m in October after a 2.1% m/m gain in September. In the commodities complex which has recently been one of the big props for the currency, NYMEX crude ended the day unchanged at $55.45 having at one point fallen as low as $55.16. USD/CAD ended the New York session up at 1.2768 having been as high as 1.2787 whilst AUD/CAD opens in Sydney this morning around 0.9681; barely 40 pips off an 11-month low.

Euro

AUD / EUR

Expected Range

The euro had the archetypal ‘day of two halves’ in the Northern Hemisphere. It may have been glued for a very long time recently on a USD 1.16 ‘big figure’ but it didn’t spend very long at all on 1.17; taking barely 12 hours to trade up to 1.18 and on to a best level of 1.1858 just before the US economic numbers were released. At this point in time, AUD/EUR had dived to 0.6409; a fresh low for 2017. As the US economic numbers were no worse than expected and, as noted above, interest rate expectations were entirely unmoved by the data, the EUR ran into a modest bought of profit-taking which saw it ease back to an afternoon low of 1.1793 which is where it opens in Sydney this morning.<br> <br> The day ahead in Europe brings October’s final CPI reading and it would be a big surprise if it were much changed from the provisional estimate of 1.4% y/y. ECB Council member Constancio speaks late Thursday in Ottowa and he can at least smugly reflect that he’ll be earning more airmiles than he’s BoE counterparts who have the joys of a trip to Liverpool! We’d expect any further pullback in the EUR/USD exchange rate to be fairly limited with plenty of buyers on dips should US equity futures again turn lower through the Asian time zone.

New Zealand Dollar

AUD / NZD

Expected Range

For international currency investors, the Kiwi Dollar has really slipped off the radar these past 36 hours. Price action on Tuesday was driven by better than expected numbers in Australia which pushed the AUD/NZD pair up to a high of 1.1131 but weaker Aussie wage data Wednesday slammed the cross back down at 1.0990; the first time it has been on a 1.09 ‘big figure’ since October 19th. NZD/USD benefitted from the US Dollar’s early weakness yesterday to reach a high of 0.6914 but it then gave back almost 40 pips to close in New York around the 0.6875 level.<br> <br> Our economic tongue has been firmly in cheek this week as we’ve spoken about the upcoming NZ concrete production numbers on Thursday, and in all honesty it would be a big shock if the market reacted much to them when they are released. ANZ’s consumer confidence index is also published but there’s so little interest in this amongst the professional investor community that Bloomberg doesn’t even publish a consensus forecast. Friday brings PMI and PPI data but with no RBNZ meeting now until February 8th, Kiwi currency traders will likely continue to take their clues from the AUD/NZD cross.

United States Dollar

AUD / USD

Expected Range

The USD has just had a very mixed 24 hours; down for the first half and then a recovery in the second. At the start of trading in Sydney on Wednesday morning, the US Dollar’s index against a basket of major currencies stood at 93.52. By mid-morning in London it had tumbled to just 93.18; its lowest level since the day of the ECB Council Meeting back on October 26th. Immediately prior to the latest batch of US economic data, the USD index had slipped further to an intra-day low of 93.12.<br> <br> Taking the numbers as a whole – retail sales, CPI and real hourly earnings – they were broadly in line with consensus expectations. Retail sales were up 0.2% m/m against consensus expectations of no change, the ex-autos number was a tenth weaker at +0.1% m/m but the so-called ‘control’ group’ which feeds into GDP was bang in line at +0.3%. Headline CPI met expectations at 2.0% y/y whilst the core ex-food and energy was a tenth higher at 1.8%. The CME’s online calculator at the beginning of the Northern Hemisphere day showed the probability of a December Fed hike at 96.7%.

