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NZD surges after new RBNZ Governor announced. USD steady, GBP lower after more Brexit confusion, AUD awaits NAB Survey

By Nick Parsons

The Australian Dollar had a decent day on Monday in the Northern Hemisphere. Having stabilised in the low 75’s against the US Dollar Friday afternoon, it traded better right from the off and once it broke through Friday’s 0.7528 high, an improving technical picture helped lift the pair up to a best level in New York of 0.7542.

Though it is in technically somewhat better shape, the Aussie still needs some better fundamental news if it is to build on yesterday’s gains. With the Reserve Bank of Australia clearly in no rush whatsoever to tighten monetary policy (and now not having another Board meeting for almost two months), the incoming economic data in Australia have been disappointing recently. Last week saw GDP and trade data fall shy of analysts’ expectations whilst the previous week saw softness in consumer confidence, wages and house prices.

This morning brings the widely watched NAB Business Survey. In October, Business Conditions jumped fully 7 points to +21; the highest level since the Survey began almost 20 years ago. The puzzle a month ago was that Business Confidence was unchanged at +8; only barely above its long-term average. The way in which this divergence is unwound will hold the key to the Aussie Dollar’s immediate future: will conditions ease or confidence jump?

England cricket fans travelling to the WACA in Perth for the third Ashes Test would have done well (and certainly better than their team…) if they’d converted their GBP into AUD last Friday morning. At that point, GBP/AUD was trading at 1.7990 compared to just 1.7720 at last night’s London close. It won’t make a huge difference to the price of those consolation beers but every little helps in a crisis!

For today, AUD/USD opens in in Sydney around 0.7530. The two notable technical levels to watch are the 20-day moving average at 0.7577 then last Tuesday’s RBA high of 0.7650.

After a very choppy week, the volatility of the NZD continued on Monday and it was way out at the top of the FX pile; up against every major currency. This time at least, after the frustrations of last week, there was some genuine news to explain the move: the appointment of a new Governor of the RBNZ. Finance Minister Grant Robertson announced Adrian Orr – a well-respected and highly experienced professional economist, former head of financial stability at the RBNZ and currently head of the NZ Superannuation Fund - will take up the post in the New Year.

The new Labour-led government in New Zealand wants to add full employment to the bank’s inflation-fighting mandate and change its governance structure, including the appointment of outside experts to its policy committee. The appointment of a classically-trained insider to be the new Governor will help calm investor fears about a too-radical shift of direction which have weighed on the NZD since the election on September 23rd.

Monday’s price action for the Kiwi Dollar was little short of spectacular: NZD/EUR rallied 55 pips, NZD/USD was up 80 pips, NZD/CAD rose 100 whilst GBP/NZD plunged more than 2 ½ cents. The NZD opens in Asia this morning at USD0.6915 with GBP/NZD down 5 cents from last Thursday’s high at 1.9290.

As we had suspected it might, the British Pound had a poor day on Monday falling against all the major currencies we track here.

Over the weekend, the Minister for Exiting the European Union, David Davis, had described the Irish border agreement as a “statement of intent” which was not legally enforceable, suggesting that the government could walk away from the deal. He also said that Britain would not pay a divorce bill without securing a trade deal with the EU in return; in contrast to the chancellor who said last week it was “inconceivable” that Britain would fail to honour its international obligations. Mr. Davis said of the bill, “It is conditional on getting an implementation period. Conditional on a trade outcome. No deal means that we won’t be paying the money.”

Investors are struggling to know what weight to ascribe to policy announcements which seem to be made up, announced, then quickly rescinded. Indeed, only yesterday morning, the Brexit Secretary was forced to issue ‘clarification’ of his comments; none of which left observers any wiser but reinforced the notion of a policy vacuum at the heart of Government. As the week progresses, there’s a busier economic data calendar than we’ve seen recently. Average earnings and retail sales are all due before Thursday’s BoE MPC meeting whilst today brings the November CPI figures. If consensus expectations of an annual inflation rate of 3.0% prove correct, the Governor of the Bank of England will narrowly avoid having to write a letter of explanation to the Chancellor. If it is above 3% (and our own back of the envelope projections suggest higher petrol prices might outweigh Black Friday discounting) then the UK Press will also be full of stories about a worsening squeeze on real incomes.

