Home Daily Commentaries USD steadies, GBP wobbles, AUD sleeps

USD steadies, GBP wobbles, AUD sleeps

Daily Currency Update

We’ll try our best to avoid references to Groundhog Day this morning but the fact remains that the Aussie Dollar is stuck within some very familiar ranges. It will be no surprise to read that throughout the Northern Hemisphere trading sessions it remained on a US 76 cent big figure. Indeed, just 46 pips separated its highs and lows of 0.7619 and 0.7665 respectively.

We highlighted here yesterday that RBA Deputy Governor Guy Debelle was scheduled to give a speech on business investment. Mr. Debelle is always a fascinating speaker and foreign exchange professionals worldwide will be familiar with his work as the lead on the FX Global Code. He describes this as, “global principles of good practice in the FX market to provide a common set of guidance to the market, including in areas where there is a degree of uncertainty about what sort of practices are acceptable, and what are not”. It is effectively the new global FX rulebook and is well worth reading over a couple of flat whites.

Yesterday’s speech, however, was more about business sector activity and what it may mean for monetary policy and his plain speaking is always a refreshing antidote to the usual global Central Bank dullness. As he put it, “Are we just going to jack up rates to see how the household sector lives with that? I don’t think so.”

As we await and then pore over all this week’s incoming economic data and scrutinize them for what they may mean about the Cash Rate, just be certain of one thing: the RBA is in no hurry at all to raise rates. And with this in mind, the AUD will need some hugely positive activity numbers if it is even to stabilize, let alone reverse its recent decline.

Key Movers

Having been stuck on a US 69 cents handle ever since last Wednesday afternoon, it was no great surprise to see the Kiwi Dollar glued to this level throughout Monday’s European session. As the North American morning wore on, though, the NZD gradually slipped lower and finally broke on to 68 cents around 10am New York time on it its way to a session low of USD0.6895. It has subsequently recovered very modestly and indeed it would not even be worthy of a mention were it not for the fact that it ends the NY session back on a US 69 cent ‘big figure’.

There is no economic data locally until Thursday’s ready mixed concrete production numbers which now take the prize as our new favourite indicator! Usually, we might well suggest looking at the AUD/NZD cross for signs of interest from relative value FX players but a rate of 1.1047 is within 10 pips of the opening level in Wellington on Monday morning with barely 30 pips separating the day’s high and low. Move along folks, there’s really nothing to see here…

The British Pound fell quite sharply as the London market opened yesterday; something of a relief to your author who warned here 24 hours ago that this would be the likely reaction to the weekend’s UK political developments. From an opening level in Sydney around USD1.3180, the GBP tumbled to a low in the European morning of 1.3068 before rallying just under half a cent to close in New York around 1.3115.

We wrote on Monday that, “as the EU withdrawal bill returns to the House of Commons on Tuesday… it is widely expected the Labour Opposition will join Conservative rebels to inflict a series of potentially damaging defeats on the government.” We subsequently learned that MP’s have tabled an astonishing 471 amendments for debate in Westminster.

Perhaps the most damaging was one was Number 7: tabled by 10 Conservative MP’s effectively demanding a Parliamentary vote on the UK’s Brexit deal. The GBP rallied when the Government conceded this point, perhaps in the belief that it might avert a worst-case scenario whereby the UK could leave without a deal having been secured.

However, it is by no means clear that this is in fact the case. It is only a vote on a deal. It doesn’t provide for a vote on a ‘no-deal’ outcome. We don’t profess to be experts on the UK constitution but it may require CPI figures today to be well in excess of the 3.2% y/y consensus if the GBP isn’t once more to resume its slide…

The US Dollar had a pretty dull and uneventful day on Monday. Its’ index against a basket of currencies edged very marginally higher from Friday’s close of 94.13 to end in New York at 94.20 after an intra-day high of 94.33. Equity markets in the United States initially reacted quite negatively to fears that President Trump’s tax reform agenda might have ground to a halt. Futures on the S+P 500 index at one point lost almost 10 points but by the closing bell the market had recovered all these losses and more to be up a net 5 points on the day. “Buy the Dip” still seems to be the most profitable investment strategy, though for how long this can endure remains to be seen.

Fed Chair Janet Yellen is one of the speakers at an ECB Conference in Frankfurt Tuesday on “Communications challenges for policy effectiveness, accountability and reputation”. Along with the heads of the BoJ, BoE and ECB, Dr Yellen addresses a late-morning session entitled, “At the heart of policy: challenges and opportunities of central bank communication”. Your author can only wonder if at least two of the four speakers should talk about ‘how not to do it’.

On the US economic data front we have the latest NFIB survey of small business optimism but once again it’s the prospects for tax reform and the stock market’s reaction to them which will likely determine the near-term direction of the USD. We again flag technical support for the US Dollar index which comes from the 200 day moving average at 93.25.

Hands-up anyone who’s surprised to see the EUR/USD exchange rate on a 1.16 big figure! Just as the AUD/USD appears nailed on to US 76 cents, so it appears the EUR is glued to 1.16. Indeed, the trading range throughout the whole of the Northern Hemisphere time zones was just 32 pips from 1.1640 to 1.1672. As for the AUD/EUR cross, no great mathematical prowess is necessary to work out that it hasn’t moved a great deal, though at 0.6535 it is nevertheless around 30 pips lower than Monday’s opening level.

We noted here yesterday that Eurozone CPI on Thursday will likely be the most important of the economic numbers to be released this week. Germany is the biggest economy in the Eurozone and with the inflation numbers calculated on the basis of GDP weights, then obviously it’s the German numbers which matter most. Provisional numbers for October indicated at 1.5% y/y rate and the final numbers are released this morning.

Later in the European session we get Eurozone industrial production (f/c +3.6% y/y) and then the German ZEW Survey. We’re not great fans of this as it’s a survey of investment professionals rather than industrialists but with stock markets hitting fresh highs last month, it will likely help underpin the EUR at or around current levels.

The Remembrance Day commemorations fell on a weekend this year, with November 11th being a Saturday. Some US Federal organisations had last Friday as a holiday but in Canada it was observed on Monday and its banks were therefore closed yesterday. This is important to bear in mind when trying to analyse the price action of the Canadian Dollar since Friday’s close. Yes, the charts will record that USD/CAD at 1.2730 is around 40 pips higher than at the end of last week but it might be premature to declare that the CAD’s recent outperformance has definitively ended.

Certainly, it would be wise to await upcoming economic releases before rushing to judge. Perhaps the most important number in Canada this week is CPI, where the annual rate is expected to ease back a touch from 1.6% to just 1.4%. Before then, there’s a few statistics on house prices to digest. September’s -0.8% m/m decline was the biggest monthly drop nationwide since 2010 whilst prices in Toronto tumbled -2.7% m/m (who said monetary policy doesn’t work very quickly?). Weaker CPI and lower house prices won’t help the CAD but keep an eye, too, on oil and natural gas which have recently been one of the big props for the currency.

Expected Ranges

  • AUD/NZD: 1.1035 - 1.1075 ▼
  • GBP/AUD: 1.7085 - 1.7250 ▼
  • AUD/USD: 0.7605 - 0.7665 ▼
  • AUD/EUR: 0.6520 - 0.6580 ▼
  • AUD/CAD: 0.9700 - 0.9760 ▼