By Nick Parsons

USD tumbles as stocks fail to regain losses, AUD falls with it


Australian Dollar

AUD

Expected Range

It should be no cause for celebration that the Aussie Dollar is pretty much unchanged over the past 24 hours against the USD. Having opened in Sydney on Tuesday morning at USD0.7622, the AUD this morning stands at 0.7634. The problem is that the USD itself has fallen heavily during this period, so keeping up with the world’s worst major currency is hardly a badge of honour.<br> <br> In fairness, a range of just 31 pips from USD0.7613 to 0.7644 may merely indicate the global FX investor community has been pre-occupied elsewhere (see our comments below on the EUR) but it would have been nice to see the Aussie draw a bit more support from yesterday’s pretty solid NAB Survey. Instead, the gap between business conditions and business confidence has left currency traders a little puzzled and they’re now awaiting official data on wages and employment.<br> <br> The first of this week’s data from the Australia Bureau of Statistics is due this morning. The consensus expectation is that the Wage Price Index will have risen around 0.7% q/q in Q3 to be up around 2.2% in y/y terms though the risks appear to be skewed very modestly to the downside, notwithstanding a 3.3% increase in the minimum wage effective July 1st. The AUD is unlikely to react well to any number which falls shy of expectations.

British Pound

GBP / AUD

Expected Range

The British Pound still moves up and down like the proverbial fiddler’s elbow. Having touched a low of USD1.3087 during the London morning, the so-called ‘cable’ rate managed to rally almost a full cent to a high of 1.3178 before closing in New York around 1.3170. Official statistics Tuesday showed that CPI inflation in the UK was steady at 3.0% y/y in October rather than the 3.1-3.2% consensus of analysts’ expectations. This was important for several reasons: it continues the squeeze on real earnings (wages are growing only around 2% y/y) but it calls into question both the BoE’s recent decision to raise interest rates and undermines the arguments for any further tightening of monetary policy.<br> <br> Despite these headwinds, the GBP improved steadily throughout the Northern Hemisphere day, little troubled by the latest political squabbles in the UK. Giving evidence to the House of Commons Business Committee, the Head of Honda UK said said it relied on 350 trucks a day arriving from Europe to keep its UK factory operating, with just an hour’s worth of parts being held on the production line. In an elegant piece of understatement, he said, “I wouldn’t say that the just-in-time manufacturing model wouldn’t work, but it would certainly be very challenging.” Wednesday in the UK brings the latest official data on unemployment and average earnings, with the wages rather than the jobless number likely setting the tone for the GBP.

Canadian Dollar

AUD / CAD

Expected Range

The Canadian Dollar’s recent strong run may be coming to an end. Having finished last week at USD1.2690 the pair moved steadily higher throughout the London and New York time trading sessions on Monday to finish around the highs of the day at 1.2733. On Tuesday it extended this move (USD higher, CAD weaker) to a spike high of 1.2765 before the latest bout of USD weakness pushed it down to 1.2736 by the North American close.<br> <br> In an otherwise quiet market, there’s a bit of chat around upcoming talks around the North American Free Trade Area (NAFTA). The fifth round of renegotiations is due to be held between November 17 and 21 in Mexico City and with 75% of all Canada’s exports headed to the United States, there’s a concern these talks might be the catalyst for a bit of profit-taking on long CAD positions. Before then we get some CPI inflation numbers which probably won’t help the CAD but keep an eye, too, on oil and natural gas which have recently been one of the big props for the currency. NYMEX crude futures fell 1.9% to $55.68 on Tuesday with natural gas down a chunky 2.4% to $3.09.

Euro

AUD / EUR

Expected Range

The euro has enjoyed a very strong 24 hours. It ended last week at 1.6662, reached a high Monday of 1.1672 and having opened in London Tuesday around USD1.1680 it took less than 12 hours to trade as high as 1.1800; its best level since the ECB meeting on October 26th. The main reason for the EUR’s strength was yet another set of better than expected economic numbers. They’ll be of little comfort to Italian soccer fans who on Monday saw their team fail to qualify for the World Cup finals for the first time since 1958, but GDP of 0.5% q/q pushed the annual rate of growth in Italy up to a 6-year high of 1.8%. Germany grew +0.8% in Q3 - driven by public consumption, investment and net exports - and some of its back data were also revised higher.<br> <br> The comparison with the US tells a clear story: the GDP of the 19 countries using the euro grew by 0.6% from July-September and was 2.5% higher than the same period in 2016. In the United States, the economy grew just 2.3% y/y in Q3 after also growing slower than the Eurozone in Q2. We could argue that the pace of EUR appreciation over the last 24 hours leaves it technically overbought but there’ll be few sellers as log as nervousness persists in US asset markets.

