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EUR falls after failure of German Coalition talks

By Nick Parsons

The British Pound opens a after a good week which saw GBP/USD begin at 1.3130, move up to a high of 1.3250 on Friday, and then end at 1.3220. Against the Aussie Dollar, GBP rose from 1.7150 to 1.7475 whilst against the Kiwi Dollar it gained more than four cents from 1.8950 to 1.9390. Overnight in Sydney the so-called ‘cable’ rate traded steadily down to lose half a cent but has subsequently recovered a little to open in London this morning around 1.3220.

Background chatter on the Brexit negotiations suggests something of a stalemate ahead of an EU Summit in mid-December, but these take a back seat this week to the annual Budget delivered by UK Chancellor Philip Hammond on Wednesday.

Just as superpowers fight out ‘proxy wars’ in third countries, so the Budget will be the scene of much political infighting in the UK Conservative Party. The Chancellor has the seemingly impossible task of spending considerably more money by borrowing less against a background of a slowing economy. It might really be a question of how exactly he will fail, rather than whether he can actually succeed.

Of course, some of these concerns are already ‘priced in’ to the currency but clients with GBP transactions to execute should be aware of the potential for increased volatility in the second half of this week.

Before then, the monthly data on Public Finances on Tuesday will be more closely watched than usual for an clues as to how much ‘wiggle room’ the Chancellor has to fine-tune his Budget message.

The US Dollar had a pretty disappointing week. Its index against a basket of currencies stood at 94.20 last Monday morning, around half a percent down from its recent closing high of 94.70 on November 6th.

By Friday evening it had slipped to a close of 93.39; only just off the lows of Wednesday morning before the latest round of US economic data were published. With the EUR lower today (see below) the USD index has risen around three-tenths to open in London around 93.66.

As the S+P 500 rallied quite sharply off last Wednesday’s lows, it was interesting to note that the Dollar could glean no support from the stock market. With equities driven by corporate earnings and the prospects for tax reform, it has often been the case that the USD also correlates positively with stocks. This is something which should be watched carefully from here as a close below 93.30 opens up the technical path to a retest of early September’s 91.00 low.

Of course, the big event of the week ahead will close the market on Thursday’s Thanksgiving holiday, with retailers then praying for a shopping frenzy to rescue their year on Friday.

Before then, the Minutes of the last FOMC meeting will be released on Wednesday afternoon Washington time. The CME probability calculator shows a 96.7% chance of a 25bp rate hike on December 13th so there’s not much support the USD can get from interest rates near-term. It could be a choppy few days in the foreign exchange market…


The euro is lower this Monday morning but it’s all about politics, not economics. After a week in which it was – along with the GBP – one of the two winners in the foreign exchange market, EUR/USD has tumbled from a high just under 1.18 in Sydney to a low just under 1.1730 to open in London around 1.1737 with GBP/EUR 40 pips higher at 1.1250.

More than two months have passed since the German Federal Elections in September and Chancellor Angela Merkel’s attempts to create a four-party government failed last night when the pro-business Free Democrats walked out shortly before midnight after repeatedly clashing with the left-wing Greens.

A so-called Jamaica coalition (named after the four colours of the Caribbean island’s flag) had never been put together before but the narrowness of the election result meant it was the only way forward without bringing the right-wing AfD party into Government.

It appears the major stumbling block between the parties was on immigration, an issue that has overshadowed the past two years of Ms. Merkel’s CDU leadership following her decision to allow over a million asylum seekers into Germany. The Christian Social Union (CSU), which is the Bavarian sister party to the CDU, had demanded a cap of 200,000 on refugees allowed into Germany in a year, a demand that had proved unacceptable to the Greens.

The way forward from here is far from clear. It is possible that fresh elections will be held in the New Year, but Ms. Merkel may no longer be the head of the CDU at that time. For the moment, German politics will totally overshadow Eurozone economics even as ECB speakers this week will likely continue the upbeat messaging which comes from its President and Chief Economist.

