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GBP lower as Prime Minister May struggles to find answer Irish question

By Nick Parsons

The pound opens this morning down at USD1.3433, having on Monday traded as high as 1.3548 before news that Theresa May was unable to offer an agreement on the Irish border issue to European Commission President Jean-Claude Juncker.

Her Press Conference in Brussels was short, tense and defensive as it became very clear the Ulster Unionist Party had vetoed the agreement between London and Dublin. It is claimed in newspapers this morning that DUP leader Arlene Foster had been briefed on the proposed agreement but had not seen the specific wording of the 15-page draft text. When reports suggested that the plan would mean Northern Ireland could effectively remain in the single market and customs union after Brexit, Mrs Foster reacted angrily.

With the Conservatives already requiring the support of 10 DUP members in order to govern, the stakes have been increased overnight by Jacob Rees-Mogg who said, “The Conservative Party has always been for the union. The basic premise is that the UK and Northern Ireland must leave on the same basis and Northern Ireland cannot stay de facto in the single market and customs union.”

Mrs. May’s assertion that, “on a couple of issues some differences do remain which require further negotiation and consultation” looks a huge understatement.

Currency markets will get a brief respite from politics when the UK services PMI is released at 09.30 this morning but then it will be back to taking bets on the Government’s ability to deliver a Brexit deal acceptable to everyone.

The USD Dollar had a decent day on Monday as stock markets rallied early in the New York session and it proved surprisingly resilient as equity markets subsequently gave up their gains. Its index against a basket of major currencies reached almost 93.10 and it opens in London this morning at 92.8.

Away from Trump and taxes, the main economic news will be the release of the ISM non-manufacturing index. This has signaled 94 consecutive months of expansion in activity and can confidently be predicted the run will extend to at least 95. October’s reading of 60.1 was the highest since August 2005 and whilst some modest pullback to around 59.0 is expected today, this would still be a very high reading historically.

One of the more closely watched indicators of the US economy is a model developed by the Atlanta Fed. This takes incoming high-frequency US economic data and updates in real-time its forecast of the current quarter’s GDP number.

As today brings not just the ISM survey, but also the merchandise trade deficit for October, they’ll be publishing a new forecast of Q4 GDP this evening. Currently it stands at an annualized pace of 3.5%; providing ample justification for the Fed to be raising interest rates at next week’s FOMC meeting.


The euro ended Monday within 10 pips of where it began at 1.1865. It has been in a very tight range overnight with little enthusiasm shown to trade it one way or another.

The simple problem for the EUR at present is that whilst the economic news is almost without exception positive, it is well known and already ‘in the price’. It takes a stunning set of incoming data to produce a genuine shock. So, although we’ll get the latest individual country and Eurozone aggregate service sector PMI’s today, everyone expects them to be very good. Anything softer than consensus expectations would likely be dismissed as a blip, whilst the bar is set so high that it will be very difficult to top the superlatives which have been used to describe the performance over the last couple of months.

EUR/USD opens in London this morning at a very familiar 1.1865 though GBP/EUR is around 30 pips lower at 1.1329 having at one point on Monday been as high as 1.1420.

Perhaps the biggest lesson from the volatility of the GBP/EUR rate of the past week is that it is good to have firm orders already in place if there’s a particular target rate you wish to deal at. There are so many twists and turns and plenty of price ‘spikes’ in both directions that trying to follow the market in real time requires a huge amount of mental capital. Better to have a firm order than try to hit a constantly moving target…

In our Sydney commentary overnight, we said about the RBA Board meeting that, “Re-reading the November 7th Statement, it is not obvious which paragraphs need much of a tweak either way”. Putting today’s Statement side-by-side, you’d need a magnifying glass to discern much of a difference.

“Recent data suggest that the Australian economy grew at around its trend rate over the year to the September quarter. The central forecast is for GDP growth to average around 3 per cent over the next few years. Business conditions are positive and capacity utilisation has increased. The outlook for non-mining business investment has improved further, with the forward-looking indicators being more positive than they have been for some time… Employment growth has been strong over 2017 and the unemployment rate has declined. Employment has been rising in all states and has been accompanied by a rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead.”

The use of the word “further” when talking about investment is one subtle change but whilst the RBA went on to note that, “some employers are finding it more difficult to hire workers with the necessary skills”, they qualified this in the very next sentence by saying, “However, wage growth remains low.”

With retail sales showing a +0.5% m/m increase in October against forecasts of a more modest +0.3% rise, Australia’s Dollar has had a better night than its cricketers. AUD/USD is almost half a cent higher at 0.7645 whilst GBP/AUD is a full 1 ½ cents lower at 1.7585.

Canadian Dollar traders were able to pause for breath on Monday after the enormous swings of Friday afternoon. The good news was the general resilience of the currency in the face of a 90 cents drop in crude oil prices.

NYMEX crude began the week at $58.35 but fell steadily in each time zone to finish in New York around $57.46 which is where it opens this morning. Despite this drop, USD/CAD closed barely 20 pips above its opening level at 1.2685 and in the Asian session overnight it has moved down to 1.2660.

There are no local economic events on today’s calendar. Looking forward, the Bank of Canada holds its 8th and final monetary policy meeting of the year on Thursday. Compared to the economic situation at its last meeting in October, retail sales, the labor market, housing market, manufacturing activity, trade and oil prices have all improved somewhat though inflation has eased a bit lower.

Markets are pricing around a 50% probability of a rate hike in January. Though they could react quite sharply to any clear steer from Governor Poloz, it’s hard to imagine much more volatility for the CAD than we saw at the very end of last week. It opens in London this morning at USD1.26600 and GBP/CAD1.7020.

The New Zealand Dollar ended Monday as the worst performer of all the major currencies we track here.

The AUD/NZD cross rose half a cent, while NZD/USD and NZD/CAD both fell half a cent. Overnight it has recovered somewhat, after RBNZ Acting Governor Grant Spencer’s speech on “Low inflation and its implications for monetary policy”; the text of which was released at 1.15pm local time today.

He told the Institute of Directors in Auckland a series of factors "may be reducing the leverage monetary policy has over inflation" and said the bank's flexible inflation targeting approach is becoming more flexible and relatively more weight is being attached to "output, employment, and financial stability." The Governor painted different scenarios where both rate cuts and rate hikes might be necessary, but said the central bank is now "assuming greater persistence in low global inflation" and that is contributing to its current flat interest rate track.

The RBNZ’s latest forecasts show it doesn't expect to raise rates until mid-2019 at the earliest. The NZD rose from USD0.6860 to a high of 0.6907 overnight and opens in London at 0.6893. GBP/NZD is more than 1 ½ cents down at 1.9497.