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AUD ends Wednesday at the day’s lows, GBP still hit by Brexit worries, CAD falls after BoC meeting

By Nick Parsons

The Aussie Dollar had a bad day on Wednesday and is now almost a full cent lower against the US Dollar than Tuesday’s best level of 0.7650. Worse than expected Q3 GDP figures immediately knocked the pair from 0.7607 down to 0.7580 and after stabilizing during the European morning (without ever managing to get back on to a US 76 cents big figure) the AUS was hit for a further 30 pips in the New York session.

Most analysts’ forecasts had pinned Q3 GDP growth around 0.7-0.8% q/q so the headline gain of just 0.6% was a clear miss. The annual rate of growth had been expected at 3.0% but printed only at 2.8%. The main culprit was the household expenditure category which struggled to grow at all and rose just 0.1% q/q. This weakness is due to a combination of very soft earnings growth and some nervousness over personal finances and the residential property market. A deeper dive into the GDP figures shows that the savings rate increased from 3.0% to 3.2%; the first increase since Q2 2016.

This morning locally, we’ll get the Performance of Construction index and the October trade balance but sentiment internationally towards the AUD is pretty negative and it still seems easier to knock it down than to push it higher. By close of business Wednesday, the Aussie had fallen against everything except a very weak Canadian Dollar. USD0.7540 is now the very important technical support level to watch.

‘Turnaround Tuesday’ for the Kiwi Dollar didn’t quite morph into Wonderful Wednesday though there was some very good price action against both the Aussie and Canadian Dollars and the British Pound. Just 36 hours ago, AUD/NZD was trading at 1.11 but it spent a fair amount of time yesterday at 1.09 after the disappointing Australian GDP numbers.

Locally in New Zealand on Wednesday we saw the ANZ job vacancy numbers inch down 0.1% in November from the previous month. Despite this slip – which was the first drop in four months - job ads remain near historic highs as the country experiences a skilled labour shortage. Annual job ads growth in Canterbury and Wellington eased to 6% and 8% respectively while Auckland is slowly heading towards a broadly flat outturn.

Separate numbers released yesterday from Stats NZ (the snappily titled official statisticians) showed Building activity in the Wellington region has grown strongly over the past year. The value of activity rose 27 percent on the previous September year – the largest annual increase ever recorded for Wellington. In the year ended September 2017, the value of building work put in place in the region totalled $1.7 billion (up $0.4 billion), almost tripling the growth rate seen in 2015. Though the NZD lost ground steadily from its overnight best level of USD0.6913, it ended the New York session little changed from this time yesterday at 0.6873, with the AUD/NZD cross down at 1.1000.

The British Pound’s volatility continues so for our Antipodean clients, let’s try to summarise the situation as it currently stands. UK Prime Minister Theresa May leads a minority government which has entered into a formal Coalition with Northern Ireland’s Democratic Unionist Party in order to get the 326 seats it needs for a majority in the House of Commons. Before Brexit negotiations can move to a second phase after an EU Leaders’ Summit on December 14, the UK and EU must agree on a customs arrangement, the size of the divorce bill and the rights of EU nationals living in Britain. The last two of these appear settled.

However, the question of the Irish border is fiendishly complicated, due to the historical troubles between Northern Ireland and the Republic. The Dublin Government insists on an open border with complete freedom of movement and no physical controls. The UK agrees with this in principle but there will still have to be a border somewhere in the UK. The DUP is implacably opposed to anything which it sees a dilution of the territorial integrity and rights of the United Kingdom. It will not accept a border with mainland Britain. That is its’ whole reason for existence as a political party in Northern Ireland.

With the clock ticking down, either something has to give or the Brexit talks could collapse, bringing the UK Government down with it. We said in our London comment yesterday morning that from its opening level of USD1.3425, the GBP could move as much as 3-4% in either direction depending on whether there’s movement to a transition Brexit deal or the collapse of the Coalition Government and a fresh General Election. So far, GBP has moved 0.5% lower and opens in Sydney today at USD1.3370 and AUD1.7675.

The USD Dollar rose for a second consecutive day on Wednesday. Its’ index against a basket of major currencies opened around 93.00 and having slipped to 92.85 on worries about the stock market, it then had a steady and pretty much uninterrupted rise to a best level of 93.30 before closing in New York around 93.25 as stocks found some support.

The USD at the moment seems unusually well-correlated to movements in equity markets both at home and abroad. The average daily move on the S+P 500 for the last three months has been barely 0.2% either way so although Tuesday’s 0.4% drop was not large by historical standards it was poor in the context of the last three months’ price action. To put this into perspective, the S+P 500 index on average has fallen by at least 5% on three or four occasions every year over the past decade. It hasn’t now done so at all during 2017.

But, before jumping to the conclusion that a decent correction must now be imminent, note that December has not been the weakest month of any year going all the way back to 1928. It’s not just US equity markets which are under the spotlight at the moment: Asia’s equivalent of America’s FANG stocks, the so-called TATS (Taiwan Semi, Alibaba, Tencent and Samsung) have been down for 7 consecutive days with a cumulative drop over 10%. Keep a close eye on equities globally as the outlook for stocks (and bonds) is an important element of the investment case for the US Dollar. Technical support on the USD index at 92.5 then last Monday’s low of 92.2 are the key levels to watch.

The euro had another poor day on Wednesday losing around 60 pips from its best level in Sydney of USD1.1844 to trade down to a 2-week low of 1.1781 with AUD/EUR at 0.6412. The drop came despite figures showing German factory orders climbed in October for the third month in a row, confounding expectations of a decline.

Factory orders increased 0.5% in October from the previous month, according to the Federal Statistics Office. September’s gain was also revised higher to 1.2% m/m from a previous reading of 1.0%. Details of the report showed orders from companies within Germany increased 0.4%, while international orders were up 0.5%. The international component was led by firms outside of the eurozone, where orders increased 1.6%.

Clearly, there’s still plenty of demand for the very high-quality consumer goods, autos and machinery for which Germany is so deservedly famous. Elsewhere in Wednesday’s batch of data releases, Eurozone Retail PMI improved to 52.4 points in November, its highest level since June. The problem for the EUR continues to be that whilst the economic news is almost without exception positive, it is well known and already ‘in the price’. Traders are reluctant either to sell dips or to buy into the rallies so we’re left in a familiar USD1.1750-1.1930 range unless and until some genuine ‘news’ hits the screens.

The Canadian Dollar’s strong run came to an abrupt end on Wednesday after the Bank of Canada’s final monetary policy meeting of the year. Its review of incoming economic data noted they were, “in line with October’s outlook, which was for growth to moderate while remaining above potential in the second half of 2017. Employment growth has been very strong and wages have shown some improvement, supporting robust consumer spending in the third quarter. Business investment continued to contribute to growth after a strong first half, and public infrastructure spending is becoming more evident in the data. Following exceptionally strong growth earlier in 2017, exports declined by more than was expected in the third quarter.

However, the latest trade data support the MPR projection that export growth will resume as foreign demand strengthens. Housing has continued to moderate, as expected”. There was nothing too troubling in that assessment. Instead, the CAD was hit by the line that, “While higher interest rates will likely be required over time, the Governing Council will continue to be cautious, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation”.

After its recent strong run and with traders positioned for a hawkish BoC surprise, the CAD fell sharply. USD/CAD rose from 1.2665 to nearly 1.2800 whilst AUD/CAD and NZD/CAD rose 25 and 70 pips respectively. The Canadian Dollar opens in the APAC time zone this morning at USD1.2795 and AUD/CAD0.9675.