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GBP ponders the Irish question, AUD softer after GDP figures, Bank of Canada meets today

By Nick Parsons

It is tempting to wonder whether England’s performance on last day of the second Ashes test might be a metaphor for this week’s Brexit negotiations; acres of newsprint taken up with the possibility of a victory then a sudden and dramatic collapse leaving only the taste of disappointment and defeat.

The London-Dublin agreement on so-called “regulatory alignment” post-Brexit may have looked a clever form of words but Arlene Foster, the DUP leader, said that they spent five weeks trying to get hold of a draft text of the UK-EU Brexit deal and that, when it finally saw it on Monday it was a big shock.

“When we looked at the wording and had seen the import of all that we knew we couldn’t sign up to anything that was in that text that would allow a border to develop in the Irish Sea.” When it was put to her that the Irish Government has said it would not budge on the substance of these matters, she said, “The Irish prime minister can be as unequivocal as he likes. We’re also unequivocal in relation to these matters.”

It now transpires that Theresa May and Arlene Foster didn’t even speak yesterday, whilst some Conservative MP’s are openly wondering whether regulatory alignment is not the clean Brexit they were hoping for. Somewhere, it seems, there’ll be tears before Friday and they might well be shed as much by foreign exchange traders as by angry politicians.

It’s a big call but from its opening level of USD1.3425 today, the GBP could move as much as 3-4% in either direction depending on whether there’s movement to a transition Brexit deal or the collapse of the Coalition Government and a fresh General Election.

The USD Dollar had a good time for much of Tuesday before slipping into the close and then overnight in Asia. It’s index against a basket of major currencies rose from 92.75 to 93.13 - its best level in almost two weeks – but slid to 93.0 at the New York close and opens this morning at 92.9.

The latest reading on the service sector of the US economy signaled the 95th consecutive month of expansion in activity. The headline index fell 2.7 points to a still-elevated 57.4 whilst the business activity sub-index slipped just 0.8 to 61.4; reflecting growth for the 100th consecutive month. New orders and export orders were at 58.7 and 57.0 respectively whilst employment slipped a couple of points to 55.3.

One of the really good but somewhat obscure 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 Tuesday brought not just the ISM survey, but also the merchandise trade deficit for October, they published a new forecast of Q4 GDP yesterday evening; downgrading their estimate from 3.5% to 3.2%. This is still higher than anywhere else in G7 but may not be enough on its own to support the Dollar if bond yields and stock markets now turn lower. Technical support around 92.5 then last Monday’s low of 92.2 is now very important.

 

The euro had a poor day Tuesday, losing almost half a cent to the USD to finish around 1.1813 and falling against almost every other currency, although unchanged against the Pound at GBP/EUR1.1360.

Its drop came despite figures which confirmed the eurozone service sector registered quicker output growth in November, with the final PMI matching the flash estimate of 56.2. The final Eurozone composite index was also confirmed at 57.5 with the Press release noting breathlessly, “The rate of euro area economic expansion moved up a gear in November. Output growth accelerated to the fastest in over six-and-a-half years, while rates of increase for all of the main survey indicators covering demand, employment and inflation also hit multi-year highs… Growth was again led by a resurgent manufacturing sector. Manufacturing production rose at the quickest pace in almost seven years in November and the headline index from the manufacturing survey – the Manufacturing PMI – posted a level bettered only once in its 20-year history.”

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.

With an absence of Eurozone economic indicators today, attention this morning will be on German data: factory orders then retail and construction PMI’s. EUR/USD opens in London this morning at 1.1835 with GBP/EUR around 25 pips lower at 1.1335.

The Aussie Dollar did well through Tuesday’s Sydney session but the day’s high of USD0.7650 came just before London traders arrived at work and it was downhill all the way from there against a generally better-bid US Dollar. By the New York close, the pair was struggling to hold on to a 76 cents handle though the AUD had made net gains against the CAD, GBP and EUR.

Overnight, the big news has been the Q3 GDP figures which came in softer than consensus expectations. Most analysts’ forecasts had pinned growth around 0.7-0.8% q/q so the headline gain of just 0.6% was a clear miss. The annual rate of growth had been expected at 3.0% but printed only at 2.8%.

The main culprit was the household expenditure category which struggle to grow at all and rose just 0.1% q/q. This weakness is due to a combination of very soft earnings growth and some nervousness over personal finances and the residential property market.

A deeper dive into the GDP figures shows that the savings rate increased from 3.0% to 3.2%; the first increase since Q2 2016. The AUD/USD rate fell from 0.7612 to 0.7576 then stabilized at these lower levels to open in London around 0.7583. GBP/AUD, meantime, opens at 1.7700.

After a 2-day surge, the Canadian Dollar had a more mixed performance on Tuesday; rising against the GBP and CAD but falling against the US, Kiwi and Aussie Dollars. Overnight it has been largely out of the spotlight, almost exactly unchanged against the USD with GBP/CAD down around 20 pips at 1.7035.

The CAD was helped by figures showing the trade deficit narrowed to $1.47bn in October from a revised $3.36bn in September as exports increased after four consecutive monthly declines. Economists had forecast a deficit of $2.70bn. The Bank of Canada – like all its global peers – stresses how its monetary policy actions are dependent on incoming economic data.

Today we’ll get to see how these export numbers and last Friday’s labour market report are influencing their current thinking. It would be a big surprise if rates are moved from their current 1.0% today, though Governor Poloz has previously spoken about his preference for surprises rather than forward guidance if policy is to be most effective.

Before last week’s stunning employment numbers, markets were pricing around a 47% probability of a rate hike in January. This has now risen to a little over 50% and the Canadian Dollar opens in London this morning at USD1.2693 and GBP/CAD1.7035.

Foreign exchange can be a very frustrating asset class at times. Having ended Monday as the worst performer of the major currencies we track here, it was very much a case of ‘Turnaround Tuesday’.

The New Zealand Dollar finished top of yesterday’s FX pile even though arguably very little had changed other than RBNZ Acting Governor Grant Spencer’s speech on “Low inflation and its implications for monetary policy” which we reported on here.

Overnight we’ve seen the ANZ job vacancy numbers which inched down 0.1% in November from the previous month. Despite this slip – which was the first drop in four months - job ads remain near historic highs as the country experiences a skilled labour shortage. Annual job ads growth in Canterbury and Wellington eased to 6% and 8% respectively while Auckland is slowly heading towards a broadly flat outturn.

The Kiwi Dollar has extended yesterday’s gains overnight and is again up against every one of our featured currencies. It has clawed its way back on to a US 69 cents handle and opens in London at USD0.6904 and GBP/NZD1.9435.