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Yellen and Powell to set tone for USD this week. AUD and NZD sidelined.

By Nick Parsons

The Aussie Dollar was pretty much out of the international spotlight last week, with no major economic data releases and little in the way of fresh insight on monetary policy. AUD/USD opened last Monday in Sydney at 0.7553 and traded down to the low 0.7530’s on Tuesday morning after the release of the Minutes of the RBA’s November Board meeting. It regained a US 76 cent handle on Wednesday and finished the week around 0.7615.

The week ahead is pretty quiet with the Australian Bureau of Statistics showcasing its expertise in social rather than economic data. Tuesday brings Marriage & Divorce numbers for 2016 whilst Wednesday is all about Ageing & Caring. The rest of G10 has already published Q3 GDP numbers but Australian doesn’t do so until December 6th. Before then, we get a look at the so-called ‘partial data’ and on Thursday this week it’s Private Capital Expenditure which will be plugged into analysts’ spreadsheets. The same day we’ll also see Building Approvals and RBA Credit numbers.

Meantime, it’s radio silence as far as RBA speakers are concerned: the next Board meeting is December 5th so there’ll be no clues about monetary policy from Central Bank officials. With the second Ashes Test not starting until Saturday in Adelaide, the big challenge now for currency traders locally will be how to fill their days…

With the AUD/NZD rate trapped in a 30 pips range either side of 1.1080, NZD/USD is basically tracking the movements of its Aussie cousin. It began last week at 0.6805, hit a low on Tuesday of 0.6794 and a high on Thursday of 0.6897 before closing at 0.6880.

The good news is that the Kiwi data calendar looks a little busier in the week ahead, but unfortunately it doesn’t really kick off until Wednesday with the publication of the RBNZ Financial Stability Report and then Acting Governor Graeme Wheeler up in front of a Parliamentary Select Committee. The main interest will likely be on the assessment of the success – or otherwise – of the so-called ‘macro prudential’ controls in the housing market and whether or not these are to be lifted any time soon.

On Thursday the ANZ business survey will be closely watched as it’s the first look at a whole fresh month of data since the new Labour-led government was formed. It will be pored over for any sign that the recent sharp fall in the NZD is impacting confidence, activity or inflation expectations. The first two days of the week look to be as quiet in New Zealand as they are across the Tasman. It would be a big surprise to see the AUD/NZD cross move sustainably outside a 1.1050-1.1110 range.

The GBP began last Monday morning around USD1.3195 but this proved to be the low of the week. It strengthened pretty much without interruption to finish up almost 2½ cents against a very weak US dollar at 1.3340. The GBP gained less than half a cent against both the Aussie and New Zealand dollars but fell against a surging EUR. The weekend Press in the UK has largely agreed that Chancellor Philip Hammond may have saved his job with the Budget and that from the very narrow perspective of avoiding immediate calamity, it was less bad than many people had feared.

For now, the focus switches firmly to Brexit negotiations. Egged on by Irish PM Leo Varadkar, the EU insists on no border between the Republic of Ireland and Northern Ireland. But if it wins this, there will have to be a border between Northern Ireland and the UK, something which the Prime Minister’s DUP Coalition partners refuse to accept. It is a tricky problem to which there is no obvious solution. Notwithstanding the bluster on the UK side of the Brexit talks, there is little incentive for the EU to concede early. On an otherwise fairly sparse UK economic data calendar, the attention on Monday will be on a speech from BoE MPC ‘dove’ Dave Marsden; one of the two members who voted against a 25bp rate hike in November.

The US Dollar had a very poor week, sliding lower before the Thanksgiving holiday then tumbling further on Friday to its lowest level since September 25th. Its Index against a basket of major currencies began last week at 93.6. By Wednesday evening it was 92.9 and after plunging through the October 11th low of 92.58 on Friday, it ended the week down at just 92.45.

Fed Chair Dr. Janet Yellen and her colleagues on the FOMC publicly revealed their doubts about whether or not the decline in inflation was indeed, transitory. “A number of participants were worried that a decline in longer-term inflation expectations would make it more challenging for the Committee to promote a return of inflation to 2 percent over the medium term. These participants’ concerns were sharpened by the apparently weak responsiveness of inflation to resource utilization and the low level of the neutral interest rate, and such considerations suggested that the removal of policy accommodation should be quite gradual.”

This week, Dr. Yellen is testifying to the Congressional Joint Economic Committee on Wednesday, whilst the Fed’s targeted measure of inflation, PCE, is released Thursday. Interest rate markets continue to fully discount a 25bp rate hike on December 14th but this is no longer enough to support the USD. Traders will be watching the Senate Banking Committee hearing on Tuesday for clues as to what next Fed Chief Jerome Powell may be thinking on inflation and monetary policy.

The Euro began last week after the breakdown of talks to form a new Coalition Government but as these were back on track on Friday, and incoming data showed a very buoyant Eurozone economy – the PMI’s were at 17-year highs – the EUR surged to be the strongest currency of all last week. It opened at USD1.1760, hit a low of 1.17715 on Tuesday morning but then soared on Friday to hit 1.1930; its best level since September 25th.

Looking ahead, we’ll likely see in currency markets a repeat of the tussle between economics and politics. Thursday brings the flash estimate of Eurozone CPI in November but before then, concerns about the strength, or otherwise, of German Chancellor’s Angela Merkel’s position are likely to dominate trader sentiment.

The immediate loser in the Coalition talks was SPD leader Martin Shulz, though his party may still be able to extract significant concessions – perhaps the Finance Ministry – as the price for its ongoing support of the CDU/CSU. “Hour zero: country without direction, unity, chancellor?” was how Der Spiegel, Germany’s leading current affairs magazine, summed up the crisis. Its rival, Stern, depicted Merkel upside down with the headline: “Free fall . . . end of the Merkel era”. It promises to be a fascinating week ahead for the Single European Currency.

The Canadian Dollar began last week boosted by oil prices and the apparent progress in ‘NAFTA 2.0’ talks but was then undermined by weakness in both wholesale and retail sales. USD/CAD fell from 1.2780 to a low of 1.2760 before ending the week at USD1.2710 with AUD/CAD at 0.9760 and NZD/CAD at 0.8725. There are two highlights on the Canadian calendar this coming week: the Bank of Canada’s Financial System Review on Tuesday and the release of the Q3 GDP figures on Friday. Economists are estimating annualized GDP growth of 1.8% in Q3, down from 4.5% in the second quarter.

Canada is unusual – indeed it is a world leader – in producing monthly GDP numbers. July was flat m/m whilst in August GDP edged down by 0.1% the first m/m drop since October 2016. In between these two big domestic events, on Wednesday we should see a Statement from the 173rd OPEC meeting in Vienna. The CAD’s reaction to oil prices has recently been quite straightforward, at least until softer economic data were published. If oil can extend last week’s gains – NYMEX Crude reached a fresh 2017 of $58.82 on Friday – then it should continue to offer some support for the CAD before the GDP numbers are released.