After Monday’s slide, the GBP opens in Asia this morning at USD1.3345 with GBP/AUD at 1.7720.

After last week’s 5-day winning streak, the USD gave back some of its gains on Monday. This was largely because a 20 pip rise in the EUR/USD exchange rate outweighed a 20 pip fall in GBP/USD. If we look in detail at the US Dollar’s narrow trade-weighted index against a basket of currencies, the EUR has a 57% weight. The Japanese Yen has a 14% weight, GBP 12%, CAD 9%, with the Swedish Krone and Swiss Franc both at 4%.

The Fed begins its two-day FOMC meeting today and it is a near-certainty that rates will be raised 25bp. First up on this week’s US economic data calendar was the so-called “JOLTS” report out yesterday; the Job Opening and Labour Turnover Survey. This is often said to be one of Fed Chair Janet Yellen’s favourite indicators of labour market activity though it hasn’t gotten much traction with currency or interest rate analysts. For the record, the total number of job openings dropped from 6.177m to 5.996m, well below the 6.135m estimate; the biggest monthly drop and the lowest job openings number since May.

The NFIB Survey of small business optimism comes later today, CPI is released Wednesday, Thursday brings retail sales and Friday is industrial production. If the stock market can withstand higher rates and a new set of interest rate projections for 2018 (the S+P 500 index managed another 5-point gain yesterday), the US Dollar ought to find some support though we wouldn’t rule out a move down to 93.00 in the meantime.

The euro’s low last week came right at the open of North American trade on Friday morning when it hit USD1.1735 before rallying 40 pips or so into the New York close at USD1.1775. On Monday in the Northern Hemisphere it extended gains up to 1.1801 but couldn’t sustain a 1.18 big figure to the end of the day, finishing at USD1.1790 and AUD/EUR0.6390.

There was some talk at the weekend that the euro’s poor performance might have been linked to the European banking sectors’ seasonal demand for USD financing ahead of year-end; a phenomenon which has seen the cross-currency basis swap move sharply lower (USD more expensive to borrow) in each of the last two calendar years and which seems to be repeating again in 2017. The very last working day of 2016 proved to be especially painful for many international bank funding desks and there may be a willingness to pay up early for year-end money rather than suffer the extreme and very expensive volatility of end-Dec 2016. If this explains last week’s EUR weakness, however, it still doesn’t solve the puzzle of why the EUR rallied on Monday. It certainly wasn’t due to any incoming Eurozone news.

Over the next few days, there’s an ECB Council Meeting at lunchtime on Thursday at which new staff economic projections will be unveiled. Before that, today its Germany’s ZEW survey of professional investors and we’ll get the ‘flash’ December PMI’s on Thursday morning. On Wednesday, European Commission President Juncker and European Council President Tusk are scheduled to brief members of the European Parliament about Brexit negotiations ahead of the EU Economic Summit in Brussels on Friday.

The Canadian Dollar was pretty much sidelined throughout Monday, after a week in which it reversed all its prior strength after the really good employment report on the very first day of the month. Last Tuesday morning it reached a best level of USD1.2644 as investors anticipated the possibility of a hawkish surprise from Wednesday’s Bank of Canada policy meeting. This did not materialize. Instead, BoC noted that, “While higher interest rates will likely be required over time, the Governing Council will continue to be cautious, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation”.

USD/CAD jumped up to 1.2800 almost immediately and by the New York close on Friday it was up at 1.2850; pretty much exactly where it was just before the jobless report. For the whole of the last 24 hours, USD/CAD has been trapped in a very narrow 30 pip range from 1.2834 to 1.2864 even though crude oil rallied more than half a cent during the New York session to take MYMEX up from $57.20 to $57.86.

The week ahead is pretty light in terms of economic data with just new house prices on Thursday and the monthly survey of manufacturing on Friday. Bank of Governor Stephen Poloz has a fascinatingly titled speech “Issues keeping me awake at night” on Thursday lunchtime in Toronto.