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The Aussie Dollar has had a pretty good 24 hours, even though the reaction to RBA Governor Phil Lowe’s speech to the Australian Business Economists (ABE) annual dinner might well prove to have been a bit optimistic. The RBA chief set out three sets of questions that have occupied much of their time over the past year. The first is how the final stages of the transition to lower levels of mining investment would play out. The second is the degree to which an improving labour market would translate into a pick-up in wage growth and inflation. The third is the nature of risks stemming from high and rising levels of household debt and how to deal with those risks.<br>
Mr Lowe’s speeches are always packed with information and insight. They are worth reading many times over. But, in the FX world of instant, reductive analysis, the sentence which drew most attention was that ‘If the economy continues to improve as expected, it is more likely that the next move in interest rates will be up, rather than down’. This was in no way newsworthy. It was a statement of the blindingly obvious. But, in a market which was clearly short of AUD, it was enough to prompt a flurry of buy orders which took AUD/USD up from the 0.7530 area to a high of 0.7586 before closing in New York around 0.7580. Whether it can sustain these gains remains to be seen. The so-called “Construction Work Done” series on Wednesday is the highlight of an otherwise empty calendar today and will be a good test of sentiment after yesterday’s decent Aussie Dollar bounce.
GBP / AUD
The best levels for the pound on Tuesday came early in the European session and it gradually slid lower as the day progressed. GBP/USD hit 1.3264 as London traders arrived but lost around 30 pips over the rest of the day. Its best levels against the Aussie and Kiwi Dollars also came in the morning (1.7580 and 1.9505 respectively) and both these pairs ended the day more than a full cent lower.<br>
Four of the nine members of the Bank of England Monetary Policy Committee (MPC) were giving evidence to MP’s yesterday, with a wide spread of views on the outlook for monetary policy and the reasons for their individual votes at their last meeting. Gertjan Vlieghe, an external MPC member, said he switched his vote to support the rate hike due to signs that employers were finding it harder to recruit staff and that employees were more confident about changing jobs for higher pay whilst Jon Cunliffe, a BoE deputy governor who was one of the two MPC members who voted against a rate hike, said low domestic inflation pressures made it possible to “wait before tightening policy until there is clear evidence that pay growth is responding to the level of unemployment in line with our forecast."<br>
There’s something for everyone in that spread of views though the GBP on Wednesday will be all about fiscal policy – not monetary policy – when the Chancellor presents his annual Budget to Parliament. Be prepared for a potentially much more volatile day ahead for the GBP.
AUD / CAD
The Canadian Dollar got a double dose of good news on Tuesday and ended the North American session the equal strongest (with the AUD) of the currencies we follow here. Crude oil was up around 23 cents per barrel with NYMEX spot at $56.66 per barrel; more than a dollar and a half above last week’s low having at one point touched $56.90 late in the New York morning. The other bit of fundamental good news came from the NAFTA negotiations which are being held to thrash out a new version of the 23-year old Free Trade Agreement between the US, Canada and Mexico. These so-called NAFTA 2.0 talks are taking place as closed-door meetings and no documents from the meetings have been made public. Stakeholders involved in the negotiations are also forbidden from disclosing details.<br>
Nevertheless, it was reported on Bloomberg yesterday afternoon that, “Mexico sees the nations close to finishing work on telecom, energy and digital commerce chapters in the fifth round of negotiations ending today”. USD/MXN fell from 19.00 to a 4-week low of 18.79 on these headlines, with USD/CAD down from a high of 1.2817 to 1.2753. In other NAFTA news it is also being reported that in the New Year the talks will be moved to non-capital cities and that after Spanish-speaking and English-speaking settings, the Canadians want to hold a round in French-speaking Quebec in late-January. The talks are still live, progress is being made and the CAD has responded accordingly.
