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With the US out for Thanksgiving Day, the Aussie Dollar was able to capitalise on the calm by very modestly extending its gains of the previous two sessions against the US Dollar. By the end of the North American session (Canada was still open for business), AUD/USD stood at 0.7628; its best level in almost 10 days. The AUD also advanced against a somewhat weaker CAD but did best against a British Pound which is beginning to suffer – as we thought it might – from a closer look at the details of Wednesday’s UK Budget. GBP/AUD closed down at 1.7430; almost a cent and a half down from its best levels earlier this week.<br>
The one currency it couldn’t outperform was the EUR which, as we explain below, benefitted from some extremely strong Eurozone PMI data. As the week draws to a close, we expect events at the Gabba this Friday to be far more interesting than the foreign exchange market. It was very considerate of the Queenslanders to serve up some Spring rain to make the travelling ‘Barmy Army’ feel at home, though a betting person would probably have a few dollars on the double of England all out by tea-time and a lower GBP/AUD exchange rate by the end of the day. We’ll review both predictions in the London opening commentary!
GBP / AUD
We expressed here yesterday our doubts as to whether the initially positive reaction to the UK Budget would stand closer scrutiny. As we pointed out then, “never in modern history has a UK Chancellor stood up to forecast growth below 2% in every one of the next five years”. A sequence of 1.4, 1.3, 1.3, 1.5 and 1.6 would be a pretty dire set of marks in ice-skating or gymnastics. As a set of GDP forecasts, it is equally grim; a cumulative increase in real national income of just 7.0% in half a decade.<br>
Once the various UK economic think tanks had time to crunch the numbers on Wednesday night and into Thursday, there are some pretty alarming stories. The Times newspaper reports the widely-respected Institute for Fiscal Studies saying, “Britain will not return to debt levels as low as before the financial crisis until the 2060s, with workers facing two “lost decades” without earnings growth… Real earnings are falling this year as inflation has risen to 3%. The nascent recovery in earnings, which were growing through 2014 to the first half of 2016, has been choked off. That they might still be below their 2008 level in 2022 as the OBR forecast is truly astonishing”. Ouch!! GBP/USD is down 30 pips from its pre-Budget high to 1.3300, GBP/AUD is down 75 pips at 1.7450 whilst GBP/NZD is just over a full cent lower at 1.9315. We don’t imagine the Budget forecasts will look any better on Monday morning after a whole weekend’s reflection…
AUD / CAD
All good things come to an end and so has the Canadian Dollar’s recent strong run. South of the border, folks were celebrating Thanksgiving but north of the 49th parallel markets were very much open for business. The blame for the CAD’s fall was most definitely not oil prices. NYMEX crude added another half a cent to $58.04. instead, the culprit was a soft set of domestic economic data. Statistics Canada said retail sales rose just 0.1 percent in September, versus forecasts for a 1 percent gain, after dropping 0.1 percent in August. Receipts for the country’s retailers have been flat over the past four months, after one of the best starts to a year for the industry on record.<br>
This was the last major piece of output data ahead of third quarter GDP numbers next week, and is the second release this week that showed unexpected weakness in activity. Statistics Canada reported Tuesday that wholesale sales fell 1.2 percent in September. Economists are estimating annualized GDP growth of 1.8% in Q3, down from 4.5% in the Q2. Though the CAD fell on the news, it can hardly be described as a collapse: USD/CAD is up around 20 pips at 1.2715 whilst AUD/CAD is around 25 pips higher at 0.9692.
AUD / EUR
The EUR was by some margin the strongest currency of all on Thursday, not because of any great change in the German political situation – though it is rumoured that the leader of the SPD, Martin Schulz, may be about to resign – but on the back of a stunning set of ‘flash’ PMI numbers in France, Germany and the Eurozone. The Eurozone manufacturing index of 60.0 was the strongest in 211 months, the services index was at a 6-month high of 56.2 whilst the composite index was at a 79-month high of 57.5.<br>
Markit’s Press Release noted, “The eurozone economy is showing signs of picking up momentum in the fourth quarter, with multi-year highs seen for all main indicators of output, demand, employment and inflation in November. Business activity and prices rose at the steepest rates for over six years, while the largest accumulation of uncompleted work for over a decade encouraged firms to take on staff at a rate not seen for 17 years…. Inflows of new orders showed the largest gain since February 2011. The biggest increase in factory new orders since April 2000 helped offset a slight moderation in the service sector. Goods exports increased at a survey record pace”. EUR/USD extended Wednesday gains to reach a high of 1.1850 whilst AUD/EUR is at 0.6435.
