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GBP weighed down by fresh Brexit row, USD awaits Powell’s Senate testimony

By Nick Parsons

In a generally quiet Asian session, the GBP traded pretty much sideways against most currencies, falling a little against the AUD and a bit more against the NZD. GBP/USD opened around 1.3320 and has spent the night in a range between 1.1317 and 1.1337. GBP/AUD stands at 1.7510 whilst GBP/NZD is at 1.9220.

On a morning taken up with Press coverage of a Royal Wedding, the discussions on Brexit have become more introspective.

Last week was mainly about differences in approach between the UK and EU negotiating teams. Today, the row is between the Government and Opposition parties as well as between some of the Government’s own MP’s.

To head off a Parliamentary defeat a few weeks ago, it was agreed that the Secretary of State for Exiting the EU, David Davis, would hand over so-called “impact assessments” on 58 sectors of the UK economy to the cross-party Brexit Committee.

He has done so overnight, but they have been heavily edited, removing anything deemed to be market sensitive or that he said could damage the UK’s negotiations with the EU27. Mr.Davis said he was withholding the information because he had “received no assurances from the [Brexit] committee regarding how any information passed will be used”.

In return, the Committee is now deciding whether to issue proceedings for “Contempt of the House”. It’s all pretty unedifying and though the row hasn’t yet had any major impact on the Pound, it’s certainly worth keeping an eye on as the week progresses.

The US Dollar had a day of two unequal halves on Monday, falling for the first 15 hours since the Sydney open then rallying through the New York day to regain all and more of its earlier losses.

The USD Index against a basket of major currencies opened at 92.50, tumbled to a 2-month low of 92.21 then rallied all the way back up to 92.61. After a quiet session in Asia, it opens this morning at 92.55.

The chief trigger for the rally was the publication of US October new home sales data. Against expectations of a 6.1% fall in sales, the outturn was a stunning 6.2% m/m increase.

The numbers aren’t quite as straightforward as they look: September’s outsized 18.9% spike was revised down to 14.2% which meant October started from a lower base. Nevertheless, the annualized pace of 687k was the highest since November 2007 and accompanying data on prices showed the average price of a new house rose above $400,000 for the first time ever to $400,200. Read that and weep if you’re a homebuyer in London, Sydney or Auckland.

Ahead of the Senate Banking Committee confirmation process for incoming Fed Chair Jerome Powell, Tuesday brings more data on house prices, consumer confidence and the goods trade balance.

For the US Dollar, the key will be how “Jay” – as he is known – sees strong activity numbers feeding into inflation and affecting future monetary policy decisions.


The EUR has gradually clawed back some of Monday’s losses. As the US Dollar recovered after the home sales numbers, EUR/USD fell from its intra-day high of 1.1958 to dip back on to a 1.18 handle.

The low point overnight was 1.1897 and it opens in London this morning around 1.1910. GBP/EUR spent nearly of Monday in the high 1.11’s then just managed to trade 1.12 as the Asian session drew to a close.

There were no fresh Eurozone data or Central Bank speakers on Monday and none scheduled for today so it’s back to watching the unfolding Coalition talks in Germany.

By common consensus, the immediate loser in these talks is SPD leader Martin Shulz, though his party may still be able to extract significant concessions as the price for its ongoing support of the CDU/CSU. It may gain control of the Finance Ministry or it may force Merkel’s CSU partner to abandon the proposed 200,000 annual cap on asylum seekers.

For her part, Angela Merkel said only that global challenges such as relations with Russia and the US needed a Germany “able to act… President Macron’s plans for EU reform had led to an “expectation that we draw conclusions and position ourselves”.

In words which were widely interpreted as a call for a Grand Coalition, she said, “given the conflicts we have in the Middle East, given the situation in Russia, the situation in the United States of America, I think it is good if Germany is able to act. That is why we believe that such a stable government should be formed, in terms of Europe, in terms of our economic strength, in view of the new challenges we face”. We’ll now have to see if this helps EUR/USD hold on to 1.19 after the slight reversal lower yesterday.

