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Bank of England in focus

By Nick Parsons

By tradition, the Bank of England never comments publicly on monetary policy or interest rates in the week before a meeting of its Monetary Policy Committee (MPC). Thus, all the shaping of market expectations has to be done well beforehand and there’s a vacuum into which the latest economic data are then released. Having signaled a rate hike is on the way – notwithstanding the Governor’s previous poor form in not following through with threats to hike – the most recent economic numbers on GDP and manufacturing PMI have beaten consensus expectations. All of this makes a Bank of England rate hike today a virtual certainty.

The big issue is how the Governor handles the subsequent Press Conference which will be given to present the Bank’s latest Quarterly Inflation Report. If he errs on the side of “one and done” and emphasizes a slow and gradual pace of future tightening, the pound could slip back further. If, instead, he adopts a more hawkish tone, the threat of more hikes in 2018 (which are not yet priced in to the market) could set the GBP on another tear higher. Perhaps the least likely outturn is that the pound ends the day unchanged: it could be quite a volatile 24 hours ahead.

The price action yesterday was a day of two halves: up in the morning and down in the afternoon with Asia’s overnight session showing the GBP regaining around half its losses against the USD. Technical support is now seen at USD1.3245 with resistance at 1.3295 and 1.3310.

There was never any realistic prospect of Wednesday’s Fed meeting delivering a rate hike. We can’t remember it ever doing so in the modern era when it was less than 50% discounted in market pricing and certainly there hasn’t been a rate hike without a Press Conference to explain why.

Neither of those conditions were met yesterday though we do at least have a new FOMC Statement to pore over. They key phrase is that, “Hurricane-related disruptions and rebuilding will continue to affect economic activity, employment, and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.

Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further”. The US Dollar index initially liked what it saw in the Statement and pushed up towards the top of its daily trading range (94.30-94.56) which was the best level since Friday evening.

Overnight, however, there are many Press Reports that President Trump will today announce Jerome Powell as the new Fed Chairman to replace Janet Yellen. To the extent that he is seen as less likely to tighten policy aggressively, this has seen the USD unwind all of yesterday’s gains.


After Wednesday’s holiday, Spain, Italy, France and Germany all release their manufacturing PMI numbers this morning. We know that growth ended Q3 on a high note and these will be the first numbers to show how the momentum carried over into Q4. Separately, we’ll get to see the German labour market report which is expected to show another 10k drop in the jobless total with the unemployment rate steady at a record low 5.6%.

With the US Dollar taking a bit of a beating overnight on the leaks around Jerome Powell’s appointment as new Fed Chair, EUR/USD has picked up from the low 1.16’s to open in London around 1.1650. It has been on a 1.16 big figure ever since 7pm London time on Friday and for the whole of this week’s trading it has been trapped in an extremely tight range from 1.1603-1.1660.

The ECB has previously said that undue exchange rate volatility was unwelcome and it must be delighted at the price action since its last Council Meeting. After its sharp decline since late August, EUR/GBP is well below its 20, 50 and 100 day moving averages and this week has slipped below the 200 day measure at 0.8799. It will be interesting to see whether this can now be regained if the BoE doesn’t sound too hawkish later today.

In our overnight commentary for the Australian time-zone, (OFX never sleeps!) we said that, “AUD/USD remains below all four of its main moving averages (20, 50, 100 and 200 day) but at some point this sideways range will be broken, perhaps dramatically”. We previewed the upcoming trade figures, noting that, “consensus expectations are for a seasonally adjusted monthly trade surplus around $1,200m after +$989m in August and +$808m in July”.

The actual number was much better than expected with a $1,745 surplus being the largest since May; benefiting from essentially flat imports but a pretty decent 3% rise in exports. This now completes the three monthly snapshots which will go into the Q3 GDP numbers and it seems that net trade will make a pretty decent contribution to growth in the quarter.

Before getting too carried away, note the trade balance is often a misleading indicator of domestic demand (as its obviously mainly an export story) and the mining and LNG sector is not a huge employer so there’s no strong and immediate link back to spending at home.

Nonetheless, good news is good news and after more than a week of poor price action amidst liquidation of long positions, the AUD finally caught a bid overnight and moved at last back on to a 77 US cent handle for the first time in a week. GBP/AUD is more than a cent down from its recent 1.7358 high and we now await Fridays Aussie retail sales numbers for more clues.

The Canadian Dollar has recovered around half its losses suffered in the post-GDP sell-off but it still faces plenty of domestic economic headwinds. The latest of these came with the manufacturing PMI Survey which dipped to 54.3 in October from 55.0 in September.

Although continuing to signal stronger business conditions at the start of the fourth quarter, the latest improvement in the health of the sector was the weakest since January. Markit noted, “Both output and new orders rose at slower rates during October. Production increased for the twelfth successive month, but at the weakest pace since January. Where output rose, this was mainly linked to higher new orders.

Export sales were particularly subdued, meaning that manufacturers were reliant on domestic demand to drive growth during October.” USD/CAD is at 1.2830 after printing 1.29 just after GDP whilst GBP/CAD is at 1.7045 having been as high as 1.7160.

There’s no more economic news scheduled for release in Canada today and we’d expect the currency to be driven more by news elsewhere – especially in the UK and US – than by events at home.

In New Zealand it sometimes feels impossible to have a conversation which doesn’t at some point involve house prices. They are amongst the most expensive in the world, with eye-watering prices being paid for very modest properties in the main cities. The average house price in Auckland has risen 90% in the last 10 years to more than one million NZ dollars whilst the average price nationally has risen 56% to $647,000.

Latest figures out this morning from property research agency Quotable Value suggest that the boom might finally be over, at least in the country’s largest city. Prices in the Auckland region fell 0.6% from a year ago; the first annual decline in 6 years whilst the nationwide growth rate has slowed to a 5-year low of 3.9% y/y.

The incoming Labour government has already pledged to ban foreign purchases of property and to build 100,000 new homes, whilst changing the tax code which makes residential property such an attractive investment. Who knows, perhaps there’ll be some different property conversations in future?

The NZD largely shrugged off the housing news, with a weaker US Dollar helping lift it back onto US 69 cents. GBP/NZD is down around 1.92 whilst the well-watched AUD/NZD cross rate has risen to 1.1150 after the good Australian trade numbers.