AUD / EUR
The euro had a much calmer day on Tuesday. Having opened in Europe around USD1.1735, it managed a best level in USD1.1750 but then gave back all its admittedly modest gains to end little changed on the day against the USD, though down against the Aussie, Kiwi and Canadian Dollars. With no fresh incoming economic data, the focus of attentions remains very firmly on German politics.<br>
We can summarise the four options facing Chancellor Merkel quite simply: She can try to struggle along with a minority government which then risks being defeated in Parliament on any single issue. She can call fresh Federal elections and hope to increase her party’s 33% share of the vote it won in September. She can try to form a Coalition with the SPD who have already rejected this option. Or she can try to restart Sunday’s failed talks in the hope that the FDP’s leader might cop the blame for the instability and be prepared to renegotiate. None of these four options look particularly appealing to Ms. Merkel and none of them provide the solid and stable leadership the EU needs during Brexit negotiations. Flash PMI data on Thursday might help switch investor attention back on the Eurozone economy, but for now politics continue to weigh on the euro.
New Zealand Dollar
AUD / NZD
It’s fair to say that the New Zealand Dollar rose on Tuesday only because the Australian Dollar did. It was certainly not in reaction to any fresh local news, whether economic or political. Offshore traders often link the two Antipodean currencies far more than is warranted by a closer examination of relative fundamentals. So, if the AUD rallied on a one-line comment from RBA Governor Lowe, so it dragged the NZD in its’ wake. The AUD/NZD cross opened in Sydney on Tuesday morning at 1.1090 and it opens today at 1.1090…<br>
The latest Global Dairy Auction from Fonterra certainly did nothing to encourage a positive view of the NZD. Dairy values, as measured by the GlobalDairyTrade (GDT) index, dropped for a fourth successive auction, this time by 3.4%, to record their weakest finish in eight months. The index, which came in at 969, also showed a year-on-year decline for the first time since May last year. This morning in NZ brings the official data on overseas visitor numbers and net inward migration. It’s too soon to see the recent fall in the NZD translate into higher tourism inflows but if it’s sustained then it surely can’t do any harm to that industry.
United States Dollar
AUD / USD
The US Dollar is trading as though the Thanksgiving holiday is already here. Its index against a basket of currencies opened the week around 93.50, and thirty-six hours later it stood at 93.67, having been as low as 93.30 on Monday and traded to a high of 93.80 yesterday. In economic data, October’s existing home sales came in stronger than expected at 5.48 million units but the big talking point of the day was the performance of the stock market where the S+P 500 index traded at 2600 for the first time ever. This index added 16 points during the day (0.64%) with the Dow Jones Industrial Average up a whopping 175 points to 23,600.<br>
Ahead of Wednesday’s FOMC Minutes, outgoing Fed Chair Janet Yellen is at Stern Business School in New York Tuesday evening at an event billed as “In conversation with Mervyn King”. This is by invitation only and scheduled to start at 6pm local time in New York. Whether her resignation loosens her tongue remains to be seen... With incoming economic data still quite firm and the stock market at record highs, the CME probability calculator shows a 91.5% chance of a 25bp rate hike on December 13th. In fact, such a move is more than fully discounted: there’s a calculated 8.5% probability of a 50bp move. Which would certainly count as a shock!
The Aussie Dollar has steadied a little after last week’s losses but it nevertheless traded very heavily throughout the Northern Hemisphere session on Monday. After its weakest close in more than five months (AUD/USD0.7565) on Friday, it could only rally as high as 0.7569 during the London morning before sliding throughout the New York session. There will be some relief that it didn’t break last week’s intra-day low of USD0.7540 but price action remains pretty poor and it won’t require much - whether a stray comment in Tuesday’s RBA Minutes or in Governor Philip Lowe’s speech to the Australian Business Economists (ABE) annual dinner – to knock the currency through some fairly fragile technical support. The two RBA speeches Monday focused mainly on financial stability rather than monetary policy but the Governor’s chosen title - “Some Evolving Issues” – rings a few alarm bells in your author’s head. Central Bankers are paid to worry and the danger of worrying in public is the audience focuses on the risks rather than their mitigants. Economic data is certainly a little thin on the ground in Australia this week with the so-called “Construction Work Done” series on Wednesday the ‘highlight of an otherwise empty calendar. If the AUD is to find any support, it won’t be from incoming economic news.
