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NZD tumbles, AUD edges lower, GBP still bid on Brexit news but can it last?

By Nick Parsons

The very last day of the month of November saw the Aussie Dollar go up and down, but not necessarily in that order, and without any particular fresh sense of direction. It reversed direction at least four times over the past 24 hours and opens in Sydney this fine December morning almost exactly where it was this time yesterday around USD0.7570.

At no point over the intervening period has it been back on a US 76 cents handle, with a high of 0.7593 and a low of 0.7569. Overall, this must be considered a pretty disappointing performance as the US Dollar itself fell against both the GBP and EUR. Against that backdrop, it requires few mathematical skills to work out that the AUD is down against both these currencies with GBP/AUD now on a 1.78 big figure for the first time since June 2016.

One notable – and somewhat worrisome – feature of the session, was the lack of support the AUD received from a pretty decent set of economic data. There was little to find fault with in the Q3 Capex numbers which confirmed the RBA’s view in the November Minutes that it saw a pick-up in non-mining investment. It’s a pretty good trading maxim that, “a currency that doesn’t go up on good news is a currency that isn’t going up”. Today gives us a chance to test that adage with the release of Australia’s two competing purchasing managers’ indices early this morning. November was a very poor month for the AUD; will the last month of the year be any better?

The Kiwi Dollar has gone from hero to zero. Monday’s technically-driven squeeze higher against all the major currencies has been fully reversed by incoming fundamental news. On Thursday the NZD was by some margin the worst performer of all the major currencies we follow here. The culprit was a very weak ANZ business outlook report which showed New Zealand business confidence has tumbled to its weakest since the global financial crisis amid uncertainty over the policies of a new center-left government. A net 39.3 percent of firms expected the economy to deteriorate in the next 12 months; down from 10.1 percent in October and the lowest reading since March 2009.

A separate gauge of expectations for their own activity also fell to an eight-year low and it appears that political uncertainty and a slowing housing market are hurting investment and consumption and threatening to curb economic growth. This incoming data is at odds with the OECD’s very upbeat assessment of the NZ economy in Wednesday’s semi-annual report but it has certainly taken the wind out of the Kiwi Dollar’s sails. NZD/USD ended November at USD0.6840 with AUD/NZD at 1.1065; a frustrating and perhaps expensive month for those who have sought to pick the bottom of the Kiwi’s 10-week decline.

The pound has continued its remarkable run higher which has seen it rise almost 4 cents against the US Dollar and 6 cents against the Aussie Dollar in the space of less than three weeks. In our overnight commentaries for clients in the UK and North America, we made the observation that, “For the moment, the GBP seems only to want to hear good news, but with September’s highs for USD/GBP within touching distance, it may soon be time to question whether the recent strong rally has gone far enough”. This morning we’d repeat that comment for our Aussie and Kiwi audience.

The great currency investor/speculator George Soros (like him or loathe him) coined the term “reflexivity” whereby price action itself determines the way that incoming news is viewed. If the market is falling, traders look for the bad news. In a rising market, all news is good. We’re tempted to wonder whether the GBP is currently a good example of this phenomenon? A combination of a Eurosceptic Conservative rebellion over a £50bn Brexit divorce bill and an Ulster Unionist Party who will not accept a hard border with England and Scotland certainly has the potential to halt and reverse the recent exuberance for the British Pound. If the DUP don’t like what’s being proposed, the Coalition Government will fail: the DUP exists only to protect the Union. The clue is in its’ name. For the moment, of course, the FX market is not in the business of ascribing nuanced probabilities. The pound is going up so the news is good. Let’s see if the exuberant mood lasts through December…

At the beginning of November, the Dollar’s index against a basket of major currencies stood around 94.3. It has since been as high as 94.8 on November 7th with a low of 92.2 on Monday 27th; a relatively narrow range of just over two points before finishing around 92.70. Four weeks ago, the Dollar was being driven higher by hopes of tax cuts, a Budget boost to infrastructure investment and a stock market which stood at an all-time high. Here we are today, with the Budget still not passed but equity markets which are even higher still; the S+P 500 has added 75 points in the space of just over 20 trading days. Interest rate expectations have barely shifted over this period. A 25bp rate hike on December 14th still looks a done deal barring any external shock, whilst incoming Fed Chair Jerome Powell seems unlikely to deviate from the monetary policy path set out by his predecessor.

What has changed a little is the economic and political outlook elsewhere in the world. The UK seems to have made some progress with Brexit negotiations whilst the European economy is growing at its fastest pace in almost 20 years. As all currencies are relative prices, the adjustment to this incoming news flow has made the GBP and EUR a little more attractive than they previously were. We’d characterise the US Dollar as “down but not out”. Plenty could still happen in December to change that view.

Sometimes foreign exchange can be a very frustrating asset class – how many times recently have we seen a move become established, gain traction and then reverse as quickly as it developed? The EUR is a very good example of this. On Wednesday it rose due to higher German CPI. On Thursday morning European time it fell due to softer Eurozone CPI (driven largely by Italy) and just as it seemed likely to test the recent range low around USD1.1825, it promptly surged almost a full cent before ending the month at 1.1900; a net gain of around 250 pips from Halloween’s USD1.1650 close.

Over the last 4½ weeks since “Trick or Treat”, AUD/EUR has tumbled from 0.6580 to 0.6355, whilst NZD/EUR is down from 0.5925 to 0.5740. The new month begins, unusually, without US payrolls on the first Friday. The US national holiday for Thanksgiving on November 23rd has delayed publication of the US employment report until December 8th so the main data focus for the EUR/USD pair today will be final Eurozone PMI data. Spoiler alert: the ‘flash’ estimates showed manufacturing growth at a 17-year high. Beyond that data release, currency traders will have eyes firmly on the weekend. Foreign exchange is supposed to be a ‘zero sum game’. Sometimes, though, it just feels there are more losers than winners. For EUR/USD, this was one of those weeks…

We’ve said all week the Canadian Dollar would be driven by oil prices and news from the OPEC meeting. That’s pretty much how it panned out. In talks which seemed to go on until the last minute, both OPEC and non-OPEC producers led by Russia agreed on Thursday to extend oil output cuts until the end of 2018 as they try to finish clearing a global glut of crude while signaling a possible early exit from the deal if the market overheats. Kuwaiti Oil Minister Essam al-Marzouq told reporters the Organization of the Petroleum Exporting Countries and non-OPEC allies had agreed to extend the cuts by nine months until the end of 2018, as largely anticipated by the market. OPEC also decided to cap the combined output of Nigeria and Libya at 2017 levels below 2.8 million bpd. Both countries have been exempt from cuts due to unrest and lower-than-normal production. That’s the deal but traders were distinctly unimpressed. NYMEX crude fell from a European high of $57.92 to a low of $57.05 before settling at $57.30 whilst USD/CAD jumped to a 5-month high of 1.2905. Thankfully for those driven to tears by the sheer tedium of following OPEC and a near 1:1 correlation with the currency, the focus now shifts to Canadian economic data with Q3 GDP and the October employment reports released later today.