New Zealand Dollar
AUD / NZD
For most of this week, you’d have been forgiven for thinking that New Zealand had a fixed exchange rate against the Australian Dollar; it hasn’t moved more than 30 pips either side of 1.1080 and after printing a low of 1.1055 on Thursday, it’s now pretty much back to the mid-point of the range. Earlier this week, Statistics New Zealand published detailed data on overseas visitor numbers. Yesterday we got to see how deeply those tourists and NZ residents dug into their pockets to spend some money.<br>
Overall sales volumes rose 0.2% in the three months ended September 30, following a 2% increase in the June quarter. Eight of the 15 industries surveyed posted higher sales volumes in the quarter, though comparisons with Q2 can be a little misleading. For example, the food and beverage sector - which includes cafes, restaurants, bars, takeaways, and catering services - saw a record fall in both value and volumes in the quarter (down -2.2% and -3.1%). This came after a record gains in Q2 thanks to the hungry and thirsty supporters of the World Masters Games and the British Lions rugby tour in that earlier period. With NZD/USD now down around the lows of the last 12 months, the big question is whether the cheaper currency will be able to attract a fresh wave of overseas visitors.
United States Dollar
AUD / USD
The US was of course away yesterday for Thanksgiving. Celebrated on the fourth Thursday of November in the US and the second Monday of October in Canada, it began as a celebration to bless the harvest. Nowadays, it’s a day of rest before the serious business of shopping begins in earnest on ‘Black Friday’; the day when it used to be said storekeepers finally moved out of the red to make some profits before year-end. Though asset markets were closed, foreign exchange is a 24-hour business and continued to trade in Canada after Europe closed.<br>
In any case, the calculation of the US Dollar index against a basket of major currencies is mathematically straightforward. As our US friends tucked in to their turkeys, the USD rose against the GBP and CAD, fell against the EUR and AUD and was unchanged against the NZD. With significant index weights also for the Mexican Peso and Japanese Yen, the overall impact of Thursday’s bilateral moves was to push the USD Index down another tenth of a point to 92.8. This is the lowest since October 13th and the technical picture still leaves the way clear for a test of the September 7th low at 91.0. News reports on Friday will doubtless be dominated by the success, or otherwise, of retail promotions and though Markit will release its version of the manufacturing and services PMI’s, it’s a safe bet they will be pretty much ignored.
The Australian Dollar has managed to gain some ground against a very weak US Dollar, but it is lower against most of the other FX majors: EUR, GBP and CAD and has even slipped a bit against the Kiwi Dollar. We’ve been arguing here that investors were wrong to focus on RBA Governor Lowe’s comments that, “it is more likely that the next move in interest rates will be up, rather than down” as they weren’t time-defined, most certainly did not indicate an early tightening of policy and told us nothing about the pace of rate hikes relative to the rest of the world.<br>
Sometimes it is nice to see a plan come together and feel vindicated when it happens. On a day when the US Dollar index finally broke down through key technical support at 93.30, a net gain for AUD/USD of just 40 pips over the past 24 hours is pretty unimpressive. Yes, it is just over half a cent off the European session low of 0.7560 but the feeling persists that it really should have done better.<br>
With the US celebrating Thanksgiving on Thursday and all this week’s Australian economic data all out of the way, investors locally can get down to the serious business of watching the first Ashes Test in Brisbane. England’s cricket fans now get A$1.75 per pound which is the most in more than a year. It may take some of the sting out of buying consolation beers…
The pound had a pretty mixed day on Wednesday – up against the USD and AUD but down slightly against the EUR, CAD and NZD – after UK Chancellor Philip Hammond delivered his annual Budget speech to the House of Commons. He had the seemingly impossible task of spending more whilst borrowing less against the backdrop of a slowing UK economy and though he generated some initially popular headlines with the scrapping of taxes on house purchases by first-time buyers, the economic numbers he presented from the independent Office for Budget Responsibility (OBR) made for pretty grim reading.<br>
After growing just 1.5% in 2017, UK GDP is then expected to grow over the next five years by 1.4, 1.3, 1.3, 1.5 and 1.6 percentage points. Never in modern history has a UK Chancellor stood up to forecast growth below 2% in every one of the next five years. Even the initially positive news headlines might not stand up to much scrutiny when it’s realised that cutting transaction taxes merely pushes up prices with the benefits accruing to existing owners, not new homebuyers. It is often said that a Budget should be judged after 5 weeks, not 5 minutes and if the smiles on the Government benches begin to evaporate, then so too will the recent enthusiasm shown for the GBP…
The Canadian Dollar had another good day on Wednesday, boosted by a further sharp rise in oil prices to their highest level of the year. As recently as last Tuesday, NYMEX crude was at $55.19 per barrel. On Tuesday this week it finished in New York around $57.05 and yesterday it traded – and then closed - as high as $58.02. The rise in oil prices was very timely for the Canadian Dollar as some of the earlier optimism around the ‘NAFTA 2.0’ began to be reassessed locally.<br>
Indeed, one of the major banks locally in Canada put out a report saying the CAD could fall as much as 20% if the talks failed in the New Year. They stressed this was not their central scenario (otherwise they might now be looking for a new Head of Research!) but noted, “Despite ongoing threats from President Trump and a more contentious renegotiation process of late, we continue to view NAFTA termination as a tail risk… the risk of significant negative impacts to economic activity and financial volatility, through the channel of policy uncertainty, is non-trivial.” USD/CAD is down 75 pips from 1.2780 to 1.2705 over the past 24 hours whist the AUD/CAD cross is down from almost 0.9690 to 0.9665.