The British Pound’s generally positive momentum continued through the London session Monday but then faded later in the day as investors reflected on an important speech from the European Union’s chief negotiator Michel Barnier to the Centre for European Reform conference in Brussels. He said there are two contradictory soundbites from the strongest supporters of Brexit: that the UK will set itself free from EU bureaucracy; and that after Brexit the UK will still be able to participate in the single market, because the UK and the EU have shared common rules for 40 years. This is not a sound basis for going forward: “The UK has decided to give up the free movement of people. That means the UK will lose the benefits of the single market. That is a reality”. With Prime Minister potentially losing an ally in German Chancellor Angela Merkel (see below), it is a difficult background against which Chancellor Philip Hammond must deliver the annual Budget on Wednesday. He has the seemingly impossible task of spending considerably more money by borrowing less against a background of a slowing economy. It might really be a question of how exactly he will fail, rather than whether he can actually succeed. Of course, some of these concerns are already ‘priced in’ to the currency but do be aware of some potentially large swings in the GBP as the week progresses.
The Canadian Dollar continues to track oil prices quite closely and with a generally firmer US Dollar because of German politics (see above), lower NYMEX crude prices had a predictable effect on the external value of the CAD. Oil only ended around 40 cents a barrel lower at $56.37 but USD/CAD advanced around 40 pips to finish in New York Monday around 1.2812; its highest level since November 2nd. The 173rd OPEC meeting starts in Vienna next Thursday and we’re approaching the point where normally there’d be lots of talk about production cutbacks and quota ceilings but it hasn’t happened yet. Last week, Bank of Canada Senior Deputy Governor Carolyn Wilkins said central bank had decided to advance the timing of speeches providing economic updates to “align them more closely” with its interest rate decisions. Unfortunately, these speeches are going to come after BoC meetings in order to “explain the thinking”. A sceptic might call this ‘backward guidance’ as its certainly no help to predicting future decisions! Canadian wholesale sales numbers are out Tuesday with retail sales published on Thursday. As the OPEC meeting approaches, however, keep a close eye on those oil prices for clues to the CAD.
The euro had a wild ride on Monday. We noted here 24 hours ago that the failure of Chancellor Angela Merkel to form a so-called Jamaica coalition (named after the four colours of the Caribbean island’s flag) would be a potentially big negative for the euro. This proved correct. From a Sydney open of 1.1782, EUR/USD fell to just below 1.1730. It was then a bit of a puzzle to see the EUR rally on talk about the possibility that Ms. Merkel might try to lead a minority government which could be over-ruled on any Parliamentary vote. It was even odder to imagine that new French President might somehow step into the political vacuum to lead Europe forwards. He’s struggling to lead his own country forwards and he must rely on the patronage and support of a strong German leader to shore up his own domestic position. Nevertheless, EUR/USD rallied all the way back up to the high 1.1790’s before Ms. Merkel, who has headed three coalitions since 2005, said she was “very sceptical” about ruling in a minority government and suggested she would stand again as a candidate if elections were called in the new year, telling public broadcaster ARD she was “a woman who has responsibility and is prepared to take responsibility in the future”. EUR/USD promptly reversed course yet again and ended in New York around 1.1733. Right now, you know it’s been a bad day for your currency when it falls against both the Aussie and Kiwi Dollars but that’s exactly what happened to the euro on Monday. AUD/EUR ended 15 pips higher at 0.6432 with NZD/EUR up 20 pips at 0.5801.