New Zealand Dollar

AUD / NZD

Expected Range

The Kiwi Dollar has had a pretty difficult 24 hours, albeit not really of its own making. After Tuesday’s very strong NAB Survey and with investors generally positioned long NZD, short AUD, there was a rush to close out these positions. This pushed the AUD/NZD cross up to a high of 1.1138 by the time of the London opening. The NZD then did a pretty good recovery job through the Northern hemisphere trading day. By the close of business in New York, the cross has fallen to 1.1094 having at one point traded as low as 1.1080. The NZD/USD pair touched 0.6847 just after the London open but has since recovered around 35 pips to open in Sydney today around 0.6882. <br> <br> There is literally nothing on the New Zealand economic slate today though students of price action will take some comfort from the NZD’s recovery off its’ lows against both the AUD and USD. Indeed, the NZD/USD pair has actually just managed to break above its 20-day moving average, even if it remains well below its 50, 100 and 200-day measures. A gap of just 180 pips from its 50-day average of 0.7065 doesn’t scream that the NZD is in oversold territory though it would offer some psychological encouragement if it could trade back on to a US 69 cents handle. It could be a long day ahead…

United States Dollar

AUD / USD

Expected Range

The “buy the dip” crowd clearly didn’t get the memo on Tuesday. Prior to the NY open, futures markets had signaled an opening loss of just 3 points for the S+P 500 index but at no point during the New York day did the market manage to claw its way back into positive territory. Indeed, at one point it was more than 16 points lower at 2566; its lowest point in almost a week. At the start of the trading session the latest NFIB survey of small businesses was actually pretty upbeat. It noted, “The Index of Small Business Optimism gained 0.8 points to 103.8 in October, maintaining a streak of robust readings. Labor market indicators point to continued good jobs reports and job openings surged to record territory”.<br> <br> Unfortunately, producer prices came in at a much stronger than expected 2.8% y/y; the fastest rate in more than 5 years with core PPI of 2.4% the highest since February 2002. The USD hasn’t really been trading off rate hike expectations recently – a December hike was already priced at 97.1% probability. Instead, the stock market wobble and continued uncertainty over tax reform have continued to weigh on investor sentiment. The USD Index tumbled more than half a point on Tuesday to 93.52; the lowest since October 26th. The next test for stocks and the Dollar comes with Wednesday’s CPI data where consensus looks for the y/y rate to be unchanged at 1.7%.

By Nick Parsons

USD steadies, GBP wobbles, AUD sleeps


Australian Dollar

AUD

Expected Range

We’ll try our best to avoid references to Groundhog Day this morning but the fact remains that the Aussie Dollar is stuck within some very familiar ranges. It will be no surprise to read that throughout the Northern Hemisphere trading sessions it remained on a US 76 cent big figure. Indeed, just 46 pips separated its highs and lows of 0.7619 and 0.7665 respectively.<br> <br> We highlighted here yesterday that RBA Deputy Governor Guy Debelle was scheduled to give a speech on business investment. Mr. Debelle is always a fascinating speaker and foreign exchange professionals worldwide will be familiar with his work as the lead on the FX Global Code. He describes this as, “global principles of good practice in the FX market to provide a common set of guidance to the market, including in areas where there is a degree of uncertainty about what sort of practices are acceptable, and what are not”. It is effectively the new global FX rulebook and is well worth reading over a couple of flat whites.<br> <br> Yesterday’s speech, however, was more about business sector activity and what it may mean for monetary policy and his plain speaking is always a refreshing antidote to the usual global Central Bank dullness. As he put it, “Are we just going to jack up rates to see how the household sector lives with that? I don’t think so.”<br> <br> As we await and then pore over all this week’s incoming economic data and scrutinize them for what they may mean about the Cash Rate, just be certain of one thing: the RBA is in no hurry at all to raise rates. And with this in mind, the AUD will need some hugely positive activity numbers if it is even to stabilize, let alone reverse its recent decline.

