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GBP losing support after further examination of Budget

By Nick Parsons

We questioned here yesterday whether the initially positive reaction to the UK Budget would stand closer scrutiny. As we pointed out then, “never in modern history has a UK Chancellor stood up to forecast growth below 2% in every one of the next five years”.

A sequence of 1.4, 1.3, 1.3, 1.5 and 1.6 would be a pretty dire set of marks in ice-skating or gymnastics. As a set of GDP forecasts, it is equally grim; a cumulative increase in real national income of just 7.0% in half a decade. Now the various UK economic think tanks have had time to crunch the numbers, there are some pretty scary stories.

The widely-respected Institute for Fiscal Studies says, “Britain will not return to debt levels as low as before the financial crisis until the 2060s, with workers facing two “lost decades” without earnings growth… Real earnings are falling this year as inflation has risen to 3%. The nascent recovery in earnings, which were growing through 2014 to the first half of 2016, has been choked off. That they might still be below their 2008 level in 2022 as the OBR forecast is truly astonishing”. Ouch!!

GBP/USD is down 40 pips from its pre-Budget high to 1.3290, GBP/AUD is down 80 pips at 1.7440 whilst GBP/NZD is almost a full cent lower at 1.9335. We don’t imagine the Budget forecasts will look any better on Monday morning after a whole weekend’s reflection…

After the traditional Thanksgiving turkey and cranberries, Americans – and those in the UK and elsewhere who ate them – can get on with the serious business of shopping. ‘Black Friday’ is the day when it used to be said storekeepers finally moved out of the red to make some profits before year-end.

Foreign exchange traders have been profiting recently by selling US Dollars though it had a steadier session yesterday. The USD rose against the GBP and CAD, fell against the EUR and AUD and was unchanged against the NZD. With significant index weights also for the Mexican Peso and Japanese Yen, the overall impact of Thursday’s bilateral moves was to push the USD Index down another tenth of a point to 92.8. This is the lowest since October 13th.

The overnight session in Asia has been pretty quiet; the GBP and NZD have been the biggest movers but the Kiwi Dollar doesn’t feature in the calculation of the USD index. A quick look at the charts shows the way is still clear for a test of the September 7th low at 91.0. The index is below its 20,50,100 and 200-day moving averages and the only noticeable area of technical support is the October 11th low at 92.58.

News reports today will doubtless be dominated by the success, or otherwise, of retail promotions and what they might mean for financial markets. A quick Google search this morning brings up 283 million results for ‘Black Friday’ so it’s going to be pretty difficult to ignore…

 

Just as the UK Budget gets more depressing after a second or third reading, so the Eurozone flash PMI’s just get better and better. The manufacturing index of 60.0 was the strongest in 211 months, the services index was at a 6-month high of 56.2 whilst the composite index was at a 79-month high of 57.5.

Markit’s Press Release noted, “The eurozone economy is showing signs of picking up momentum in the fourth quarter, with multi-year highs seen for all main indicators of output, demand, employment and inflation in November. Business activity and prices rose at the steepest rates for over six years, while the largest accumulation of uncompleted work for over a decade encouraged firms to take on staff at a rate not seen for 17 years….”

“Inflows of new orders showed the largest gain since February 2011. The biggest increase in factory new orders since April 2000 helped offset a slight moderation in the service sector. Goods exports increased at a survey record pace”.

No wonder the EUR was the strongest major currency on Thursday; rising to USD1.1855 overnight and pushing GBP/EUR back down into the low 1.12’s. If the PMI’s are reflected in a similarly strong German ifo Survey this morning, then the EUR ought to have another good day. Keep an eye too on German politics: if SPD leader Martin Schulz resigns, it may make it easier to restart Coalition talks.

In our Sydney commentary yesterday evening, we said, “a betting person would probably have a few dollars on the double of England all out by tea-time and a lower GBP/AUD exchange rate by the end of the day”.

The scorecard does indeed show the tourists didn’t last until lunchtime and GBP/AUD is 25 pips lower at 1.7430 although England’s supporters will probably find much more to cheer about than the GBP bulls. Just to pick out a few highlights, it’s the first time ever 3 Ashes debutants have made half-centuries and only the third time England have reached 300 batting first at the Gabba. They won on both previous occasions in 1936/37 and 1986/87.

With Australia four wickets down as we write, the game is beautifully balanced. As for the currency, traders Down Under clearly had better things to do than push the AUD/USD exchange rate around. From the close of play in London to this morning’s open, the pair has moved in a range of just 10 pips from 0.7617 to 0.7627.

With Amazon set to launch its Australian operations this weekend, talk of downward pressure on prices (as we’ve already seen elsewhere across the world) will probably push rate hike talk even further out into the future.

All good things come to an end and so has the Canadian Dollar’s recent strong run.

South of the border, folks were celebrating Thanksgiving but north of the 49th parallel markets were very much open for business. The blame for the CAD’s fall was most definitely not oil prices. NYMEX crude added another half a cent to $58.04 and is up at $58.42 this morning in London.

Instead, the culprit was a soft set of domestic economic data. Statistics Canada said retail sales rose just 0.1 percent in September, versus forecasts for a 1 percent gain, after dropping 0.1 percent in August. Receipts for the country’s retailers have been flat over the past four months, after one of the best starts to a year for the industry on record. This was the last major piece of output data ahead of third quarter GDP numbers next week, and is the second release this week that showed unexpected weakness in activity.

Statistics Canada reported Tuesday that wholesale sales fell 1.2 percent in September. Economists are estimating annualized GDP growth of 1.8% in Q3, down from 4.5% in the Q2. Though the CAD fell on the news, it can hardly be described as a collapse; it just takes it back to Wednesday’s levels. USD/CAD is at 1.2725 whilst GBP/CAD is at 1.6906.

For most of this week, you’d have been forgiven for thinking that New Zealand has a fixed exchange rate against the Australian Dollar; it hasn’t moved more than 30 pips either side of 1.1080 and after printing a low of 1.1055 on Thursday, it’s now back exactly to the mid-point of the range.

Economic data released overnight showed New Zealand’s trade deficit narrowed in October as dairy and lamb shipments fueled a jump in exports, despite imports hitting a record high. There’s always plenty of detail in these numbers: exports of milk powder, butter and cheese rose 22% from the same month a year earlier to $1.29bn whilst logs, wood and wood articles jumped 27% to $461m.

Overall, according to Statistics New Zealand the trade deficit narrowed to NZ$871 million from NZ$1.156 billion in September. The Kiwi Dollar has been on a US 68 cents handle for almost the entire week and opens in London this morning at 0.6875. GBP/NZD at one point was down more than 2 cents from its recent 1.95 high and begins this Friday morning at 1.9340.