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Bring on the new month

By Nick Parsons

Two days of very strong gains for the GBP have taken it to a four week high against the US Dollar and a 5 week high against the EUR. Versus the Australian Dollar, meantime, it hasn’t been as high as 1.73 since the first week of June. All this has taken place without any fresh ‘news’ other than increasingly cemented expectations of a 25bp hike in rates at Thursday’s Bank of England meeting. Short positions in the currency have been squeezed out and it might well now require a very hawkish commentary around the interest rate decision if the GBP is to advance further.

For today, it’s that time when we look forward to the release of Purchasing Managers Indices around the globe. China kicked off on Tuesday with disappointing manufacturing and service sector numbers and after Australia first thing this morning, it will be the turn of the UK and US to report on manufacturing later today before the Eurozone numbers on Thursday.

The UK has actually been quite resilient over the last few quarters with healthy external demand for UK products offsetting a somewhat weaker domestic picture. The read-across into FX ought to be straightforward (famous last words!) and with a consensus of 55.8 for Octobers survey after 55.9 in September, a beat/miss on the number should push GBP up/down.

This current phase of broad USD strength began almost two months ago when its index against a basket of currencies reach a low of 91.00. markets rarely move in straight lines but the progress higher since then has been steady and gradual; albeit punctuated by the occasional setback. On Friday last week it reached an intra-day high of 94.83 just after the Q3 GDP figures were released and subsequently it has given back around half a point to 94.3; largely on the back of recoveries in the GBP and to a lesser extent the EUR.

Yesterday, with virtually no change in 10-year US bond yields or cash equity indices, there was no great directional indicator for the currency and the USD index spent the whole day in a very tight range from 94.25 to 94.40. The next economic data point to be watched for interest rates, asset markets and the USD will be the ISM report on manufacturing.

September printed at a fresh cycle high of 60.8; signaling the fastest pace of expansion in 13 years. This was driven by a jump in new orders to 64.6 whilst production was back close to its best level of the year and prices paid surged to 71.5. Expectations for the October number centre on a median forecast of 59.4 for the headline index and if it is anywhere close to this level then the USD ought at the very least to consolidate its current levels and maybe even push on a little higher.

 

We said on Monday that ECB President Draghi would have been very pleased with the market reaction to his ECB Press conference. He managed to deliver a ‘dovish taper’ on QE and push bond yields and the EUR lower by promising to keep rates at current levels at least until the current asset purchase programme finishes sometime towards the end of 2018.

Of course, the whole purpose of monetary policy is not about bond yields and FX alone. These are intermediate variables. The purpose of policy is to foster non-inflationary economic growth. If Mr.Draghi was pleased last Thursday, he would have been delighted with yesterday’s economic news.

For the Eurozone as a whole, Q3 GDP was a tenth higher than expectations at 0.6% q/q (or 2.4% annualised as our American friends would describe it) whilst the second quarter was revised up by a tenth from 0.6% to 0.7%. Capping off a very encouraging day for economic news, unemployment in the Eurozone fell below 9 per cent for the first time since the beginning of 2009 and is now down more than 3 percentage points from its 12.1% peak in early 2013. EUR/USD has slowly but steadily clawed back around 60 pips from Friday’s low whilst EUR/AUD is roughly 70 pips higher. There’s a bit of a lull in the data calendar today but if EUR/USD can hold on to a 1.16 big figure then it will be in decent technical shape for when PMI numbers are released Thursday.

The Aussie Dollar has managed to eke out some tiny gains despite very conflicting second-tier economic data. There were a couple of readings on manufacturing activity with CBA’s PMI and the AiG indices both released.

Quite why we need two indices to measure pretty much the same thing is a bit of a mystery, especially when they moved in opposite directions! CBA’s manufacturing PMI rose 1.7 points to 55.8 whilst the AiG gauge fell 3.1 to 51.1. Pick the bones out of that… AUD/USD has spent every single minute since 2pm London time last Thursday trading on a 76 cent big figure and we should be wary about overinterpreting a chart which has such a compressed trading range. The pair is almost 20 pips above Tuesday’s 0.7646 low but it only takes one or two decent sized orders in a market as quiet as this to have an outsize impact.

What’s more, there’s been a bit more interest in the AUD/NZD cross overnight which has fallen almost a full cent from 1.1180 at the New York close to a low in the APAC session of 1.1085. This is the first time in almost two weeks that the pair has seen a 1.10 big figure and dealers who could only see upside price targets are now looking at technical support levels. The 20 day moving average is at 1.1095 and the 50 day at 1.1023. It would be a surprise if this latter level were broken but AUD/NZD price action now presents another reason for a bit of caution on the AUD more broadly.

The Canadian Dollar is once again under pressure after the latest GDP numbers managed to miss even very low consensus expectations. Analysts had looked for just a +0.1% m/m increase in August GDP after no change in July. Instead, the outturn was a -0.1% m/m drop as declines in oil and gas and manufacturing more than offset small gains in a majority of other industries.

Manufacturing was a particular soft spot, with chemical manufacturing posting its biggest one month decline in 20 years, and other types of manufacturing being down because of planned maintenance shutdowns. The service sector eked out a small gain of 0.1% and has now expanded for 17 months in a row but this was the first monthly contraction for the economy overall since October 2016.

The FX reaction was pretty brutal – USD/CAD jumped almost 70 pips to be back once again on a 1.29 handle for the first time since early July whilst GBP/CAD is at 1.71 for the first time since mid-June. The Bank of Canada surprised the market this year by hiking rates twice without warning. It won’t be delivering a third hike any time soon.

After 5 weeks of almost uninterrupted declines, the New Zealand Dollar finally caught a bid overnight, helped by a very good set of Q3 employment numbers. Unemployment for the three months ending September was 4.6 per cent, 0.2 percentage points lower than the prior quarter and the lowest level since the December 2008 quarter, according to Statistics New Zealand.

Surging demand for labour boosted the participation rate to a record 71.1%; a jump of 1.1 percentage points in the quarter whilst wages grew 0.7% in the quarter to take the annual rate of growth up to a five year high of 1.9%. Some of the increase was due to government-mandated pay rise for care workers and the new Labour government was elected with plans to raise the minimum wage more than 25% over the next few years which could also spill over into higher wages elsewhere.

Of course, we don’t know how much of the legislative programme will be enacted and there’s virtually no chance the RBNZ will raise rates next week or be signaling a hike in the near future. For the NZD, though, those falling knives which we talked about yesterday might well now have hit the ground. Maybe it is time at last to buy some cheaper Kiwi Dollars ?