British Pound

GBP / AUD

Expected Range

The British Pound fell quite sharply as the London market opened yesterday; something of a relief to your author who warned here 24 hours ago that this would be the likely reaction to the weekend’s UK political developments. From an opening level in Sydney around USD1.3180, the GBP tumbled to a low in the European morning of 1.3068 before rallying just under half a cent to close in New York around 1.3115.<br> <br> We wrote on Monday that, “as the EU withdrawal bill returns to the House of Commons on Tuesday… it is widely expected the Labour Opposition will join Conservative rebels to inflict a series of potentially damaging defeats on the government.” We subsequently learned that MP’s have tabled an astonishing 471 amendments for debate in Westminster.<br> <br> Perhaps the most damaging was one was Number 7: tabled by 10 Conservative MP’s effectively demanding a Parliamentary vote on the UK’s Brexit deal. The GBP rallied when the Government conceded this point, perhaps in the belief that it might avert a worst-case scenario whereby the UK could leave without a deal having been secured.<br> <br> However, it is by no means clear that this is in fact the case. It is only a vote on a deal. It doesn’t provide for a vote on a ‘no-deal’ outcome. We don’t profess to be experts on the UK constitution but it may require CPI figures today to be well in excess of the 3.2% y/y consensus if the GBP isn’t once more to resume its slide…

Canadian Dollar

AUD / CAD

Expected Range

The Remembrance Day commemorations fell on a weekend this year, with November 11th being a Saturday. Some US Federal organisations had last Friday as a holiday but in Canada it was observed on Monday and its banks were therefore closed yesterday. This is important to bear in mind when trying to analyse the price action of the Canadian Dollar since Friday’s close. Yes, the charts will record that USD/CAD at 1.2730 is around 40 pips higher than at the end of last week but it might be premature to declare that the CAD’s recent outperformance has definitively ended.<br> <br> Certainly, it would be wise to await upcoming economic releases before rushing to judge. Perhaps the most important number in Canada this week is CPI, where the annual rate is expected to ease back a touch from 1.6% to just 1.4%. Before then, there’s a few statistics on house prices to digest. September’s -0.8% m/m decline was the biggest monthly drop nationwide since 2010 whilst prices in Toronto tumbled -2.7% m/m (who said monetary policy doesn’t work very quickly?). Weaker CPI and lower house prices won’t help the CAD but keep an eye, too, on oil and natural gas which have recently been one of the big props for the currency.

Euro

AUD / EUR

Expected Range

Hands-up anyone who’s surprised to see the EUR/USD exchange rate on a 1.16 big figure! Just as the AUD/USD appears nailed on to US 76 cents, so it appears the EUR is glued to 1.16. Indeed, the trading range throughout the whole of the Northern Hemisphere time zones was just 32 pips from 1.1640 to 1.1672. As for the AUD/EUR cross, no great mathematical prowess is necessary to work out that it hasn’t moved a great deal, though at 0.6535 it is nevertheless around 30 pips lower than Monday’s opening level.<br> <br> We noted here yesterday that Eurozone CPI on Thursday will likely be the most important of the economic numbers to be released this week. Germany is the biggest economy in the Eurozone and with the inflation numbers calculated on the basis of GDP weights, then obviously it’s the German numbers which matter most. Provisional numbers for October indicated at 1.5% y/y rate and the final numbers are released this morning.<br> <br> Later in the European session we get Eurozone industrial production (f/c +3.6% y/y) and then the German ZEW Survey. We’re not great fans of this as it’s a survey of investment professionals rather than industrialists but with stock markets hitting fresh highs last month, it will likely help underpin the EUR at or around current levels.

