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Brexit talks restart amidst fresh Irish concerns

By Nick Parsons

It is the turn of the Daily Telegraph newspaper this morning to splash with an exclusive report that just as formal Brexit negotiations are due to restart, the Irish Government has put forward a draft paper “Dialogue on Ireland/Northern Ireland”, seeking hard guarantees about the border question before the European Union leaders’ summit next month.

In summary, the document argues that the UK should stay in the Customs Union to avoid a hard border between Northern Ireland and the Republic. Viewed from London, where the Government is propped up by a formal coalition with the Ulster Unionists, this is not possible as it would mean granting special status to Northern Ireland and undermine the integrity of the UK.

Quick progress on Brexit talks looks ever more elusive and the worst case “no deal” scenario looks just a bit more likely this morning than it did yesterday. The pound hasn’t really reacted to this news yet, but as we’ve seen throughout this week, this doesn’t mean it won’t eventually do so – it was very slow to react to developments around the latest Cabinet resignation.

Since the London close yesterday, GBP/USD has been trapped in a range 1.3139 -1.3162 and it opens today near the top of this narrow band at 1.3150. This morning we have economic data on industrial production and the merchandise trade balance. We’d expect most interest to focus on the net drag on GDP from the trade deficit but it’s progress – or otherwise – on Brexit talks which could then dominate the news agenda.

The USD had a very poor day on Thursday with its index against a basket of major currencies tumbling below the 94.40-94.85 range which had contained it all week. We highlighted yesterday that the 20-day average of 94.10 would become the downside target and the low in New York was 94.16. The overnight session has seen the USD steady a bit to open in London this morning at 94.22.

The big problem for the USD hasn’t been President Trump’s Asia visit or what he did or didn’t say with Premier Xi in Beijing. Instead, it’s all about the lack of progress on tax reform in the United States, upon which so many hopes had been pinned. In a piece of legislative text guaranteed to make the heart sink, the House Ways and Means Committee has released the updated GOP tax bill. The very first sentence reads, “An Amendment to the Amendment in the Nature of a Substitute to HR 1 Offered by Mr. Brady of Texas” and - believe your author – it doesn’t get any better from there.

The S&P 500 index at one stage on Thursday was showing its biggest loss in almost 3 months but rallied to close just 9 points lower having at one point lost 25. We’ve warned all week here about tax reform prospects and the USD. So far, it is outweighing anything the President has said or done on his Asia trip.

 

The European Commission yesterday released updated economic forecasts for the Eurozone economy. Back in Spring, it forecast euro area GDP growth of 1.7% in 2017 and 1.8% in 2018. These numbers have now been revised up to 2.2% and 2.1% with next year now seeing the economy growing at its fastest pace in a decade.

European Commissioner Pierre Moscovici said, “We have entered a new phase of the economic recovery, with stronger growth driven by resilient consumption, the global upswing, loose financing conditions and falling unemployment”. Though still very high, unemployment in the euro area is expected to average 9.1% this year, its lowest level since 2009, dropping to 8.5% in 2018 and 7.9% in 2019.

With the US Dollar under pressure and few attractive alternatives elsewhere, the euro was indeed the best performing currency on Thursday; holding on to a big figure of EUR/USD1.16 throughout the day and pressuring the pound from an opening level of GBP/EUR1.1325 all the way down to a low of 1.1268.

Today looks set to be much quieter (unless you’re really interested in Slovakian industrial production) and the EUR opens in London at USD1.1647 and GBP/EUR1.1290. We’d expect EUR/USD to stay on a USD1.16 big figure throughout the day but gains to be capped around 1.1670.

The RBA’s Quarterly Statement of Monetary Policy puts some flesh on the bones of the monthly interest rate decision. Running to 76 pages, the November edition has an awful lot of flesh and there’s plenty to keep even the most geeky analyst fully occupied for quite some time.

The Overview section notes, “The Australian economy is expected to expand at a solid pace over the next couple of years, and labour market developments have been quite positive of late. The drag on growth from the end of the mining investment boom has eased and is likely to end sometime in the next year or so. Investment in the non-mining sector has been increasing but growth in consumption has been below average.

Inflation and wage growth remain low. Both are expected to increase only gradually over time.” The RBA’s detailed forecasts for the economy were largely unchanged from the last SoMP. GDP growth is expected to average around 3.25% for 2018 and 2019 whilst unemployment at the end of the forecast horizon is seen around a quarter of a point lower than last time at 5.25%.

Unlike the RBNZ, the RBA uses market interest rates for its forecasts and doesn’t give explicit signals. Nonetheless, the Aussie Dollar liked what it saw on the economy. AUD/USD opens in London at 0.7694 (it’s been on US 76 cents all week) with GBP/AUD at 1.7089.

The Canadian Dollar has performed very well over the last week. It hasn’t been a one-way trade because of the volatility of incoming economic data but from an opening level of USD1.2904 on October 1st, the pair has moved down to a low of 1.2667.

Taking the “Commonwealth currencies” together, the CAD is also stronger against the Aussie Dollar (down from a high of 0.9908 to 0.9740) and a little less so against the Kiwi Dollar (from a high of 0.8924 to 0.8795 this morning). Against the more volatile British Pound, GBP/CAD was as high as 1.7150 at the beginning of the month but has tumbled almost exactly 5 cents in these first 10 days of October to open in London this morning at 1.6752.

Oil prices are little changed overnight with Brent crude at $63.78 per barrel and NYMEX futures at $57.06. The day ahead is quiet in terms of scheduled economic data in Canada (new home prices are expected up 0.2% m/m and 3.8% y/y) If the Canadian Dollar can hold on to current levels, it will end the week and the month-to-date as the best performer amongst all the major currencies.

Earlier this week, Finance Minister Grant Robertson launched a review of the Central Bank’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.

Speaking in Wellington overnight, Mr. Robertson said that the Reserve Bank of New Zealand’s 2% inflation target could be up for discussion although the government remains committed to the current 1-3% inflation band. The new Labour government has said it might include an employment target in the RBNZ’s monetary mandate, even if it is less specific than the government’s own, first-term 4% target.

Mr. Robertson has already said that a dual mandate, targeting both inflation and employment, “may mean looser policy in some instances.” These latest comments have been enough to trigger a bit of profit-taking on the Kiwi Dollar which has now fallen from a high of USD0.6972 after the RBNZ meeting to open in London this morning at 0.6935.

Against the British Pound, it is almost unchanged on the week at 1.8913 but it has been quite a volatile week so far with a low of 1.8819 and a high on Wednesday of 1.9090.