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AUD and NZD surge against GBP

By Nick Parsons

Courtesy of a generally weaker USD and yesterday’s better than expected September trade surplus, the AUD has clawed its way back on to a 77 cent big figure against the USD. Indeed, in the New York morning it managed to climb as high as 0.7727; its best level in over 10 days. The big story, though (which we write on in more detail in the British Pound section) is the collapse of the GBP/AUD exchange rate. As recently as Halloween when the kids and adult children were out playing ‘trick or treat’, GBP/AUD stood at 1.7350; its highest level since the beginning of June. We warned at the beginning of this week that a UK rate hike appeared fully discounted and that the tone of the Press Conference would be far more important than the 25bp increase itself. This proved a very good call as GBP/AUD collapsed from 1.7180 to 1.6907 during the London afternoon to fully reverse all the gains of the past 10 days. The AUD focus this morning shifts to more domestic matters as the September retail sales numbers are published. August saw a very disappointing -0.6% m/m decline and expectations generally are for a decent rebound to something like +0.5% m/m in September. Even if consensus is correct, the quarterly retail sales volume number which feeds into GDP estimates is likely to be a pretty uninspiring +0.1% q/q. On a day which later is likely to bring a very punchy US labour market report, the AUD might struggle to hold on to US 77 cents.

In New Zealand it sometimes feels impossible to have a conversation which doesn’t at some point involve house prices. They are amongst the most expensive in the world, with eye-watering prices being paid for very modest properties in the main cities. The average house price in Auckland has risen 90% in the last 10 years to more than one million NZ dollars whilst the average price nationally has risen 56% to $647,000. Latest figures out yesterday from property research agency Quotable Value suggest that the boom might finally be over, at least in the country’s largest city. Prices in the Auckland region fell 0.6% from a year ago; the first annual decline in 6 years whilst the nationwide growth rate has slowed to a 5-year low of 3.9% y/y. The incoming Labour government has already pledged to ban foreign purchases of property and to build 100,000 new homes, whilst also changing the tax code which makes residential property such an attractive investment. Who knows, perhaps there’ll be some different – or at least more interesting - property conversations in future? As for the New Zealand Dollar, it matched the AUD tick-for-tick overnight in London and NY to leave the AUD/NZD cross unchanged at 1.1150. There doesn’t seem much enthusiasm to push it off a 1.11 big figure but the deciding factor will be the Aussie economic numbers rather than any fresh local news.

If we might be permitted a modest pat on the back, we wrote earlier in the week that 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”. Yesterday morning we warned that if the Governor in his Press Conference errs on the side of “one and done” and emphasizes a slow and gradual pace of future tightening, the pound could slip back further… Perhaps the least likely outturn is that the pound ends the day unchanged: it could be quite a volatile 24 hours ahead. Don’t say you weren’t warned!! From this time yesterday, both GBP/AUD and GBP/NZD are down more than 300 pips; fully three cents lower on both rates. Our readers in Australia and New Zealand might well be scratching their heads at all this so let’s try and briefly summarise. The BoE has a 1-3% target for CPI and, with the fall in the exchange rate since the Brexit vote in June 2016, import prices have risen sharply pushing CPI to the top of its target band. Though his predecessor had been content to see CPI rise to 5.2% without raising rates, Governor Carney has warned so often of a rate hike - but not actually delivered one - that his own credibility was on the line. So, even though real wages in the UK are falling and there has been a very poor run of retail sales figures, the rate hike duly came with a 7-2 split vote on the MPC. But, in the accompanying Quarterly Inflation Report, the BoE dropped its references to rates having to rise in future more than the market currently expects. It was, to coin a phrase often used to describe the Fed, “a dovish hike”. By the end of the day, the futures market had priced out one of the 2018 hikes, 10-year bond yields fell 10bp and the currency had fallen 2%. The Governor may have felt compelled to raise rates to boost credibility but that doesn’t seem to have worked very well so far…

With the guessing game over the identity of the new Fed chief now done, attention switches to the far more difficult issue of the President’s much-heralded tax reform. This formed a central plank of his campaign pledge to “Make America Great Again” but was delayed so much that the hopes of USD bulls were consistently dashed through the first 10 months of his term of office. From November 9th to the beginning of January, the USD Index surged from 96.6 to 103.3 on hopes for a substantial fiscal boost, faster economic growth and much tighter monetary policy. None of this materialized. The Fed is still “measured and gradual”, GDP growth will be in the 2-3% range in 2017 and tax reform hasn’t yet happened. By late September, the USD Index had slid to just 90.9. A subsequent attempt to kickstart the fiscal agenda once again raised hopes and the index is now up at 94.4. This is where the real test now comes as the Republican Party releases details of its tax cut plan. These show the 20% corporate tax cut as permanent, and claim that a family of four earning $59,000 will get a $1,182 tax cut. However, the bill also includes the repeal of an itemized deduction for medical expenses, and limits the home mortgage interest deduction. For new home purchases, interest would be deductible only on loans up to $500,000, down from $1 million. The bottom line for currency markets is that the 429-page “Tax Cuts and Jobs Act” still has no guarantee of passing any time soon. Keep a close eye on the politicians for it is they, not the Central Bankers, who are now crucial to the US Dollar outlook.

We know that Eurozone growth ended Q3 on a high note and numbers released yesterday showed the positive momentum carried over into Q4. For the Eurozone as a whole, the final IHS Markit Eurozone Manufacturing PMI rose to an 80-month high of 58.5 in October, up from 58.1 in September. Growth of both output and new orders remained elevated, while the pace of job creation accelerated to a survey-record high. Markit noted that, “the upturn was again led by a strong-performing core of Germany, the Netherlands and Austria. PMI readings were unchanged in Germany and Austria, while the Netherlands PMI rose to its highest level since February 2011. The expansions in Italy (80-month record) and Spain (29-month high) both accelerated, while the France PMI held steady at September’s 77-month high. Growth was also recorded in Ireland and Greece, meaning all of the nations covered registered expansions for the fifth straight month”. EUR/USD still remains stuck on a 1.16 big figure despite these very encouraging PMI numbers whilst AUD/EUR appears nailed on to 66 cents and NZD/EUR is steady on 59 cents.

Everyone knows that the first Friday of the month is when US non-farm payrolls are nearly always released. What tends to get overlooked is that Canada often releases its own labour market report at the same time. Statistics Canada reported last month that Employment was essentially unchanged in September (+10,000 or +0.1%) and the unemployment rate remained at 6.2%, matching the low of October 2008. In the 12 months to September, employment rose by 320,000 (+1.8%), and the number of hours worked increased by 2.4%. However, after two surprise rate hikes from BoC and a sharp slowdown already underway in GDP, we should note that the trends in employment are also slowing down. Overall employment grew by only 0.2% in the third quarter, slower than the 0.6% growth rate in the second quarter and the 0.5% growth rate of the first quarter of 2017. Consensus looks for an increase of 15,000 in employment today but if there’s any disappointment, then the CAD’s gains of the last 48 hours against the USD might be difficult to sustain. For now, USD/CAD is at 1.2809 after printing 1.29 just after GDP whilst AUD/CAD at 0.9883 after a high on Wednesday of 0.9913. NZD/CAD stands at 0.8858 after reaching a high earlier this week of 0.8928.