AUD/USD has spent all of the past 24 hours on a US 76 cents big figure, though the AUD/NZD cross has moved down from 1.10 to 1.09 and GBP/AUD remains on 1.75.

The Australian economy is largely driven by two things: exports of iron ore and the residential property market. So important is housing that the total value of all properties is around four times the size of GDP. By way of comparison, in the UK it’s around 3.5, in Canada around 2.4 and in the US around 1.6 times GDP. A huge amount of debt has had to be taken on by homeowners to accumulate this property wealth.

After Switzerland, Australia has the greatest proportion of household debt to GDP in the world; a little over 120%. What is more, there is more debt held by older homeowners than anywhere else on the planet.

This, of course, is all fine and well as long as there’s a steady stream of new entrants to the market, interest rates don’t go up and prices don’t fall. The simple problem for Australia is that it has been actively discouraging overseas property buyers, whilst prices are still too high for locals and the monetary policy debate has shifted to when and by how much interest rates will go up.

In a new opinion poll published this week by Roy Morgan, only 31 per cent of people think 2018 will be “better” than 2017 – the lowest figure recorded since the survey began in 1980. Younger Australians are more positive than older generations, with almost half (46%) of 18-24-year-olds expecting next year to be better, while just 20 per cent of over 65s feel that way.

Perhaps they feel that housing might at last become less unaffordable; not a problem if existing homeowners have little debt, but potentially a major issue for the economy if they do. Bigger picture, keep an eye on property prices for clues to the Aussie Dollar outlook…

Monday’s trading pattern for the Canadian Dollar was the same as most other FX majors: it strengthened through Asia and Europe then reversed these gains during New York hours.

USD/CAD fell from 1.2710 to a low of 1.2682 before jumping almost a full cent to a high of 1.2766 where it has remained throughout the overnight session. This leaves GBP/CAD steady at exactly 1.7000.

As well as the obvious influence of a recovery in the USD, the CAD was also hit by a quite sizeable drop in oil prices. Though a concerted effort to talk crude prices higher ahead of Wednesday’s OPEC meeting in Vienna, little has been heard from the major players about future production cutbacks.

NYMEX Crude reached a fresh 2017 high of $58.82 last Friday but fell steadily on Monday to $58.15 and this morning is lower still at $57.75.

A very busy Canadian economic calendar begins with the Bank of Canada’s Financial System Review today whilst the labour market report and Q3 GDP figures are released on Friday.

Economists are estimating annualized GDP growth of 1.8% in Q3, down from 4.5% in the second quarter. Canada is unusual – indeed it is a world leader – in producing monthly GDP numbers. July was flat m/m whilst in August GDP edged down by 0.1% the first m/m drop since October 2016. The September numbers will be published alongside the full quarterly estimate.

It’s been a rare sight recently to see the New Zealand Dollar at the top of the one-day performance charts but this is exactly what happened Monday.

Around lunchtime in London, the AUD/NZD cross finally broke out of last week’s 1.1060-1.1120 range and by close of business, the pair had fallen all the way down to 1.1005; its lowest level in almost 6 weeks. Overnight it has extended losses to open in London this morning at just 1.0980.

The big surprise is that this move took place in a total news vacuum. There was simply nothing. No economic data, no political announcement and no big-hitting analyst research report.

We haven’t yet had the weekly CFTC Commitment of Traders report on speculative positioning in currency markets as it has been delayed due to the Thanksgiving holiday last Thursday.

We do know from the last one released November 17th that the market’s net short of NZD was the largest since the week of May 19th; having turned around 180 degrees from the big net long state of late July.

As AUD/NZD broke out of the last week’s trading range, a likely big volume of stop-loss/stop-entry orders were triggered which then fed through into NZD strength against all the other currencies as any available Kiwi liquidity was sucked up. NZD/USD is up at 0.6926 whilst GBP/NZD is down almost 3 cents from last week’s 1.9500 high.