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GBP steadies after plunge

By Nick Parsons

If we might be permitted a modest pat on the back, we wrote earlier in the week that UK interest rate markets currently reflect a 90% probability of a 25bp hike on Thursday and though the announcement might well see a short-term blip higher, this could be very much a case of “buy the mystery, sell the history”. Yesterday morning we warned that “if the Governor in his Press Conference errs on the side of ‘one and done’ and emphasizes a slow and gradual pace of future tightening, the pound could slip back further… Perhaps the least likely outturn is that the pound ends the day unchanged: it could be quite a volatile 24 hours ahead”. Don’t say you weren’t warned!!

The BoE has a 1-3% target for CPI and though his predecessor had been content to see CPI rise to 5.2% without raising rates, Governor Carney has warned so often of a rate hike - but not actually delivered one - that his own credibility was on the line. So, even though real wages in the UK are falling and there has been a very poor run of retail sales figures, the rate hike duly came with a 7-2 split vote on the MPC. But, in the accompanying Quarterly Inflation Report, the BoE dropped its references to rates having to rise in future more than the market currently expects.

It was, to coin a phrase often used to describe the Fed, “a dovish hike”. By the end of the day, the futures market had priced out one of the 2018 hikes, 10-year bond yields fell 10bp and the currency had fallen 2%. Overnight the GBP has stabilized somewhat and GBP/USD stands at 1.3074 having touched a low of 1.3048. This will now be seen as the first area of technical support though it’s hard to see a sustained rally anytime soon even if today’s ISM services number surprises to the upside.

The US Dollar has traded pretty much flat overnight with its index against a basket of currencies at 94.40; right in the middle of the 94.20-94.57 in which it has been stuck for the last 48 hours.

Though non-farm payrolls today will doubtless lead to half an hour of very volatile trading conditions, the bigger picture for the USD will now be framed by the President’s much-heralded tax reform. This formed a central plank of his campaign pledge to “Make America Great Again” but was delayed so much that the hopes of USD bulls were consistently dashed through the first 10 months of his term of office. From November 9th to the beginning of January, the USD Index surged from 96.6 to 103.3 on hopes for a substantial fiscal boost, faster economic growth and much tighter monetary policy. None of this materialized.

The Fed is still “measured and gradual”, GDP growth will be in the 2-3% range in 2017 and tax reform hasn’t yet happened. By late September, the USD Index had slid to just 90.9. A subsequent attempt to kickstart the fiscal agenda once again raised hopes and the index is now up at 94.4. This is where the real test now comes as the Republican Party releases details of its tax cut plan. These show the 20% corporate tax cut as permanent, and claim that a family of four earning $59,000 will get a $1,182 tax cut.

However, the bill also includes the repeal of an itemized deduction for medical expenses, and limits the home mortgage interest deduction. For new home purchases, interest would be deductible only on loans up to $500,000, down from $1 million.

The bottom line for currency markets is that the 429-page “Tax Cuts and Jobs Act” still has no guarantee of passing any time soon. Keep a close eye on the politicians for it is they, not the Central Bankers, who are now crucial to the US Dollar outlook.


We know that Eurozone growth ended Q3 on a high note and the latest surveys of industrial activity show the positive momentum carried over into Q4. For the Eurozone as a whole, the final IHS Markit Eurozone Manufacturing PMI rose to an 80-month high of 58.5 in October, up from 58.1 in September.

Growth of both output and new orders remained elevated, while the pace of job creation accelerated to a survey-record high. Markit noted that, “the upturn was again led by a strong-performing core of Germany, the Netherlands and Austria. PMI readings were unchanged in Germany and Austria, while the Netherlands PMI rose to its highest level since February 2011. The expansions in Italy (80-month record) and Spain (29-month high) both accelerated, while the France PMI held steady at September’s 77-month high. Growth was also recorded in Ireland and Greece, meaning all of the nations covered registered expansions for the fifth straight month”.

EUR/USD still remains stuck on a 1.16 big figure despite these very encouraging PMI numbers and when a look at the economic calendar shows that the only numbers to be released today are Latvian industrial production, you sense that it’s going to be a long wait until the US non-farm payrolls.

The Aussie Dollar has waited all week for some numbers on domestic economic activity and when they were finally released overnight, there was a real sense of disappointment. August had seen very poor -0.6% m/m decline and expectations were for a decent rebound to something like +0.5% m/m in September. Instead, the Australian Bureau of Statistics reported that sales were unchanged on the month.

A detailed look at the numbers showed household goods down -0.4%, apparel down -0.7% and so-called ‘other retailing’ down -1.7%. Cafes and restaurants eked out a +0.3% m/m increase after a -1.1% tumble in August whilst department stores saw a decent 2.1% increase to help reverse the losses of the last few months. Overall, though, it was a poor set of data and the quarterly measure of sales which feeds into the GDP estimate rose just 0.1%; the weakest since Q3 2016.

Having clawed on to a US 77 cents big figure after Thursday’s international trade numbers, the AUD couldn’t even hold that level for 24 hours and this morning it’s back down at 0.7675. GBP/AUD is almost a full cent off the New York low of 1.6918 but at 1.7020 at the London open today it is still down more than 3 cents from Tuesday’s high.

The first Friday of the month is of course payrolls day in the United States. What tends to get overlooked is that Canada usually releases its own labour market report at the same time. Statistics Canada reported last month that Employment was essentially unchanged in September (+10,000 or +0.1%) and the unemployment rate remained at 6.2%, matching the low of October 2008.

In the 12 months to September, employment rose by 320,000 (+1.8%), and the number of hours worked increased by 2.4%. However, after two surprise rate hikes from BoC and a sharp slowdown already underway in GDP, we should note that the trends in employment are also slowing down. Overall employment grew by only 0.2% in the third quarter, slower than the 0.6% growth rate in the second quarter and the 0.5% growth rate of the first quarter of 2017. Consensus looks for an increase of 15,000 in employment today but if there’s any disappointment, then the CAD’s gains of the last 48 hours against the USD might be difficult to sustain.

For now, USD/CAD is at 1.2806 after printing 1.29 just after GDP whilst GBP/CAD is at 1.6740; down just over 4 cents from Wednesday’s high.

Despite there being little fresh news locally and our Kiwi friends already waking up to Saturday morning, the NZD has enjoyed a very good overnight session, due mostly to selling of the AUD/NZD cross after Australia’s disappointing retail sales numbers.

Ten days ago, this pair reached a near-18 month peak of 1.1284 but by the start of this week had edged back on to a 1.12 big figure. At the start of the Sydney session overnight it stood at 1.1160 and immediately fell half a cent when the Aussie data were published. As we open in London, the pair is testing the 20-day moving at 1.1108; an important technical level as it held above the 20dma for almost every single day in the month of October.

It has been a long time since the NZD has been at the top of the one-day FX performance table but price action over the last few days suggests that some of the post-Election short positions in the currency are now being closed out.

There’s an RBNZ Board meeting next Thursday which will see updated forecasts for interest rates and inflation and before then on Monday it publishes the latest survey of inflation expectations. NZD/USD opens this morning in London at 0.6932 with GBP/NZD at a 2-week low of 1.8832.