The euro had a pretty good day on Wednesday, regaining a 1.18 handle against the US Dollar and up against all the currencies we follow apart from the CAD. In our New York morning comment (OFX never sleeps!) on German politics, we noted Press reports suggesting Ms. Merkel’s team expected increasing public and political pressure on the SPD to abandon its aversion to a rerun of a "grand coalition" with the Chancellor’s Christian Democratic Union. On Monday, SPD leader Martin Schulz had said: "I will never join a government with Angela Merkel." In response, the Chancellor told ZDF television, "I do hope that they will reflect very intensely about whether they should step up and take responsibility."<br>
Opinion polls published Wednesday afternoon show why Ms. Merkel might wish to avoid a return to the ballot box: one survey showing her Conservatives on 29.2 per cent - sinking below 30 per cent for the first time since she took over in 2000 – whilst another put her Christian Democrat party and her current Bavarian coalition allies (CDU/CSU) on exactly 30 per cent, their lowest level ever. With the opposition SPD also losing support, the big gainer continues to be the right-wing AfD party. It is this fact alone which might persuade the traditional parties to re-visit Coalition negotiations; something which would surely be seen as EUR positive.
The Kiwi Dollar hasn’t had much independent direction of its own this week with an AUD/NZD rate firmly stuck around 1.1080 until Wednesday’s New York session when it finally broke 20 pips lower to 1.1060. This break and more general USD weakness saw NZD/USD pick up almost half a cent to 0.6875; its best level in almost a week.<br>
Yesterday we saw the latest official data on overseas visitor numbers to New Zealand. These always make fascinating reading. Short-term visitor arrivals, which include tourists, people visiting family and friends and people travelling for work, reached 3.7 million in the October year, up 8 per cent from a year earlier and a new annual record. Statistics New Zealand says the number of people going to New Zealand on holiday rose 8.6 per cent on an annual basis to 1.9 million people. During the past five years, annual visitor arrivals have regularly hit record highs, and have risen by more than one million, or 40 per cent, since the upward trend began in 2013.<br>
Meantime, people living in New Zealand took a record 2.83 million overseas trips in the October 2017 year, up 11 percent on the October 2016 year. If the NZD stays down at current levels, then a trip from North America will be around 3% cheaper than a year ago whilst UK tourists will find the Pound buys around 10 per cent more than it did back in November 2016.
Even before the Minutes of the last FOMC Meeting were released, the US Dollar had been under pressure; its index against a basket of currencies falling below the key technical support level at 93.30 that we have been highlighting here for the past 10 days. In our London opening commentary on Wednesday, we drew attention to Janet Yellen’s speech at NYU. She said inflation should rebound over the next year or two, although “I will say I am very uncertain about this. My colleagues and I are not certain that it is transitory, and we are monitoring inflation very closely… It may be that there is something more endemic going on or long-lasting here that we need to pay attention to.”<br>
These doubts (well-founded in our view) helped push the US Dollar lower throughout the day and were later confirmed in the FOMC Minutes. “A number of participants were worried that a decline in longer-term inflation expectations would make it more challenging for the Committee to promote a return of inflation to 2 percent over the medium term. These participants’ concerns were sharpened by the apparently weak responsiveness of inflation to resource utilisation and the low level of the neutral interest rate, and such considerations suggested that the removal of policy accommodation should be quite gradual.” The USD index has now tumbled below 93.00 to a low of 92.91 and with the Thanksgiving holiday Thursday, there’s nothing now to prevent further USD losses.
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.
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.
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.
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.
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.
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…
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