The Aussie Dollar had a pretty rough week, though ultimately not as bad as its Kiwi cousin. The slide began last Wednesday after the Q3 wage data showed there was little, if any, pass through from higher employment to higher earnings.

The AUD fell from USD0.7630 to 0.7580 and on to a low of 0.7540 on Friday before ending the week at 0.7565; its weakest close in more than five months. The pair has traded down to almost 0.7550 overnight in Sydney but opens in London this Monday morning around 0.7565.

With 11 RBA meetings each year and 4 Quarterly Statements of Monetary Policy (the clue is in the name!) the Minutes of four of the Board meetings are largely redundant. This Tuesday will be one of those occasions.

Governor Philip Lowe will give a speech at the Australian Business Economists (ABE) annual dinner on Tuesday and he has chosen the title “Some evolving questions”. Expect them to be examined in more depth when the analysts get back to work on Wednesday.

Economic data is a little thin on the ground this week, though sports lovers have a whole Ashes Test series now to look forward to. England’s cricketers arrived in Brisbane ahead of Sunday’s first test to find the British Pound bought 1.74 Australian Dollars; its best level in more than 6 months. For currency traders, that May 9th high of GBP/AUD1.7620 will now be the technical level to watch.

The Canadian Dollar had a very good first couple of weeks in November but then back some of its gains as oil prices fell and CPI inflation slipped back from 1.6% to 1.4%.

Last week it began against the US Dollar around 1.2690, moved to an intra-day high immediately after Friday’s CPI of 1.2811 and ended in New York at 1.2770. It opens in London this morning around 1.2783 with GBP/CAD at 1.6892.

Away from economic news, traders continue to focus on oil prices. NYMEX crude opened the week at $57.05 but fell to $55.15 at Tuesday’s close. Oil steadied Wednesday and Thursday then jumped sharply on Friday to end the week just a net 25 cents lower at $56.85. The Bank of Canada released its Autumn Review last week and it’s interesting to note the very first article was a very thorough examination of the factors behind the oil price decline since 2014.

They conclude, “the most important drivers were the surprising growth of US shale oil production, the output decisions of the Organization of the Petroleum Exporting Countries and the weaker-than-expected global growth that followed the 2009 global financial crisis”.

For the week ahead, Canadian wholesale sales numbers are out on Tuesday with retail sales published on Thursday when the rest of North America celebrates Thanksgiving. As Winter approaches in the Northern Hemisphere, keep a close eye on those oil prices.

There’s no doubt that momentum for the Kiwi Dollar is very negative right now. NZD/USD is stuck firmly below its 20, 50, 100 and 200 day moving averages, it has taken out the May and October closing lows (0.6830 and 0.6835) and on Friday last week hit a fresh low for the year of just 0.6783 before rallying a little to close in New York at 0.6816.

It dipped below 68 US cents once again in Sydney overnight but opens in London around 0.6820 with GBP/NZD at 1.9370.

We mentioned here on Friday the Quarterly International Visitor Survey and the highlight of the data calendar locally this coming week will be to see how that spending fits in to Thursday’s overall Q3 retail sales numbers. The second quarter got a big lift from the British Lions rugby tour and real sales (after inflation) rose a punchy +2.0% q/q. There’s no chance of a repeat in Q3 and consensus looks for just +0.1%.

Bear in mind that even though local media are reporting buoyant sales to China on Singles Day 11/11, this comes way after the end of Q3.

The only economic data today has been BNZ’s Performance of Services Index. This fell 0.3 points to 55.6 from the previous month though the accompanying Press Release sought to put a positive spin on the drop, noting “these are robust results given the prevailing uncertainty surrounding the election, coalition negotiations, and government formation over the period.”

We’ll have to wait to see if the FX market is prepared yet to see the glass as half full rather than half empty. It certainly wasn’t last week.