New Zealand Dollar

AUD / NZD

Expected Range

Having been stuck on a US 69 cents handle ever since last Wednesday afternoon, it was no great surprise to see the Kiwi Dollar glued to this level throughout Monday’s European session. As the North American morning wore on, though, the NZD gradually slipped lower and finally broke on to 68 cents around 10am New York time on it its way to a session low of USD0.6895. It has subsequently recovered very modestly and indeed it would not even be worthy of a mention were it not for the fact that it ends the NY session back on a US 69 cent ‘big figure’.<br> <br> There is no economic data locally until Thursday’s ready mixed concrete production numbers which now take the prize as our new favourite indicator! Usually, we might well suggest looking at the AUD/NZD cross for signs of interest from relative value FX players but a rate of 1.1047 is within 10 pips of the opening level in Wellington on Monday morning with barely 30 pips separating the day’s high and low. Move along folks, there’s really nothing to see here…

United States Dollar

AUD / USD

Expected Range

The US Dollar had a pretty dull and uneventful day on Monday. Its’ index against a basket of currencies edged very marginally higher from Friday’s close of 94.13 to end in New York at 94.20 after an intra-day high of 94.33. Equity markets in the United States initially reacted quite negatively to fears that President Trump’s tax reform agenda might have ground to a halt. Futures on the S+P 500 index at one point lost almost 10 points but by the closing bell the market had recovered all these losses and more to be up a net 5 points on the day. “Buy the Dip” still seems to be the most profitable investment strategy, though for how long this can endure remains to be seen.<br> <br> Fed Chair Janet Yellen is one of the speakers at an ECB Conference in Frankfurt Tuesday on “Communications challenges for policy effectiveness, accountability and reputation”. Along with the heads of the BoJ, BoE and ECB, Dr Yellen addresses a late-morning session entitled, “At the heart of policy: challenges and opportunities of central bank communication”. Your author can only wonder if at least two of the four speakers should talk about ‘how not to do it’.<br> <br> On the US economic data front we have the latest NFIB survey of small business optimism but once again it’s the prospects for tax reform and the stock market’s reaction to them which will likely determine the near-term direction of the USD. We again flag technical support for the US Dollar index which comes from the 200 day moving average at 93.25.

By Nick Parsons

Aussie wages and employment data this week


Australian Dollar

AUD

Expected Range

The Aussie Dollar ended last week pretty much where it began against a USD which lost quite a bit of ground late Thursday and into Friday. The AUD/USD pair opened last Monday in Sydney at 0.7650 and in one of the quietest weeks in recent memory remained stuck in a range of less than 60 pips from 0.7636 to 0.7694 before ending at USD0.7659.<br> <br> This calm came despite the much-anticipated RBA meeting and the new Quarterly Statement of Monetary Policy; neither of which really shifted the dial much on interest rate expectations. Against this background, a new monthly round of incoming economic begins for the RBA to then consider at their last meeting of the year on Tuesday December 5th.This kicks off with the NAB Business Survey tomorrow, then Wednesday it’s the quarterly wage price index and Thursday it’s the employment and unemployment numbers.<br> <br> Like most Central Banks around the world, the RBA has been a bit puzzled as to why falling joblessness hasn’t so far boosted earnings growth. And, like all the others, it just says “give it time, it will happen”. Interest rates in Australia aren’t going to move much, if at all, until wages actually do pick up, and it looks like being a quiet start to the week for the AUD, with a Guy Debelle speech on business investment the local highlight today.

British Pound

GBP / AUD

Expected Range

Last week was a roller-coaster for the British Pound. GBP/USD began last Monday at 1.3076 and having been as high as 1.3220 after Friday’s economic data, ended the week at 1.3190. Against the Aussie Dollar, GBP rose from 1.7087 to 1.7220 whilst against the Kiwi Dollar it gained exactly one cent from 1.8927 to 1.9027. <br> <br> The weekend Press in the UK has once again been dominated by politics; a constant stream of bad news for Prime Minister Theresa May’s minority government which remains in office (though arguably not in power) only because of a coalition agreement with the Ulster Unionists.<br> <br> The arcane rules of a leadership challenge in the Conservative Party require 48 of their MP’s to sign a letter of no-confidence. Reports on Sunday suggested there were now 40 such signatories and the number could rise as the EU withdrawal bill returns to the House of Commons on Tuesday. It is widely expected the Labour Opposition will join Conservative rebels to inflict a series of potentially damaging defeats on the government.<br> <br> As we saw last week, however, bad political news was to some extent offset by incoming economic data. This week brings UK inflation and unemployment data. CPI is likely to rise above the Bank of England’s 1-3% target range and BoE Governor Carney will have to write a letter to the Chancellor explaining what he will do to bring it down. Spoiler alert: he has already raised UK interest rates! As in Australia, the British Pound is unlikely to rally much unless wages show signs of picking up.

