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UK CPI to jump above 3% but politics still weigh on GBP

By Nick Parsons

After further sharp movements on Monday, the pound has had a much quieter overnight session; managing to even stay on the same big figure against the US Dollar. Having touched USD1.3068 yesterday, it then ground slowly higher to end the New York session at 1.3112. Trapped in a mere 16 pip range through the Asian day, with a high of 1.3128, it opens in London today at 1.3112. Against the Aussie Dollar, GBP reached a best level of 1.7230 but has given back around half a cent in Sydney to open at 1.7183.

We said here yesterday that, “as the EU withdrawal bill returns to the House of Commons on Tuesday… it is widely expected the Labour Opposition will join Conservative rebels to inflict a series of potentially damaging defeats on the government.” We subsequently learned during the day that MP’s have tabled an astonishing 471 amendments for debate in Westminster. Perhaps the most damaging was one was Number 7: tabled by 10 Conservative MP’s effectively demanding a Parliamentary vote on the UK’s Brexit deal.

The GBP rallied when the Government conceded this point, perhaps in the belief that it might avert a worst-case scenario whereby the UK could leave without a deal having been secured. However, it is by no means clear that this is in fact the case. It is only a vote on a deal. It doesn’t provide for a vote on a ‘no-deal’ outcome.

We don’t profess to be experts on the UK constitution but it may require CPI figures today to be well in excess of the 3.2% y/y consensus if the GBP isn’t once more to resume its slide…

The US Dollar was largely out of the spotlight on Monday. Its’ index against a basket of currencies edged very marginally higher from Friday’s close of 94.13 to end in New York at 94.20 after an intra-day high of 94.33. In the overnight session in Asia it has barely budged, with a low of 94.17 and a high of 94.20.

Equity markets in the United States initially reacted quite negatively to fears that President Trump’s tax reform agenda might have ground to a halt. Futures on the S+P 500 index at one point lost almost 10 points but by the closing bell the market had recovered all these losses and more to be back in the green and up a net 5 points on the day. “Buy the Dip” still seems to be the most profitable investment strategy, though for how long this can endure remains to be seen.

Fed Chair Janet Yellen is one of the speakers at an ECB Conference in Frankfurt Tuesday on “Communications challenges for policy effectiveness, accountability and reputation”. Along with the heads of the BoJ, BoE and ECB, Dr Yellen addresses a late-morning session entitled, “At the heart of policy: challenges and opportunities of central bank communication”. Your author can only wonder if at least two of the four speakers should talk about ‘how not to do it’.

On the US economic data front, we have the latest NFIB survey of small business optimism but once again it’s the prospects for tax reform and the stock market’s reaction to them which will likely determine the near-term direction of the USD. We again flag technical support for the US Dollar index which comes from the 200 day moving average at 93.25.

 

Yet again, the EUR/USD pair is glued firmly to a 1.16 big figure. On Monday it rallied from a low of 1.1639 to close in New York at 1.1666 and in the Asian session overnight it has extended these gains to a best level of 1.1675 before opening in London around 1.1670.

Against the British Pound, the continued volatility of the cable rate set the tone for GBP/EUR which yesterday fell from a high of 1.1266 to 1.1211 before recovering around half these losses to end in New York at 1.1242. Overnight it edged gradually lower through Asia with losses accelerating a little as the session came to an end and opens in London this morning around 1.1227.

We noted here yesterday that Eurozone CPI on Thursday will likely be the most important of the economic numbers to be released this week. Germany is the biggest economy in the Eurozone and with the inflation numbers calculated on the basis of GDP weights, then obviously it’s the German numbers which matter most.

Provisional numbers for October indicated at 1.5% y/y rate and the final numbers are released this morning. Later in the European session we get Eurozone industrial production (f/c +3.6% y/y) and then the German ZEW Survey.

We’re not great fans of this as it’s a survey of investment professionals rather than industrialists but with stock markets hitting fresh highs last month, it will likely help underpin the EUR at or around current levels.

Just as the EUR is stuck at 1.16, so there seems a magnet holding the Aussie Dollar at 76 US cents. On Monday through the entire 14 hours of trading in the Northern Hemisphere, just 46 pips separated its highs and lows of 0.7619 and 0.7665 respectively. In Asia it dipped to a low of 0.7611 but has subsequently recovered to open in London at 0.7634. GBP/AUD, meantime, recovered from the low 1.71’s to trade up to a high of 1.7230 by the New York close but has given back around half of these gains to open in London this morning at 1.7168.

The main reason for the AUD recovery is a very strong monthly business survey from the NAB; one of Australia’s ‘Big Four’ banks. The widely-watched “business conditions” index reached an all-time high of +21 in October; a huge 7-point jump from September’s +14. The Survey has been running for 20 years and this measure has never been so strong.

Unusually, however, the “business confidence” index was unchanged at +8 in October; only marginally above its long-term average. It’s a little strange – to say the least – to see conditions improve so much but for there to be so little lift to confidence. Maybe our Australian friends are not quite the super-optimists they once were. Or maybe there’s a bit of doubt around the Survey itself?

Whatever the case, the Aussie has found some welcome support after threatening to break lower and we’ll now look forward to official data on employment and wages to see if its gains can be sustained.

The Canadian Dollar recent strong run may be coming to an end. Having finished last week at USD1.2690 the pair moved steadily higher throughout the London and New York time trading sessions on Monday to finish around the highs of the day at 1.2733. In Asia overnight, it has extended this move (USD higher, CAD weaker) to a high of 1.2745. Against the British Pound, the GBP/CAD cross rate rose from a low of 1.6620 on Monday morning to close in New York around 1.6695. It initially rallied a further 20 pips in early Asia but opens in London today around 1.6696.

The local Press in Canada are starting to report on upcoming talks around the North American Free Trade Area (NAFTA). The fifth round of renegotiations is due to be held between November 17 and 21 in Mexico City and with 75% of all Canada’s exports headed to the United States, there’s a concern these talks might be the catalyst for a bit of profit-taking on long CAD positions.

Before then we get some statistics on house prices and inflation. Weaker CPI and lower house prices probably won’t help the CAD but keep an eye, too, on oil and natural gas which have recently been one of the big props for the currency. NYMEX cruse futures open around 20c lower at $56.57.

Sometimes the NZD/USD exchange rate moves because of what’s happening in New Zealand. Sometimes, it’s because of developments in the United States. Overnight, however, it has moved because of what happened on the AUD/NZD cross rate.

Immediately after the New Zealand elections on September 23rd, AUD/NZD stood at 1.0835. With uncertainty over the new government and its policies, the pair reached a closing high of 1.1267 on October 24th. Since then it has slipped gradually lower as the fears of a big change to the RBNZ’s mandate didn’t materialize and economic data showed the new Administration inheriting a pretty strong New Zealand economy.

AUD/NZD began to unwind some of its gains and last Wednesday reached a closing low of 1.1037 as investors bought back their Kiwi Dollars and some analysts began to recommend outright short positions in the cross. With the very strong headlines in the NAB Survey overnight, these positions have been cut and AUD/NZD has surged from 1.1040 all the way up to 1.1130.

The NZD/USD pair has suffered in this process, with the rate falling almost half a cent from a New York close around 0.6902 to open in London this morning at 0.6856. GBP/NZD has also jumped higher, and is now fully 2 ½ cents off Monday’s low of 1.8887 to open in London this morning at 1.9120.