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GBP politics, Trump’s Tax, NZD inflation

By Nick Parsons

The weekend Press did not make very comfortable reading for anyone with currency exposure in the UK. As if the unfolding Brexit negotiations, Bank of England communications issues and weakening economic data were not sufficient reasons to be bearish of the GBP, the last few days have also seen an unfolding domestic political crisis.

The minority UK Conservative Government – which now relies on Ulster’s Democratic Unionist Party to keep it in office – is now engulfed (along with its Labour Party Opposition) by scandals involving allegations of improper sexual conduct. Last Thursday saw the resignation of Defence Secretary Michael Fallon and there is simply no way of knowing how many more revelations are going to appear over the coming days and weeks.

The Asian session has seen GBP/USD hold a very tight range between 1.3063 and 1.3078 and there are no UK economic data scheduled for release today. It would be a surprise if this calm were to last long, however, and with sentiment already fragile, it will only take a couple of bad political headlines to once again push the pound lower. The path of least resistance seems very much still to the downside with major technical support seen at last week’s low of 1.3030.

The overnight session in Asia has been one of the quietest on record, with the US Dollar’s index against a basket of major currencies moving only between 94.66 and 94.71. This still leaves it firmly within last week’s range of 94.20 to 94.90.

President Trump is two days into his ten day, five country, economic and foreign policy trip to Asia and thus far it has been without controversy. His first meetings were with fellow golfer Japanese Prime Minister Shinzo Abe and public comments have thus far focused on issues of trade between the two nations. Domestically in the United States, the big picture for the currency will be determined by the President’s tax reform proposals; a central plank of his election pledge to “Make America Great Again”.

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 happened. By late September, the USD Index had fallen 10% to just 90.9. It has regained about half of these losses as investors once more focus on tax reform.

As President Trump enjoys his Asia trip, it will be important to keep an eye on what the Republican Party are doing back home. Any signs of squabbling and delay on tax cuts will keep a lid on further USD strength, whilst agreement should see it build on last week’s modest gains.


Last week the EUR/USD exchange rate managed the remarkable and almost unprecedented feat of staying on the same big figure for every single minute of the 120 hours in which the foreign exchange market was open for business. Thursday’s high was 1.1672 and Friday’s low 1.1602. Mr Draghi and his ECB colleagues have previously complained about unwelcome and unwarranted volatility of the exchange rate and will surely have been delighted by the price action of the past week.

Though this morning in Asia the pair very briefly dipped to 1.1598; it very quickly popped back up and opens in London this morning around 1.1615. For the week ahead, there’s not much economic data to be released though this morning we will get to see individual country readings for the services PMI number as well as the Eurozone aggregate.

Consensus expectations are for a reading of 54.9 for this measure. ECB speakers include Draghi, Lautenschlaeger, Nuoy, and Angeloni on Tuesday whilst it’s the turn of Bank of France Governor de Galhau and Bundesbank President Weidmann on Thursday. These speeches are often used to ‘reset’ market expectations if the ECB believes that developments since its Council Meeting have been unwelcome or its message was misinterpreted. There’ll be no such concerns this time around and if EUR/USD stays at 1.16 they’ll be absolutely delighted.

The Aussie Dollar spent most of last week on a 76 US cents handle, and though Thursday’s international trade figures gave it a modest boost to a high of 0.7724; it couldn’t even manage 24 hours on 77 cents as weak retail sales figures on Friday once again undermined the currency.

Local analysts who wrongly forecast an increase in retail sales have been swift to blame their error on the late release of the iPhone X but it is hard to believe the central bank will spend sleepless nights worrying whether the latest smartphone warrants a change in monetary policy. It’s only a short stroll from the RBA head office in Martin Place to the Apple store on George Street if they really want to check out how busy it is!

Interest rate futures for 2018 are implying an RBA Cash Rate of 1.63% compared to 1.57% a year ago and we’ll get an update of official thinking after tomorrow’s Board meeting before televisions across the country are tuned in to the Melbourne Cup; “the race that stops a nation.” Looking at the runners and riders, We wonder if “Rekindling” will be used to describe rate hike hopes, though “Boom Time” seems an unlikely way to describe the Australian economy…

The Canadian Dollar had a quite lively, and ultimately pretty good week as the incoming economic data swung around from disappointing GDP to quite decent employment numbers. From a high on Wednesday of USD/CAD1.2905, the CAD gained strength throughout the week to hit a low immediately after the employment data of 1.2734; its best level in almost 10 days.

The weekly data published by the CFTC show that investors have been running net long Canadian dollar positions since the beginning of May. So-called ‘speculative longs’ peaked at 98,079 contracts in the week of October 10th and the latest numbers published over the weekend show they have only been very gradually scaled back to 72,097 contracts.

Investors are clearly rattled by the sharp slowdown in the Canadian economy since the BoC’s two surprise interest rate hikes, but these concerns have been offset somewhat by firmer oil prices which are a benefit to its shale oil producers. BoC Governor Stephen Poloz is scheduled to give a speech Tuesday on “Central Banks’ ability to understand inflation”, though we’d humbly suggest the easiest way right now is to drive past a gas station and look at the price..

It’s been nearly 6 weeks since the New Zealand elections and amidst the uncertainty surrounding the eventual formation of a Labour-led government, the Kiwi Dollar was hit hard, losing more than 5 cents against the USD and 4 cents against the AUD. Though last week saw the first tentative signs of a short-covering rally – helped by a very solid set of Q3 employment numbers – this morning it has been knocked back by the RBNZ’s latest survey of inflation expectations.

Whilst year-ahead inflation expectations rose from 1.77% to 1.87%, the more closely-watched 2-year expectations (which aligns more closely with the RBNZ’s mandate) fell from 2.09% to 2.02%. These figures are quite important given that on Thursday is the RBNZ meeting when we’ll get updated forecasts on interest rates and CPI.

In an otherwise quiet overnight market, the New Zealand Dollar is at the bottom of the pile with NZD/USD slipping from an opening level around 0.6910 to a low of 0.6876. This briefly pushed GBP/NZD on to a 1.90 big figure but the air up there was pretty thin and it has subsequently slipped back into the high 1.89’s.