The choice facing currency traders when looking at the Australian and New Zealand Dollars at present is which one they dislike least. On Monday, the NZD took second prize in this ‘reverse beauty contest’ which meant the AUD/NZD cross edged slightly lower to 1.1092 after opening the week in Sydney around 1.1115. It does require a magnifying glass to see the movements clearly, though, and it would be a mistake to overinterpret the significance of 20 pips either way on this cross. NZD/USD just about managed to stay on a US 68 cents handle over the last 24 hours (it spent around 10 minutes in the 0.6790’s) but at no stage did it break above 0.6835. It remains below its 20, 50, 100 and 200 day moving averages and would need to trade above 0.6891 to get above its 20-day mark. The only economic data yesterday was BNZ’s Performance of Services Index. This fell 0.3 points to 55.6 from the previous month though the accompanying Press Release sought to put a positive spin on the drop, noting “these are robust results given the prevailing uncertainty surrounding the election, coalition negotiations, and government formation over the period.” For the moment, the FX market has given the NZD the benefit of the doubt though it is too early to be confident about calling the bottom of the market. NZD/USD needs to fall less than half a cent for some “fresh 2017 low” headlines to be written.
The US Dollar had a day of two halves on Monday but this was largely a reflection of the changes in sentiment around the EUR as incoming political news in Germany was assessed and digested. Its index against a basket of currencies opened around 93.50 on Monday morning and edged ahead around 20 pips as EUR/USD fell half a cent. As the EUR then recovered all its losses, the USD Index tumbled to test the big support level we’ve been highlighting at 93.30. In our New York morning commentary (we never sleep!) we wrote “Some talk of a CDU minority government has helped the EUR recover early losses but a sustained return above USD1.18 doesn’t look likely…” In fact, during the European afternoon the EUR then gave back all its earlier gains; allowing the USD index to bounce around 35 pips off its key chart point. There are no US economic data released Tuesday other than existing home sales which rarely shift the market dials much. Instead, the next big US focus is the Minutes of the last FOMC meeting to be released on Wednesday afternoon Washington time. The CME probability calculator shows a 91.5% chance of a 25bp rate hike on December 13th with a scarcely-believable 8.5% probability of a 50bp move. After a quick look through the Fed’s deliberations, it’s then time to think about the Thanksgiving turkey on Thursday and the spectacle of ‘Black Friday’ shopping to end the week.
After the Q3 wage data showed there was little, if any, pass through from higher employment to higher earnings, the Aussie Dollar had a pretty rough week, though ultimately not as bad as its Kiwi cousin. The RBA couldn’t have made it plainer a fortnight ago when it 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”. Markets were quick to hit the AUD which fell from USD0.7630 to 0.7580 and on to a low of 0.7540 on Friday before ending the week at 0.7565; its weakest close in more than five months.<br>
With 11 RBA meetings each year and 4 Quarterly Statements of Monetary Policy (the clue is in the name!) the Minutes of four of the Board meetings are largely redundant. This Tuesday will be one of those occasions. Before then, Jonathan Kearns, RBA’s head of financial stability, and Marion Kohler, head of domestic markets, are scheduled to speak at separate events in Sydney on Monday morning while Governor Philip Lowe will give a speech at the Australian Business Economists (ABE) annual dinner on Tuesday.<br>
Economic data is a little thin on the ground this week, though England’s cricketers arrived in Brisbane ahead of next Sunday’s opening Ashes test to find the British Pound bought 1.74 Australian Dollars; its best level in more than 6 months. For currency traders, that May 9th high of GBP/AUD1.7620 will now be the technical level to watch.
The British Pound spent last week pulled by incoming economic data and the latest twists and turns in the Brexit negotiations. CPI inflation didn’t rise beyond the upper end of the Bank of England’s 1-3% target range but although the UK labour market numbers on Wednesday showed the jobless rate was steady at 4.3%, the number of people in employment across the UK fell for the first time in nearly a year. GBP/USD began the week at 1.3130 and having been as high as 1.3250 on Friday, ended at 1.3220. Against the Aussie Dollar, GBP rose from 1.7150 to 1.7475 whilst against the Kiwi Dollar it gained more than four cents from 1.8950 to 1.9390.<br>
The news on Brexit talks doesn’t appear good, but it will be completely overshadowed this week by the annual Budget delivered by Chancellor Philip Hammond on Wednesday. Just as superpowers fight out ‘proxy wars’ in third countries, so the Budget will be the scene of much political infighting in the UK Conservative Party. The Chancellor has the seemingly impossible task of spending considerably more money by borrowing less against a background of a slowing economy. It might really be a question of how exactly he will fail, rather than whether he can actually succeed. Of course, some of these concerns are already ‘priced in’ to the currency but clients with GBP transactions to execute should be aware of the potential for increased volatility in the second half of this week.
