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GBP steady ahead of UK Budget, CAD jumps with oil prices

By Nick Parsons

After slipping gradually through Tuesday, the Pound has clawed its way back overnight to USD1.3250; within touching distance of yesterday’s highs. Against the Australian Dollar it is up almost a cent from Tuesday’s lows at 1.7500 and through the Asia session is the second-best performer of the currencies we track. The Canadian Dollar takes number one slot.

The big event for Wednesday is obviously the UK Budget, delivered by Chancellor of the Exchequer Philip Hammond.

He faces plenty of critics from his own side of the House of Commons, let alone the Opposition benches and faces the seemingly impossible task of spending more whilst borrowing less against the backdrop of a slowing UK economy.

The Office for Budget Responsibility has already significantly cut its estimates for UK productivity growth and with business investment crimped by uncertainties around Brexit, its usual rosy optimism about the medium-term economic prospects is far from guaranteed.

This morning will be taken up with a Cabinet meeting and the usual photo opportunities with the red Budget briefcase. The speech itself is scheduled around 12.30pm London time.

The Chancellor’s aides have briefed the Press he will “embrace change, to meet our challenges head on, and to seize the opportunities for Britain”. He faces an extremely difficult task.

The US Dollar index against a basket of currencies opened the week around 93.50, and 48 hours later it stands at 93.51, having been as low as 93.30 on Monday and to a high of 93.83 yesterday.

The big talking point on Tuesday was the performance of the stock market where the S+P 500 index traded at 2600 for the first time ever. This index added 17 points during the day (0.64%) with the Dow Jones Industrial Average up a whopping 160 points to 23,600.

The positive mood in equities helped support the USD but overnight it has slipped back after digesting remarks from outgoing Fed Chair Janet Yellen. Speaking at an event in NY she said inflation should rebound over the next year or two, although “I will say I am very uncertain about this. My colleagues and I are not certain that it is transitory, and we are monitoring inflation very closely… It may be that there is something more endemic going on or long-lasting here that we need to pay attention to.”

Interest rate futures markets haven’t changed their implied probability of a 25bp hike at the December FOMC meeting but the USD is around three-tenths of a point lower at the London opening; by a very small margin just in the lower half of its trading range thus far this week. Key technical support is still at 93.30 as the market awaits the Minutes of the last FOMC meeting at 7pm London time this evening.

 

The euro had a much calmer day on Tuesday and overnight in Asia it has edged modestly higher. Its low point against the USD was 1.1715 and it finished in New York around 1.1735 before adding another 20 pips overnight to USD1.1755 at the London open. The GBP/EUR rate is pretty much unchanged over the past 24 hours having traded in a 50 pip range from 1.1260 to 1.1310.

The focus of attention in currency markets remains very firmly on German politics and the four options facing Chancellor Merkel: She can try to struggle along with a minority government which then risks being defeated in Parliament on any single issue. She can call fresh Federal elections and hope to increase her party’s 33% share of the vote it won in September. She can try to form a Coalition with the SPD who have already rejected this option. Or she can try to restart Sunday’s failed talks in the hope that the FDP’s leader might cop the blame for the instability and be prepared to renegotiate.

Overnight Press reports suggest Ms. Merkel’s team expect increasing public and political pressure on the SPD to abandon its aversion to a rerun of a "grand coalition" with the chancellor.

On Monday, SPD leader Martin Schulz said: "I will never join a government with Angela Merkel." In response, the Chancellor told ZDF television: "I do hope that they will reflect very intensely about whether they should step up and take responsibility." They can’t both be right and the outlook for the EUR hinges crucially on which one of these views prevails.

After falling to 5-month lows last week, many investors were looking the RBA Governor’s speech to the Business Economists’ dinner for clues about the future course of monetary policy in Australia and what it would mean for the AUD.

Mr Lowe’s speeches are always packed with information and insight. They are worth reading many times over. But, in today’s world of instant, reductive analysis, there’s always the search for one key soundbite which is then repeated many times over in Press and TV reports around the world.

The sentence which drew most attention in the speech was that ‘If the economy continues to improve as expected, it is more likely that the next move in interest rates will be up, rather than down’.

To our mind, this was in no way particularly newsworthy. It was a statement of the blindingly obvious. But, in a market which was clearly short of AUD, it was enough to prompt a flurry of buy orders which took AUD/USD up from the 0.7530 area to a high of 0.7586 before closing in New York yesterday around 0.7580. GBP/AUD lost almost 1 ½ cents from 1.7585 to 1.7450.

A more considered reassessment of Mr Lowe’s remarks overnight has seen the AUD give back some of Tuesday’s gains. It opens in London today around USD0.7570 and GBP/AUD1.7515.

The Canadian Dollar got a double dose of good news on Tuesday and ended the North American session the equal strongest (with the AUD) of the currencies we follow here.

Crude oil was up around 23 cents per barrel with NYMEX spot at $56.66 per barrel; more than a dollar and a half above last week’s low having at one point touched $56.90 late in the New York morning.

The other bit of fundamental good news came from the NAFTA negotiations which are being held to thrash out a new version of the 23-year old Free Trade Agreement between the US, Canada and Mexico. These so-called NAFTA 2.0 talks are taking place as closed-door meetings and no documents from the meetings have been made public. Stakeholders involved in the negotiations are also forbidden from disclosing details.

Nevertheless, it was reported on Bloomberg yesterday afternoon that, “Mexico sees the nations close to finishing work on telecom, energy and digital commerce chapters in the fifth round of negotiations ending today”.

USD/MXN fell from 19.00 to a 4-week low of 18.79 on these headlines, with USD/CAD down from a high of 1.2817 to 1.2753.

Overnight, NYMEX crude is up more than a dollar per barrel at $57.76 (we have been warning about the upcoming OPEC meeting) and the CAD has had another leg higher. It opens in London this morning at USD1.2762 with GBP/CAD at 1.6917.

It’s fair to say that the New Zealand Dollar rose on Tuesday only because the Australian Dollar did. It was certainly not in reaction to any fresh local news, whether economic or political.

Offshore traders often link the two Antipodean currencies far more than is warranted by a closer examination of relative fundamentals.

As the AUD rallied on a one-line comment from RBA Governor Lowe, so it dragged the NZD in its’ wake. The AUD/NZD cross opened in Sydney on Tuesday morning at 1.1090 and it opens today very little changed at 1.1080… GBP/NZD, meantime, is at 1.9400.

Overnight we have seen the latest official data on overseas visitor numbers. These always make fascinating reading. Short-term visitor arrivals, which include tourists, people visiting family and friends and people travelling for work, reached 3.7 million in the October year, up 8 per cent from a year earlier and a new annual record. Statistics New Zealand says the number of people going to New Zealand on holiday rose 8.6 per cent on an annual basis to 1.9 million people.

During the past five years, annual visitor arrivals have regularly hit record highs, and have risen by more than one million, or 40 per cent, since the upward trend began in 2013. Meantime, people living in New Zealand took a record 2.83 million overseas trips in the October 2017 year, up 11 percent on the October 2016 year.

If the NZD stays down at current levels, then a trip to Middle Earth will now be even cheaper.