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Nothing too scary in FX

By Nick Parsons

Two of the main private sector gauges of confidence were released overnight in the UK: GfK’s consumer confidence and the Lloyds Bank business barometer. The first of these showed a slight deterioration to -10 after a couple of months of very modest improvement whilst the latter improved from +23 to +26 and is now around its average level for much of 2017. There is some encouragement that falling real wages and seemingly interminable Brexit negotiations have not had a more negative effect on individuals or companies but it would be something of a stretch to describe these numbers as encouraging. The trends in both series remain downwards and consumer confidence is actually lower than in the immediate aftermath of the referendum in Summer 2016. GBP/USD has been on a 1.32 big figure for much of the overnight session but has thus far failed to break Monday’s 1.3214 high. Technically it is in pretty good shape above all its main moving averages (20, 50, 100 and 200 days) and if it were to break to the topside, Thursday’s high of 1.3275 would come into focus. One word of warning: the main feature of trading this afternoon will be the month-end ‘4pm fixing’ of foreign exchange rates and the potential for the re-balancing of portfolio hedges by global institutional fund managers. These flows can be very difficult to predict in advance, but be aware of the potential for plenty of volatility at the end of the London trading day.

We noted yesterday that US equities have thus far shrugged off the rising dollar but “any sign of a wobble might be enough to send it into modest reverse”. The stock market did indeed struggle on Monday, with most of the pressure being felt on small cap stocks, whilst the S+P 500 fell 8 points and the Dow Jones Industrials Average lost 85. Lower stocks, lower bond yields and a somewhat weaker USD index (-0.3% yesterday) might not endure until the end of a week which sees major economic data releases but there’s the added complication of the Trump-Russia story which investors are now struggling to incorporate into their thinking. It is a fiendishly difficult narrative to follow and much of the reporting is as biased as the political actors themselves. It may or may not develop into a more important and tradeable theme for financial markets but in the very short-term traders are faced with ‘Trump-Russia’ headlines and the fact of lower equity markets and it is very tempting and easy to link the two. The chief economic focus today will likely be on US consumer confidence numbers where October’s string of all-time highs for the stock market is expected to push the index to a fresh cycle peak. The US Dollar index at 94.26 has so far given back around one-third of Thursday’s gains but ought to find some support around 92.10. 

The euro has spent all of the overnight session in a pretty tight range from USD 1.1625 to 1.1651 and in the process has managed to consolidate the gains it eked out yesterday. These came after a 2.5% daily increase in Spain’s stock market which was taken as an indication that the constitutional crisis in Catalonia might not be taking an immediate turn for the worse. As with the political dramas in the United States, it is not intuitively obvious to an outsider what are the implications of each twist and turn in the Spanish plot but the stock market and bond markets are seen as useful barometers of investor sentiment. Madrid’s IBEX index surged almost 250 points yesterday whilst Spanish 10 year bond yields fell 9bp to just 1.48%. If this is indeed a crisis, it’s not having much of a negative impact on local financial markets. In the league table of currency performance, the EUR on Monday took second spot behind the GBP which meant that EUR/GBP saw just a relatively modest decline from 0.8843 to a New York close around 0.8820. Around lunchtime in London it very briefly dipped onto an 87 pence handle and the low of 0.8798 will now be seen as an area of some technical support. There’s a packed economic data calendar this morning with the main numbers being Eurozone GDP at 10am (f/c +0.5% q/q) along with CPI (f/c +1.5% y/y). The risk after Monday’s German inflation numbers is that CPI might actually undershoot consensus by a tenth.

If Monday’s overnight 18 pip range in AUD/USD was dull, then today’s price action was only a very fractional improvement with all trading contained within just 25 pips from USD0.7672 to 0.7697. Though it’s been a slow and steady grind higher within these very tight ranges, we haven’t seen a USD 77 cent big figure since Thursday afternoon and GBP/USD has been firmly established above 1.7000 since last Wednesday morning. For the country with the greatest amount of household mortgage debt per capita in the world and a Central Bank Governor who takes a close interest in debt metrics, it’s always worth having a look at credit numbers to see if there are any interesting stories developing. The latest data for September released overnight showed monthly growth in owner-occupied and investor housing credit grew around one-tenth of a percent less rapidly than it did in August though the annual rates of growth were unchanged at 6.3% and 7.2% respectively. These are still pretty decent numbers though there’ll be some concern that business credit grew just 0.1% m/m (the slowest since February) and the annual rate here fell to just 4.3%. Overall, there’s nothing to get too excited or alarmed about in credit data and we still have to wait until the end of the week to get the higher-impact economic releases on retail sales and international trade.

If you thought trading in the Aussie Dollar was a bit dull overnight, then the Canadian Dollar wasn’t much livelier. Even taking account of a little jump higher around 4.45am (yes, we watch these things!) the whole range was just USD/CAD1.2825 to 1.2843. The GBP/CAD cross rate wasn’t much more interesting with 1.6940-58 covering the whole night session. Hopefully activity will pick up a little today. Canada is one of the very few countries to release GDP figures on a monthly basis (the official statisticians in Australia and New Zealand can’t even calculate CPI monthly!) and though it’s expected that the latest figures will show only a slight moderation in the annual rate of growth to 3.6% from 3.8%, much of this growth came earlier in the period before the BoC moved to twice hike interest rates. Monthly GDP in July was unchanged and the August numbers out this afternoon are expected to be up just 0.1% m/m. After yesterday’s consumer confidence numbers showed the sub-index tied to perceptions about the economy and housing had the lowest month-end reading since January, investors shouldn’t be holding their breath for a pick-up in Canadian GDP any time soon.

One of the great trading maxims in foreign exchange is “never try to catch a falling knife” but it’s also the case that sometimes the temptation to do so is irresistible. It’s no surprise, then, that there are a few analyst research notes out there saying the New Zealand currency is technically oversold, there’s too much bad news in the price and maybe the turning point is here. The problem for the knife-catchers is that the Kiwi Dollar continues to slide and in an otherwise quiet night session it is again the worst-performer amongst the major currencies. Having closed in New York last night around 0.6870, it has been down to a low of 0.6843 and is barely above this level as we go to print. GBP/NZD is up another 75 pips to 1.9292 and anyone who’d been tempted to grab the glistening steel is this morning licking their wounds. Those of you planning a holiday to Middle Earth this summer will be anxiously watching the NZD exchange rate. The good news is that the AUD and GBP both buy more Kiwi Dollars than they’ve done at any point for the last 12 months. It doesn’t yet make New Zealand a cheap place to visit, but it does make that holiday spending money go just a bit further.