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GBP slightly firmer, AUD hit by RBA Minutes, NZD at fresh 2017 low

By Nick Parsons

The British Pound has extended its recent gains with GBP/USD hitting a best level overnight of almost 1.3280 before opening in London at 1.3250. Against the Aussie Dollar, GBP has been up to 1.7575 whilst against the Kiwi Dollar, a high of 1.9485 has printed.

Talk this morning is that after a meeting of the Cabinet sub-committee on Brexit, Prime Minister Theresa May is prepared to increase the financial offer to the EU in an attempt to break the negotiating deadlock. No figure will be made public at present but it is expected to be put to the EU side at least a week before the next European Council on December 14 and 15.

The ‘usual suspects’ on the Conservative benches are all over the newspapers this morning arguing that not a penny more should be offered, but it is increasingly clear that the EU will not move on until the so-called divorce bill is settled.

Elsewhere, BoE Deputy Governor Dave Ramsden gave his first official speech in London yesterday evening saying he had a “somewhat different” view of the economy to most of his colleagues. “I attach some weight to the idea that workers have responded to the changing outlook by showing greater flexibility in their wage demands… If true it would mean there is a little more room than headline measures of slack suggest for the economy to grow without generating above-target inflation in the medium term”.

For the moment the GBP is not really being driven by interest rate expectations. Instead, it’s all about relative risks externally and how domestic politics will play out after Wednesday’s UK Budget speech.

The US Dollar had a day of two halves on Monday but this was largely a reflection of the changes in sentiment around the EUR as incoming political news in Germany was assessed and digested.

The Dollar’s index against a basket of currencies opened the week around 93.50, initially rose 20 pips but as the EUR then recovered all its losses, the USD Index tumbled to test the big support level we’ve been highlighting at 93.30.

In our New York morning commentary we wrote “Some talk of a CDU minority government has helped the EUR recover early losses but a sustained return above USD1.18 doesn’t look likely…” In fact, during the European afternoon the EUR then gave back all its earlier gains; allowing the USD index to bounce around 35 pips off its key chart point.

In the Asian session overnight, it has traded as high as 93.78 before opening in London this morning around 93.67.

There are no US economic data today other than existing home sales which rarely shift the market dials much. Instead, ahead of tomorrow’s FOMC Minutes, outgoing Fed Chair Janet Yellen is at Stern Business School in New York this evening in an event billed as “In conversation with Mervyn King”.

Whether her resignation yesterday loosens her tongue remains to be seen though note the CME probability calculator shows a 91.5% chance of a 25bp rate hike on December 13th with a scarcely-believable 8.5% probability of a 50bp move.

 

We noted here Sunday evening that the failure of Chancellor Angela Merkel to form a coalition would be a negative for the euro. Though this eventually proved correct, Monday was a day of twists and turns.

From a Sydney open of 1.1782, EUR/USD fell to just below 1.1730. It was then a bit of a puzzle to see the EUR rally on talk about the possibility that Ms. Merkel might try to lead a minority government which could be over-ruled on any Parliamentary vote. It was even odder to imagine that new French President might somehow step into the political vacuum to lead Europe forwards.

He’s struggling to lead his own country and much of his strength comes from a stable relationship with Germany. Nevertheless, EUR/USD rallied all the way back up to the high 1.1790’s before Ms. Merkel, who has headed three coalitions since 2005, said she would stand again as a candidate if elections were called in the New Year.

She told public broadcaster ARD she was “a woman who has responsibility and is prepared to take responsibility in the future”. EUR/USD promptly reversed course yet again and ended in New York around 1.1735. After an extremely tight overnight range of less than 20 pips, this is pretty much where it opens in London today, with GBP/EUR a net 5 pips higher at 1.1285.

We said it wouldn’t take much to knock the Aussie Dollar down through some key technical support and the RBA Minutes released overnight were read closely for an excuse to do just this.

Even though the new forward-looking Quarterly Statement of Monetary Policy effectively makes these Minutes redundant, they were the highlight of an otherwise quiet Asia session. The RBA said, “retail sales had been weak in the September quarter, which was expected to translate into lower quarterly consumption growth than in the June quarter.

Members noted that the outlook for consumption growth depended on the outlook for household income growth, which remained uncertain. They discussed the possibility that households might change their consumption and saving decisions if the period of low income growth persisted”.

For interest rate and FX markets, they key phrase in the Minutes was, “there was considerable uncertainty around when and how quickly wage pressures might emerge and about how much these would add to inflationary pressure. In particular, they noted that, among other factors, pressure on margins from strong competition and a faster-than-expected pick-up in productivity growth could delay the pass-through of tighter labour market conditions to inflationary pressure.”

The AUD fell from USD0.7557 to 0.7533 overnight and opens in London this morning around 0.7545; some 20-25 pips lower than Monday. Against the Pound, GBP/AUD hasn’t quite made it to the May 9th high of GBP/AUD1.7620 and opens at 1.7555.

The Canadian Dollar continues to track oil prices quite closely and with a slightly firmer US Dollar, lower NYMEX crude prices had a predictable effect on the external value of the CAD which finished in New York on Monday around 1.2812; its highest level since November 2nd.

It has been up to a high of 1.2818 overnight and opens in London today at 1.2810 with GBP/CAD at 1.6973. The 173rd OPEC meeting starts in Vienna next Thursday and we’re approaching the point where normally there’d be lots of talk about production cutbacks and quota ceilings but it hasn’t happened yet and NYMEX crude opens little changed around $56.48.

Last week, Bank of Canada Senior Deputy Governor Carolyn Wilkins said central bank had decided to advance the timing of speeches providing economic updates to “align them more closely” with its interest rate decisions. Unfortunately, these speeches are going to come after BoC meetings in order to “explain the thinking”.

A sceptic might call this ‘backward guidance’ as its certainly no help to predicting future decisions! Canadian wholesale sales numbers are out Tuesday with retail sales published on Thursday. As the OPEC meeting approaches, however, keep a close eye on those oil prices for clues to the CAD.

The choice facing currency traders when looking at the Australian and New Zealand Dollars at present is which one they dislike least.

A look at the AUD/NZD cross rate shows they can’t quite decide: the pair has been stuck in a range 1.1060-1.1110 since Monday’s Sydney open and just 20 pips have separated the overnight highs and lows. NZD/USD managed to stay on a US 68 cents handle throughout the Northern Hemisphere’s trading sessions on Monday and having dipped briefly into the high 0.67’s overnight (a 19-month low), it is back at 0.6805 as London opens.

GBP/NZD is at 1.9465 having hit a fresh high for 2017 of 1.9485. New Zealand’s trade-weighted exchange rate (TWI) is now well below the 73.5 average level the Reserve Bank is projecting for the fourth quarter and the RBNZ's latest forecasts have only two rate hikes penciled in between now and December 2020.

The 90-day bank bill rate fell to a record 1.91 percent on Friday last week and with commodity prices generally looking soft, it is hard to see what is going to come to the rescue of the NZD in the very near term.