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“Commonwealth currencies” all stronger overnight

By Nick Parsons

There are 11 RBA Board meetings each year. Very sensibly, it takes January off, considering that people would rather be at the beach or away on vacation than be disturbed by such matters as the cost of borrowing and mortgage rates. As well as the 11 monthly Statements which essentially summarise the Board’s immediate decision on one sheet of paper, there are four Quarterly Statements of Monetary Policy (the clue is in the name!) which explain in detail the numbers and assumptions which underpin its immediate interest rate decision as well as offering a medium-term view on the economic conjecture.

By tradition, the Board meeting is on the first Tuesday of the month with the SoMP on the Friday of the same week. After its’ warning that, “The higher exchange rate is expected to contribute to continued subdued price pressures in the economy… and is also weighing on the outlook for output and employment”, the market spent most of Tuesday selling the Australian Dollar.

For no particularly obvious reason, it then spent most of Wednesday buying them back and at one stage reached a high of 0.7682 before closing in NY around 0.7672. For currency traders, it threatens to be a long wait until Friday…

Just as the Aussie Dollar rose without any obvious catalyst through the European and North American sessions overnight, so too did the New Zealand Dollar. It would be a pleasure to report some insight into this price action, some hitherto unnoticed piece of news, but sadly it is just one of those occasions when we have to note what happened without fully being able to explain why. If there was a large-scale re-allocation of investment flows or a significant corporate deal to be executed, the new era of regulation in wholesale foreign exchange markets simply forbids any discussion of it.

Indeed, it can frequently be the case that close colleagues on a major bank FX desk may have little or no knowledge of each other’s customer flows. There are obvious advantages in terms of client confidentiality, but it does mean that answering the question “why did the rate move?” is nowadays infinitely more difficult. If there are any Latin scholars amongst our readers, they may be familiar with the phrase “post hoc ergo propter hoc”. In plain English, this means “after this, therefore because of it” and it is a trap into which financial journalists often fall when attempting to ascribe causality when in fact it was just coincidence.

The honest truth is that sometimes we just don’t – and can’t – know what moved an exchange rate. Your author is never afraid to hold his hand up and admit this; hoping to be rewarded for honesty, if not for insight! What we do know is the price action: NZD/USD has virtually tracked AUD/NZD tick for tick and the cross rate at 1.1089 is less than 10 pips away from where it closed last night. Let’s hope the RBNZ meeting today brings more obvious catalysts for market movement.

The British Pound continues to react nervously to the very fragile political situation in the UK and is by some distance the worst performing of all the major currencies overnight. Fortunately for Prime Minister Theresa May, the UK Parliament has just risen for a week’s holiday and she avoided the danger of once again coming off second-best to Opposition Leader Jeremy Corbyn in the weekly pantomime that is Prime Ministers’ Questions.

Unfortunately, having suffered the resignation of her Defence Secretary last week, Press reports throughout the London day suggest the International Development Secretary might now be forced out after revelations about unauthorized meetings whilst on holiday in Israel. As Oscar Wilde might have put it, to lose one Minister looks unfortunate, but to lose two begins to look like carelessness...

We wrote in our overnight commentaries for London and New York (OFX never sleeps!) that “the path of least resistance for GBP still appears to be to the downside” and this is exactly how it turned out. GBP/USD touched a low of 1.3091 after a high in Sydney yesterday of 1.3174. GBP/AUD, meantime is down 143 pips at 1.7075 whilst GBP/NZD is 142 pips lower at 1.8934.

The day ahead for GBP will again be dominated by UK politics and the upcoming economic data – house prices and industrial production – are unlikely to offer much respite for the beleaguered pound.

Air Force One touched down in Beijing on Wednesday to begin the third leg of President Trump’s five-nation Asia trip. In a reciprocal gesture for hosting Premier Xi at his Mar a Lago estate in Florida earlier this year, the two leaders and their wives enjoyed an opera performance and a tour of the Forbidden City.

Your author first experienced this almost 20 years ago; a wonderful memory from back in the days when a Global FX Strategist actually got to see the world he wrote about. With the serious business part of Mr. Trump’s trip not until Thursday, the US Dollar index remains stuck in its now-familiar 94.40-94.85 range.

It opened in London yesterday almost exactly in the middle of this band at 94.62 and simply didn’t move in North America before closing at 94.59. Of all the tools available to a current strategist or technical analyst, the most useful for analyzing the US Dollar’s movements over the last 18 hours would have been a magnifying glass. A December Fed rate hike still appears very much a done deal and it would take either a huge external shock or a sudden sharp decline in the stock market to make investors rethink their views. Keep an eye on tax reform progress back home, as well as the President’s Asia trip and his Twitter feed for near-term clues on the USD.

Just when you thought it couldn’t get any quieter, the EUR/USD exchange rate has spent the past 24 hours trapped in a 22 pip range from 1.1586 to 1.1608 and opens in Sydney this morning at 1.1598. The technical picture continues to exert some downward pressure on the currency pair. It is now below its 20 day moving average of 1.1688, the 50 day average of 1.1782 and the 100 day measure at 1.1787.

In another bearish chart development, the 50 day average has also crossed down through the 100 day one. In the very big picture, we should look to the much slower 200 day average for support but unfortunately this does not come into play until we get all the way down to 1.1410.

The ECB’s Sabine Lautenschlaeger on Tuesday said, “I would have liked to see a clear exit [from QE]” and on Thursday in Europe it is the turn of Bundesbank President Jens Weidmann to speak. Analysts will again be looking for any differences of opinion between him and ECB Chief Mario Draghi. For the day ahead, there’s little in terms of Eurozone economic data (unless Lithuanian CPI and the Estonian trade balance really excite you) though at 10am GMT the European Commission will be releasing updated economic forecasts.

The Canadian Dollar enjoyed another good day on Wednesday, falling to a low against the USD of 1.2724 compared to a high the previous day of 1.2797. It was helped in this by much better than expected numbers on housing starts which rose at an annualized pace of 222.8k against the consensus expectation of 211k and by building permits which rose 3.8% m/m versus forecasts of a more modest 1.0% m/m gain. This helped the CAD keep pace with gains in the Aussie and Kiwi Dollars to end the New York session at AUD/CAD0.9770 and NZD/CAD0.8837 respectively.

Oil prices were little changed on the day with NYMEX crude at $56.79 per barrel and natural gas futures around three-tenths of a percent higher. The day ahead is quiet in terms of scheduled economic data with only new house prices to be released and it would be a surprise indeed if the CAD was the stand-out performer in either direction over the next 24 hours.