The Canadian Dollar had a very good first couple of weeks in November but has since given back some of its gains as oil prices fell and CPI inflation slipped back from 1.6% to 1.4%. Against the US Dollar it began last week around 1.2690 and the pair edged gradually firmer to an intra-day high immediately after Friday’s CPI numbers of 1.2811. By the end of the week, USD/CAD was around half a cent off its best level and ended in New York at 1.2770. With an absence of major economic news other than CPI, traders focused on lower oil prices which had recently been a factor helping support the CAD. NYMEX crude opened the week at $57.05 but slipped to $55.15 at Tuesday’s close. Oil steadied Wednesday and Thursday then jumped sharply on Friday to end the week just a net 25 cents lower at $56.85.<br>
The Bank of Canada released its Autumn Review last week and it’s interesting to note the very first article was a very thorough examination of the factors behind the oil price decline since 2014. They conclude, “the most important drivers were the surprising growth of US shale oil production, the output decisions of the Organization of the Petroleum Exporting Countries and the weaker-than-expected global growth that followed the 2009 global financial crisis”. For the week ahead, Canadian wholesale sales numbers are out on Tuesday with retail sales published on Thursday when the rest of North America celebrates Thanksgiving. As temperatures in the Northern Hemisphere begin to tumble, keep a close eye on oil prices.
Currencies are relative prices: they can’t all go up or down simultaneously! With a weaker AUD, NZD and USD and a broadly steady CAD, the two winners over the past week were GBP and the EUR. There were plenty of ECB speakers to add their own perspective on the incoming economic data and ECB President Draghi has found a form of words which we can expect to hear repeated very often by his fellow Council members. “The euro area is in the midst of a solid economic expansion. GDP has risen for 18 straight quarters, with the latest data and surveys pointing to unabated growth momentum in the period ahead. From the ECB’s perspective, we have increasing confidence that the recovery is robust and that this momentum will continue going forward… from a monetary policy perspective our task is not complete, as we have not yet seen a sustained adjustment in the path of inflation… we are not yet at a point where the recovery of inflation can be self-sustained without our accommodative policy”.<br>
Away from economics, the big question for financial markets is the success – or otherwise – of German Chancellor Angela Merkel’s attempts to form a four-way Coalition (a so-called Jamaica coalition because of the colours of its flag). As we go to print at the Sydney open, there has still been no announcement of a government and if the talks fail it could trigger fresh elections. EUR/USD briefly clawed on a 1.18 ‘big figure’ on Friday but political problems in Germany are a big potential negative as the new week begins.
Momentum can itself be a very important input when analyzing and predicting currency movements. There’s no doubt that momentum for the Kiwi Dollar is very negative right now. NZD/USD is stuck firmly below its 20, 50, 100 and 200 day moving averages, it has taken out the May and October closing lows (0.6830 and 0.6835) and on Friday last week hit a fresh low for the year of just 0.6783 before rallying a little to close in New York at 0.6816. The AUD/NZD cross hasn’t been able to regain the highs of late October above 1.12 as the Aussie Dollar has its own set of difficulties to deal with but the pair did rally more than a full cent off Wednesday’s low to end the week at exactly 1.1100.<br>
We mentioned here on Friday the Quarterly International Visitor Survey and the highlight of the data calendar locally this coming week will be to see how that spending fits in to Thursday’s overall Q3 retail sales numbers. The second quarter got a big lift from the British Lions rugby tour and real sales (after inflation) rose a punchy +2.0% q/q. There’s no chance of a repeat in Q3 and consensus looks for just +0.1%. Bear in mind that even though local media are reporting buoyant sales to China on Singles Day 11/11, this comes way after the end of Q3. There could be further disappointment for the NZD in the week ahead which kicks off today with the Performance of Services Index.