Canadian Dollar

AUD / CAD

Expected Range

The Canadian Dollar has had a very good November so far. It hasn’t been a one-way trade because of the volatility of incoming economic data but it has thus far been the strongest of all the major currencies. It began last Monday in Sydney at USD1.2763 and after a bit of a wobble Tuesday which saw the pair back up from 1.2702 to 1.2797, it was then a steady grind lower to end the week at 1.2689. The Aussie-CAD cross fell from 0.9765 to 0.9720 whilst the Kiwi-CAD fell a little bit less from 0.8715 to 0.8700.<br> <br> As with the Eurozone and the United States, perhaps the most important economic data in Canada this week is CPI, though the annual rate is expected to ease back a touch from 1.6% to just 1.4%. Before then, there’s a few statistics on house prices to digest. September’s -0.8% m/m decline was the biggest monthly drop nationwide since 2010 whilst prices in Toronto tumbled -2.7% m/m (who said monetary policy doesn’t work very quickly?). The Bank of Canada, like its US counterpart, only has 8 monetary policy meetings per year and the next one isn’t scheduled until December 6th.

Euro

AUD / EUR

Expected Range

The EUR opened last Monday morning around 1.1615 and dipped down to a low of 1.1561 just before Tuesday’s US open. From that point it climbed slowly but steadily to a high of USD.1166 before ending week at 1.6662. The AUD/EUR cross rate began at 0.6585 and touched a high of 0.6625 on Thursday before ending Friday on its low at 0.6565. NZD/EUR, meantime, finished the week exactly unchanged at 0.5944.<br> <br> For the week ahead, Eurozone CPI on Thursday will likely be the most important of the economic numbers to be released. With Continental Europe now enjoying its 17th consecutive quarter of GDP growth, subdued price prices are the only reason the ECB continues its policy of Quantitative Easing; albeit now at a somewhat slower monthly pace.<br> <br> Provisional estimates for October showed prices rose just 0.1% on the month for a 1.4% annual inflation rate though with oil prices rising and already feeding into higher pump prices for petrol and diesel, it may not be long before CPI resumes its upward path. As we keep saying, these are the key driver (pun very much intended!) of inflation right across the G20 and the Emerging Markets universe, though the EUR exchange rate this week is more likely to be driven by sentiment towards the USD Dollar.

New Zealand Dollar

AUD / NZD

Expected Range

The Kiwi Dollar had a slightly better week than its Aussie counterpart but still only managed to gain around 50 pips against a generally weak US Dollar. The pair opened in Wellington last Monday morning at 0.6907 and closed in New York on Friday evening at 0.6931.<br> <br> The overall range was somewhat higher than for AUD with 88 pips separating the high of USD0.6972 and the low of USD0.6884. After a minor earthquake measuring 4.8 on the Richter scale was felt in Wellington overnight – almost exactly a year to the day since the destructive 7.8 Kaikoura quake – the New Zealand Dollar opens little changed this Monday morning.<br> <br> Economic data this week is very much second or even third-tier but it does include possibly one of the best indicators of construction activity: ready mixed concrete production. It’s always nice to find that a nation whose official statisticians can’t measure CPI each month can still produce this gem of a number! For today the REINZ releases house sales data but as in Australia, it looks a quiet start to the week across the Tasman Sea with the AUD/NZD cross rate (which closed Friday at 1.1048) perhaps the best guide to Kiwi sentiment.

