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Politics pressuring the pound

By Nick Parsons

We’ve already mentioned here this week the poor sales data from both the British Retail Consortium and the Society of Motor Manufacturers and Traders. In another sign that shoppers are cutting back, sales at John Lewis’s department stores fell by 3.7% last week compared to a year earlier. Revenues in the seven days to 4th November fell to £102.03m, from £105.98m in 2016. Homeware sales shank by 7% and electrical and home technology takings tumbled by 8.4% despite the iPhone X launch boosting mobile phone sales. On a day when there are no fresh economic numbers scheduled for release, the spotlight moves back onto the very fragile political situation in the UK. Fortunately for Prime Minister Theresa May, the UK Parliament has just risen for a week’s holiday and she thus avoids the danger of once again coming off second-best to Opposition Leader Jeremy Corbyn in the weekly pantomime that is Prime Ministers’ Questions. Unfortunately, having suffered the resignation of her Defence Secretary last week, Press reports say the International Development Secretary might now be forced out after revelations about unauthorized meetings whilst on holiday in Israel. As Oscar Wilde might have put it, to lose one Minister looks unfortunate, but to lose two begins to look like carelessness. Having rallied up to USD1.3174 in New York and overnight, the GBP opens around 25 pips lower in London this morning at 1.3148. Against the Australian Dollar, it is down from yesterday’s high of 1.7229 to open at 1.7199. The path of least resistance appears to be to the downside.

President Trump is still in Seoul before heading off to China and Vietnam later this week. Speaking to South Korea’s National Assembly in the first address to the legislature by an American President in nearly 25 years, he said about North Korea, “The longer we wait, the greater the danger grows and the fewer the options become. And to those nations that choose to ignore this threat – or worse still to enable it – the weight of this crisis is on your conscience”. Despite the tough rhetoric, the US stock market eked out marginal fresh highs on Tuesday and the US Dollar index remains stuck in its now-familiar 94.40-94.85 range. It opens in London this morning almost exactly in the middle of this band at 94.62. The latest US economic data showed the number of job openings in the US rose slightly in September to 6.09 million, keeping them near a record high. Job openings have now topped 6 million for four months in a row for the first time ever. A December rate hike appears very much a done deal (the CME online calculator pins the probability of a 25bp rise at 93%) and it would take either a huge external shock or a sudden sharp decline in the stock market to make investors rethink their views. Keep an eye on tax reform progress, as well as the President’s Asia trip for near-term clues on the USD.


From 6am until 11pm London time on Tuesday, EUR/USD finally moved off the 1.16 big figure on which it had been stuck for the previous week. Overnight it Asia it popped up to 1.1604 but this morning it is back on a 1.15 handle to open in Europe around 1.1588. This is almost 5 cents down from its early September high and in the absence of fresh economic news today, the technical picture continues to exert downward pressure on the currency pair. It is now below its 20 day moving average of 1.1688, the 50 day average of 1.1782 and the 100 day measure at 1.1787. In another bearish chart development, the 50 day average has just moved below the 100 day one. In the very big picture, we should look to the much slower 200 day average for support but unfortunately this does not come into play until we get all the way down to 1.1410. The ECB’s Sabine Lautenschlaeger yesterday said, “I think it was correct to reduce the amount [of QE assets] purchased from January onwards. I would have liked to see a clear exit”. Tomorrow it is the turn of Bundesbank President Jens Weidmann to speak and analysts will again be looking for any differences of opinion between him and ECB Chief Mario Draghi. For today, however, the euro’s fortunes are more probably driven by external events than any fresh domestic news.

The Reserve Bank of Australia’s Statement yesterday noted, “forecasts for growth in the Australian economy are largely unchanged… The higher exchange rate is expected to contribute to continued subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.” The RBA reiterated its forecast for GDP growth to pick up and to average around 3 per cent over the next few years but currency markets were not slow to take the hint and marked down the Aussie Dollar exchange rate. AUD/USD fell from 0.7660 to a low of 0.7628 before recovering through the NY and Asian sessions to open in London this morning around 0.7650. Looking ahead, the next major set-piece event for the Australian Dollar will be the RBA’s Quarterly Statement of Monetary Policy on Friday. This basically adds some economic flesh to the bones of the Board Statement and offers updated views on CPI, GDP and a host of economic assumptions which underpin the decision on interest rates. For foreign exchange traders, though, it could be a long wait until 11.30am Sydney time Friday morning.

Bank of Canada Governor Stephen Poloz is one of the more interesting and insightful Central Bank Governors around. Though we [only half] jokingly suggested that the best way to forecast inflation in the short-term is to drive past a gasoline station and look at the price on the pump, his speech yesterday evening to the Montreal Council on Foreign Relations was a more scholarly affair. Mr Poloz concluded a fascinating speech by noting, “The popular perception that inflation has become inexplicable has been greatly exaggerated. In part, this perception reflects a misunderstanding of the accuracy with which economists can predict inflation, and a misunderstanding of the precision with which central banks can control it. Fundamentally, we know how inflation works - the laws of supply and demand have not been repealed… The bottom line is that inflation targeting has worked, through good times and bad, for more than 25 years. It continues to work today”. Currency traders will have been a bit disappointed there were no clear signals for the CAD in the speech though USD/CAD did come off its highs of the day to end around 1.2780 and opens a touch lower still in London this morning at 1.2760. GBP/CAD, meantime, is around half a cent below Tuesday’s high at 1.6792.

The 52nd Parliament in New Zealand was formally opened on Tuesday in Wellington and overnight we had the State Opening ceremony. As promised during the election campaign, Finance Minister Grant Robertson has launched a review of the Reserve Bank of New Zealand’s mandate to include maximizing employment as a monetary policy goal. However, he said there was no plan to include the New Zealand dollar, the world’s 11th most traded currency, in the bank’s revised mandate. Mr Robertson also said he did not expect the proposed alterations to have any immediate impact on monetary policy, but acknowledged that in a situation of high unemployment and slightly higher inflation, rates could be lowered though, “My view is that this shouldn’t have a dramatic impact, certainly in the near-term”. The Kiwi Dollar was pretty resilient on Tuesday, holding steady against the USD even as the AUD came under some selling pressure and it opens in London this morning at 0.6911. At one point yesterday, the AUD/NZD cross was down to 1.1057; its lowest point in almost three weeks and it stands now at 1.1079 after a generally quiet overnight session. For local FX markets, the next key event is still Thursday’s RBNZ meeting.