The US Dollar had a pretty disappointing week. Its index against a basket of currencies stood at 94.20 on Monday morning, around half a percent down from its recent closing high of 94.70 on November 6th. By Friday evening it had slipped to a close of 93.39; only just off the lows of Wednesday morning before the latest round of US economic data were published. The S+P 500 index regained all of Wednesday’s losses on Thursday and it’s interesting to note that that the Dollar could glean no support from the stock market. With equities driven by corporate earnings and the prospects for tax reform, it has often been the case that the USD also correlates positively with stocks. This is something which should be watched carefully from here as a close below 93.30 opens up the technical path to a retest of early September’s 91.00 low.<br>
Of course, the big event of the week ahead will close the market on Thursday’s Thanksgiving holiday, with retailers then praying for a shopping frenzy to rescue their year on Friday. Before then, the Minutes of the last FOMC meeting will be released on Wednesday afternoon Washington time. The CME probability calculator shows a 96.7% chance of a 25bp rate hike on December 13th so there’s not much support the USD can get from interest rates near-term. It could be a lively few days in the foreign exchange market…
Thursday' Australian labour market report was a classic example both of why foreign exchange can sometimes be such a difficult asset class, and why it pays to look beyond the immediate headlines which flash across the screens and the news wires. The world is a dangerous place already without adding unnecessary layers of excitement by programming trading systems to react in a pre-determined way to economic data releases. From a starting point of 0.7593 yesterday, the AUD/USD pair traded at both 0.7584 and 0.7606 within moments as the employment numbers were simultaneously better and worse than expectations: weaker job creation but a lower unemployment rate. A more considered look at the data showed not only the weakness in jobs was false: full-time job creation far outstripped the losses in part-time employment but so too was the strength of the unemployment rate; it fell largely because the participation rate fell a tenth to 65.1%. The more considered reaction to the data would have been to do nothing and that' pretty much what then happened over the next 18 hours! AUD/USD has been stuck in a 22 pip range from 0.7582 to 0.7604 and finishes the NY session exactly unchanged from where it was one minute before the jobs report. Overall, that seems a fair reaction.
The British Pound almost managed to stay on the same big figure against the US Dollar (1.31) for the whole of the last 24 hours but there were a few minutes where it briefly printed 1.32 and the high in New York was 1.3203. By the end of the North American session, it was back down at 1.3183. With a pretty stable Aussie Dollar, it’s been a similar pattern for the GBP/AUD cross which reached an intra-day high of 1.7395 before settling back to 1.7367 at the NY close. Economic data in the UK in the first part of this week showed the cost of goods and services as measured by the CPI, the number of people in work and the amount they were collectively paid. On Thursday, we got to see how all that translated into consumer spending. After a -0.8% m/m tumble in September, October rebounded a little to +0.3% m/m; a tenth above consensus expectations. The annual rate of sales is now negative (-0.3% y/y) for the first time since 2013 and the official statisticians comment that, “growth month-on-month in October was particularly strong in the second-hand goods sector”, doesn’t exactly point to buoyant consumer confidence. Speaking in Liverpool, BoE Governor Carney said, “If the economy evolves broadly in line with our projections we would probably raise interest rates a couple of times over the next few years… But there’s some pretty big forces, some pretty big decisions still to be taken with respect to Brexit by the UK Government and the Europeans and all of those things can affect it”. There’s no UK economic data scheduled Friday so it looks like a somewhat calmer day ahead unless UK politics suddenly turn nasty.
