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A big week of news ahead

By Nick Parsons

This week is packed with events offshore and the AUD will likely spend the first half of it buffeted by what’s happening elsewhere. In the United States there’s an FOMC meeting on Wednesday and whilst investors can be confident there’ll be no change in monetary policy, the statement will be watched carefully for clues about a December rate hike. Perhaps more importantly, the White House has said that President Trump will announce his pick for the next Fed Chair before he departs for a trip to Asia on Nov 3rd. Throw the latest US employment report on Friday into the mix and there’s scope for plenty of volatility for the FX majors. Locally, there’s only second-tier economic data in the beginning of the week but Thursday brings September’s Trade Balance (consensus +$1.2bn) and Friday sees Retail Sales (+0.4% m/m). The AUD traded very heavily last week, breaking its 200 day moving average at 0.7705 and falling on to a US 76 cent handle for the first time since July 13th. With the RBA silent ahead of next Tuesday’s Board meeting and domestic politics not helping, the path of least resistance still looks lower with Friday’s 0.7627 low being a key technical support level.

The Kiwi Dollar has spent the last couple of weeks as the FX market’s whipping boy; the worst performer amongst all the major currencies with Friday’s close of USD0.6878 the lowest since mid-May. Amidst the post-electoral uncertainty, NZD/USD tumbled through its 20, 50 and 100 day moving averages and its 200dma at 0.7155 was decisively broken after the announcement of a new Labour government. ‘Jacindamania’ has clearly failed to lift currency investors’ spirits and the ‘big figure’ of US 70 cents was easily broken for the first time in almost 5 months. There’s an understandable temptation to view the currency as technically oversold at current levels but unless and until they receive more clarity about the government’s economic policy and its stance on the remit of the RBNZ, investors are unlikely to want to play the NZD from the long side anytime soon. With the AUD/NZD cross still looking well-bid above 1.10, any nascent Antipodean enthusiasm will this week likely be reflected in support for the AUD rather than its trans-Tasman cousin.

The key event this week will be the meeting of the Bank of England’s Monetary Policy Committee on Thursday. BoE Governor Mark Carney – now five years into his term of office – was memorably called an ‘unreliable boyfriend’ by the former Chairman of the influential UK Treasury Select Committee, Andrew Tyrie. This was a reference to his frequent unfulfilled promises to raise UK interest rates but then never to deliver on them. Although the macroeconomic background for post-Brexit Britain is far from encouraging, the Governor and his committee have effectively been boxed into a corner by his recent warnings about the need to raise interest rates to deal with rising inflation. His predecessor Mervyn King had been quite content to allow CPI to rise to 5.2% y/y without raising rates but Mr. Carney’s credibility risks being shot through if he doesn’t deliver on his latest threat. UK interest rate markets currently reflect a 90% probability of a 25bp hike on Thursday and though the announcement might well see a short-term blip higher, this could be very much a case of “buy the mystery, sell the history”. GBP/AUD powered more than 3 cents higher last week but with all the good news seemingly in the price, Wednesday’s high of 1.7222 will be a tough one to crack. With GBP/USD stuck below all of its main moving averages, GBP will need some positive Brexit news to capitalize on a well-discounted rate hike.

Has the US Dollar finally turned its long-awaited corner? Q3 GDP figures last Friday may have been flattered by a positive contribution from inventories but two back-to-back quarters of 3% growth effectively cemented the case for a Fed rate hike in December. With the prospects for tax reform also looking pretty favourable, it seems that the announcement of President Trump’s choice to succeed Dr Yellen at the helm of the Federal Reserve Bank will be received this week in similarly positive fashion. We shouldn’t underestimate the power of momentum in foreign exchange markets and from a position just a few months ago when many investors had thrown in the towel on the USD, suddenly the US Dollar seems to be the only game in town. Latest readings from the ISM on manufacturing and service sector activity should be at or close to cycle highs whilst October’s non-farm payrolls on Friday should see a strong rebound from last month’s hurricane distortions. Thus far, the dollar’s rally has taken it only back to the levels of mid-July and if it doesn’t dampen enthusiasm in equity markets, then neither the Fed nor the White House are likely to worry about it continuing.

ECB President Draghi will surely have permitted himself a big smile over this past weekend. For much of the past few months, the debate has been how he could communicate a scaling-back of QE without signaling a tightening of monetary policy. Last Thursday’s Press Conference gave him the opportunity to signal a “dovish taper”; a reduction in the pace of bond buying but a commitment that interest rates would not be raised until well after QE finally comes to an end. In plain English this means another 12 months without a rise in Eurozone interest rates, even as the economic recovery becomes more broadly based and the pace of activity continues to pick up. Perhaps Mr Draghi also enjoys plenty of that priceless commodity in policymaking: good luck. The constitutional crisis in Spain could not have come at a more opportune time for the ECB. Had it materialized 6-9 months ago during the period of elections in the Netherlands, Austria and France, the dominant narrative would have been a potential break-up of the EU and its institutions. Instead, the events in Catalonia have helped ease the economic impact of unwelcome exchange rate appreciation. It may well be better to be lucky than clever but Mr Draghi is blessed with being both. A period of relative calm for the EUR should now sustain Mr Draghi’s mood at least until the next Council Meeting in December.

Having surprised financial markets not once but twice with interest rate hikes, the Bank of Canada has subsequently seen a sharp deterioration in most of its main economic indicators. Indeed, the so-called “Economic Surprise Index” has plunged over the past 6 weeks to levels not seen since the fourth quarter of 2016. This may not be solely due to the power of monetary policy: Canada has also suffered from investor concerns about a potential renegotiation of NAFTA whilst there has been a high-profile attempt to curb overseas purchases of property through substantially higher taxes. Whatever the case, the period of outperformance which the Canadian Dollar enjoyed from May to September is now decisively over and USD/CAD has snapped back almost 7 cents higher onto a 1.28 handle. The bounce in AUD/CAD has obviously been less dramatic but at 0.9835 it is almost 130 pips above its October 13th low. Stuck now between its 50 and 100 day moving averages (0.9804 and 0.9870 respectively) it’s very much a case of which currency investors now dislike least. Near-term there are few compelling arguments either way, though for choice we might see a gradual grind higher as stale long CAD positions continue to be liquidated. There are more interesting opportunities elsewhere in FX.