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EUR jumps on stunning PMI surveys, AUD & NZD gain against GBP and USD

By Nick Parsons

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.

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!

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.

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.

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.

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…

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.

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 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.

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.

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.

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.