United States Dollar

AUD / USD

Expected Range

The US Dollar performed very poorly last week. In the first 3 ½ days of the week, the USD index against a basket of currencies was essentially stuck in a range from 96.40-96.84. By Thursday afternoon in New York, however, the mood turned more negative, the S+P 500 index had its worst session in 3 months and the USD index then slid all day Friday to end the week at 94.10; its lowest close since October 26th.<br> <br> The chief reason for the US Dollar’s drop was nervousness about the likely success – or otherwise – of President Trump’s tax reform bill. 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.<br> <br> 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. By late September, the USD Index had tumbled to just 90.9 and if tax reform runs into the ground now, this will again become the downside target. Some support ahead of that comes from the 200 day moving average at 93.25.

By Nick Parsons

USD sharply lower, RBA SoMP awaited


Australian Dollar

AUD

Expected Range

With little fresh news domestically, and helped to a great extent by a much weaker USD (see below) the Australian Dollar initially found some support Thursday from higher than expected inflation figures in China which helped alleviate fears about a further slowdown in the economy which is still the major destination for Australia’s exports of coal, gas and minerals.<br> <br> After a deflation scare around the beginning of the year, China’s CPI had risen to 1.6% y/y in September. October was expected at 1.8% but the actual number printed on Thursday was 1.9%. It is sometimes a little odd to see investors cheering higher inflation and we wouldn’t want to exaggerate the positive impact of the China data on the Aussie Dollar. <br> <br> Yes, the AUD/USD pair reached a high of 0.7692 in London but was then sold heavily down to 0.7652 just after the NY open before recovering to 0.7677. Indeed, if we look at Thursday as a whole, the AUD lost ground to both the Canadian and New Zealand Dollars as well as to the EUR. <br> <br> For the day ahead, the RBA’s Quarterly Statement of Monetary Policy will be the key event for currency traders locally. If AUD/USD manages to get back on to a US 77 cents ‘big figure’ it’s more likely to be because of events in the United States than in Australia. Keep an eye on the AUD crosses for a truer picture post-RBA.

British Pound

GBP / AUD

Expected Range

It was reported on the front page of The Times newspaper on Thursday that, “European Union leaders are preparing for the fall of Theresa May before the new year… Fears are growing in Brussels that the instability of Mrs May’s government raises the real prospect of a change of leadership or elections leading to a Labour victory.” <br> <br> One European leader told the newspaper that, “Britain is very weak and the weakness of Theresa May makes [Brexit] negotiations very difficult.” The appointment of a female pro-Brexit supporter to fill the latest vacant post has allowed the Prime Minister to maintain the balance between the sexes and also between so-called Leave and Remain figures in her cabinet but this is not a Government formed from a position of strength. <br> <br> Formal Brexit negotiations are due to resume later today and it would be reasonable to suppose that the EU side would press home its clear advantage. In the foreign exchange markets, the British Pound has had a wild ride over the past 24 hours. It opened in Sydney yesterday around USD1.3117 and has been as low as 1.3088 before rallying to 1.3164 as the USD itself came under pressure. <br> <br> Overall the GBP’s performance has been mixed: up against the USD, AUD and NZD but down against the EUR and CAD. Economic data in the UK on Friday are industrial production and the merchandise trade balance. We’d expect most interest to focus on the net drag on GDP from the trade deficit. Spoiler alert – it’s likely to be a bad news story.

Canadian Dollar

AUD / CAD

Expected Range

The Canadian Dollar has performed very well over the last week. It hasn’t been a one-way trade because of the volatility of incoming economic data but from an opening level of USD1.2904 on October 1st, the pair has moved down to a low of 1.2672. The CAD is also stronger against the Aussie Dollar (down from a high of 0.9908 to 0.9725) and a little less so against the Kiwi Dollar (from a high of 0.8924 to 0.8814 this morning). <br> <br> The move lower (stronger CAD) was helped by Wednesday’s 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. <br> <br> Oil prices are again firmer today with Brent crude at $63.89 per barrel and NYMEX futures at $57.17. The day ahead is quiet in terms of scheduled economic data in Canada though it will be seen as a very good performance by the CAD if it can hold on to its gains of the first 10 days of this month.