The Canadian Dollar has eked out some very modest gains against most of the major currencies and helping draw under a line after its wobble over the past couple of days. Official data on manufacturing sales were quite a bit better than consensus (actual +0.5% m/m versus f/c -0.5%) and USD/CAD has edged down from the high 1.27’s to around 1.2750 at this morning’s Sydney open. On an otherwise quiet day for news, ADP launched their first Canadian Employment Report at a breakfast function in Toronto. Their US report used to be quite widely watched as a lead indicator of payrolls but in fact now it incorporates the last official numbers as in input, making it a much less reliable guide to upcoming data. ADP had trumpeted, “Leaders from ADP will speak about the October report, what it means to the Canadian economy, and how to use monthly employment insights to make more informed decisions”, and we noted overnight that it might get a bit of coverage on an otherwise quiet day. For what it’s worth, the new report put the monthly change in Canada’s September non-farm payrolls at -5,700 but an upbeat Press Release said, “The Canadian economy has added more than 250,000 jobs so far this year, which is 25 percent more than the total number of jobs created in all of 2016.” Whether Thursday’s very modest CAD rebound can be extended still remains to be seen…
The euro has found it very difficult to hold on to a USD 1.18 ‘big figure’ and has spent the whole of the last 24 hours between 1.1760 and 1.1799. The move lower came even though ECB Chief Economist gave a pretty upbeat address to a working group of bank economists in Brussels on Thursday morning. He noted that, “domestic demand has become the mainstay of growth in the euro area, making the recovery more resilient to developments overseas. Real GDP growth is projected to remain above potential growth in the coming years. The strength and resilience of the recovery tends to foster our confidence that reflationary forces will gradually support a return of headline inflation towards a level that is below, but close to, 2% over the medium term”. For all the fancy econometric analysis available to the ECB through its vast and highly-qualified Research staff, we’d simply point out that petrol prices are now rising throughout Continental Europe and the UK. Over the last month, there’s been nearly a 5% jump in prices at the pump. And, when prices rise, so does inflation! EUR/USD opens in Sydney this morning around 1.1760; barely 20 pips below its level 24 hours ago. There’s not a lot on the economic calendar on Friday so we’d expect it to spend a bit more time on USD 1.17 than it did on the way up.
Price action in the New Zealand Dollar has been fairly poor over the last 24 hours. From a high of USD0.6918 on Wednesday, it fell steadily to a fresh November low of 0.6837 at this morning’s North American open. It has subsequently recovered around 20 pips off the low point but overall the NZD has today been the worst performer of the currencies we follow here. With no major economic data locally, such attention as there was on these matters settled on the delivery of ready-mixed concrete in the 3 months to September which fell slightly from the June quarter, and is barely above the level it was a year ago. The main centres of population are now showing year-on-year declines; Auckland is down -4.2%, Wellington is down -12.5% and Christchurch down -14.6%. Meantime, separate figures showed the ANZ Roy Morgan Consumer Confidence Index eased from 126.3 to 123.7 in November; its lowest in 7 months. Looking ahead, Friday brings PMI and PPI data but with no RBNZ meeting now until February 8th, international investors selling the NZD feel they’re pushing on something of an open door. NZD/USD is below its 20, 50, 100 and 200 day moving averages and a close below 0.6830 would set a fresh 2017 low.
The memo about buying the dip may have arrived 24 hours late but it finally got there. The S+P 500 index is up over 20 points and the December futures contract is up more than 30 points from Wednesday’s intra-day low of 2,556. There’s been no particular catalyst for this move, though we’d note that ahead of the opening bell, WalMart exceeded analysts’ earnings expectations and Cisco gave a boost to the entire tech sector. As for the tax reform agenda, House Republicans passed their bill on Thursday with a 227-205 vote though it still isn’t clear whether it will have enough support to pass in the Senate. In economic news Thursday, weekly jobless claims were a higher than expected 249k but industrial production beat expectations with a +0.9% m/m gain and manufacturing output surged 1.3% against forecasts of a more modest, but still impressive +0.6% increase. Putting it all together, the best day for the stock market in almost 3 months, renewed hopes around tax reform and slightly higher US bond yields have all supported the US Dollar. Its index against a basket of currencies ended up around half a percent on the day at 93.65, having touched a low on Wednesday of 93.11. As for interest rate expectations, the CME online calculator shows a 91.5% probability of a 25bp December Fed rate hike but, unbelievably, an 8.5% chance of 50bp. Perhaps the econometricians should have attended that Central Bank course on policy communication…
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>
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>
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.
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>
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>
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.
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>
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.
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>
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.
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>
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.
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>
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%.
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