Euro

AUD / EUR

Expected Range

In Europe yesterday, the European Commission released updated economic forecasts for the Eurozone economy. Back in Spring, it forecast euro area GDP growth of 1.7% in 2017 and 1.8% in 2018. These numbers have now been revised up to 2.2% and 2.1% with next year now seeing the economy growing at its fastest pace in a decade. <br> <br> European Commissioner Pierre Moscovici said, “We have entered a new phase of the economic recovery, with stronger growth driven by resilient consumption, the global upswing, loose financing conditions and falling unemployment”. Though still very high, unemployment in the euro area is expected to average 9.1% this year, its lowest level since 2009, dropping to 8.5% in 2018 and 7.9% in 2019. <br> <br> With the US Dollar under pressure and few attractive alternatives elsewhere, we said in our North American commentary that this “ought to provide a favourable backdrop for the euro today though last week’s high of USD1.1671 is still likely to keep a lid on any gains”. Well here we are with the EUR the best performing currency overnight and a high against the USD of 1.1651. Sometimes it just feels so good when a plan comes together! <br> <br> Friday looks set to be a much quieter day (unless you’re really interested in Slovakian industrial production) and we’d expect EUR/USD to stay on a USD1.16 big figure throughout the day.

New Zealand Dollar

AUD / NZD

Expected Range

Yesterday’s RBNZ meeting left the Official Cash Rate (OCR) unchanged at 1.75 percent. Its Statement noted, “The exchange rate has eased since the August Statement and, if sustained, will increase tradables inflation and promote more balanced growth... Employment growth has been strong and GDP growth is projected to strengthen, with a weaker outlook for housing and construction offset by accommodative monetary policy, the continued high terms of trade, and increased fiscal stimulus”. <br> <br> This is all pretty standard stuff and, indeed, could have been written by virtually any Central Bank in the world right now. What piqued the interest of the FX market was the RBNZ’s quarterly forecast track for its official interest rate. A quick look at this showed the Bank now sees rates rising in Q2 2019 rather than in Q3 2019 as it had previously forecast. In reality this is a tiny shift and we’re still talking 18 months away, but it was enough for the Kiwi Dollar to catch a bid immediately after the numbers were released. <br> <br> After a high of USD0.6971 in the local time zone on Thursday, it went on to a best level of 0.6975 in London. Since then, however, the currency has done little more than track the fortunes of the Aussie Dollar. AUD/NZD has been trapped in less than a 30 pip range from 1.1018-1.1045 for the whole of the past 18 hours with little or no investor interest to trade the pair ahead of today’s RBA SoMP.

United States Dollar

AUD / USD

Expected Range

The USD has had a pretty grim overnight session. In our North American opening commentary (OFX never sleeps!) we said “Its index against a basket of currencies at 94.30 has broken down below the 94.40-94.85 range… The end-October low of 94.22 and the 20-day average of 94.10 now become the immediate downside targets”. <br> <br> Well, here we are at the Sydney open and the USD Index stands at 94.17 having touched an intra-day low of 94.15. Foreign exchange is a humbling asset class and we’ll try to resist the temptation to crow about this call! The big problem for the USD hasn’t been President Trump’s Asia visit or what he did or didn’t say with Premier Xi in Beijing. Instead, it’s all about the lack of progress on tax reform in the United States, upon which so many hopes had been pinned. <br> <br> In a piece of legislative text guaranteed to make the heart sink, the House Ways and Means Committee has released the updated GOP tax bill. The very first sentence reads, “An Amendment to the Amendment in the Nature of a Substitute to HR 1 Offered by Mr. Brady of Texas” and - believe your author – it doesn’t get any better from there. As we go to print the S&P 500 index is off its worst levels of the day but tax reform worries are weighing heavily on the US Dollar. We’ve warned all week here about this and thus far it is outweighing anything the President has said or done on his Asia trip.

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