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GBP fortunes still depend on Irish border news, AUD and NZD both lower

By Nick Parsons

The pound is again lower this morning. In a Press Conference yesterday, Irish Prime Minister Leo Varadkar said that Theresa May had told him she would come back with fresh proposals late on Wednesday or Thursday.

As the first of these deadlines slipped with no word from London, so nervous currency traders have marked down the value of the GBP.

Michel Barnier, the EU’s chief Brexit negotiator, has told member states that the British government has just 48 hours to agree a text on a potential deal or it will be told that negotiations will not move on to the next stage. A failure to move talks on in December would mean that the terms of a transition period could potentially only be discussed after the next European council summit of leaders in March, leaving businesses in the UK to face more uncertainty over the shape and content of any post-Brexit transitional deal.

This leaves the pound once more at the mercy of rumours and leaks about the precise status of talks between Dublin, London and the DUP.

The Twitter feeds of interested parties – politicians and senior journalists – will be the primary source of information on what threatens to be a nervous day of trading. It begins in London with the GBP at USD1.3365 with GBP/EUR at 1.1335.

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 another poor day on Wednesday losing around 60 pips from its best level in Sydney of USD1.1844 to trade down to a 2-week low of 1.1781 with GBP/EUR stuck in a very narrow range just 5 pips either side of 1.1340.

The drop came despite figures showing German factory orders climbed in October for the third month in a row, confounding expectations of a decline. Factory orders increased 0.5% in October from the previous month, according to the Federal Statistics Office. September’s gain was also revised higher to 1.2% m/m from a previous reading of 1.0%. Details of the report showed orders from companies within Germany increased 0.4%, while international orders were up 0.5%. The international component was led by firms outside of the eurozone, where orders increased 1.6%.

Clearly, there’s still plenty of demand for the very high-quality consumer goods, autos and machinery for which Germany is so deservedly famous. Elsewhere in Wednesday’s batch of data releases, Eurozone Retail PMI improved to 52.4 points in November, its highest level since June.

Today brings German industrial production and we get to see how those higher orders translated into factory output. At 4pm there is a Draghi Press Conference hosted by the ECB in Frankfurt but in his capacity as Chair of the Group of Governors and Heads of Supervision (GHOS) of the Bank for International Settlements.

In the meantime, traders are reluctant either to sell dips or to buy into the rallies so we’re left in a familiar USD1.1750-1.1930 range unless and until some genuine ‘news’ hits the screens.

The Aussie Dollar had a bad day on Wednesday. Worse than expected Q3 GDP figures immediately knocked the pair from 0.7607 down to 0.7580 and after stabilizing during the European morning (without ever managing to get back on to a US 76 cents big figure) the AUS was hit for another 30 pips in the New York session.

Overnight it has weakened further, with AUD/USD falling from 0.7465 to 0.7443 after a very disappointing set of merchandise trade figures was released.

October’s trade surplus fell dramatically, falling to $105 million in from $1.6 billion the month before. This was way short of consensus expectations of a surplus around $1.4 billion. The worse than expected result was driven by both a 3 per cent slide in exports and a 2 per cent increase in imports, according to the ABS figures.

A big factor in the export decline was a slump in iron ore sales, which fell by 10 per cent over the month to just over $7 billion. Coal exports were also down 3 per cent to $4.3 billion. Detailed data on Australia's two biggest commodity exports show both the quantity and price of iron ore fell in October, while it was a massive fall in the volume of hard coking coal exports that caused most of the decline for that sector.

These are the first trade numbers for Q4 and unless there’s a significant rebound next month, worries will grow about the contribution that net trade can make to GDP.

AUD/USD opens right on key technical support at USD0.7440 and a break below this level would leave the pair at its lowest level in 5 months. GBP/AUD opens in London at 1.7732.

The Canadian Dollar’s strong run came to an abrupt end on Wednesday after the Bank of Canada’s final monetary policy meeting of the year.

Its review of incoming economic data noted they were, “in line with October’s outlook, which was for growth to moderate while remaining above potential in the second half of 2017. Employment growth has been very strong and wages have shown some improvement, supporting robust consumer spending in the third quarter. Business investment continued to contribute to growth after a strong first half, and public infrastructure spending is becoming more evident in the data. Following exceptionally strong growth earlier in 2017, exports declined by more than was expected in the third quarter. However, the latest trade data support the MPR projection that export growth will resume as foreign demand strengthens. Housing has continued to moderate, as expected”.

There was nothing too troubling in that assessment. Instead, the CAD was hit by the line that, “While higher interest rates will likely be required over time, the Governing Council will continue to be cautious, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation”.

After its recent strong run and with traders positioned for a hawkish BoC surprise, the CAD fell sharply. USD/CAD rose from 1.2665 to nearly 1.2800. The Canadian Dollar has slipped a little further overnight and opens in London this morning at USD1.2810 and GBP/CAD1.7135.

The Kiwi Dollar had a decent day on Wednesday, rising against both the Aussie and Canadian Dollars and the British Pound though it has fallen throughout the Asian session overnight.

Locally in New Zealand yesterday we saw the ANZ job vacancy numbers inch 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.

Separate numbers released yesterday from Stats NZ (the snappily titled official statisticians) showed Building activity in the Wellington region has grown strongly over the past year. The value of activity rose 27 percent on the previous September year – the largest annual increase ever recorded for Wellington. In the year ended September 2017, the value of building work put in place in the region totalled $1.7 billion (up $0.4 billion), almost tripling the growth rate seen in 2015. Having ended the New York session around 0.6875, NZD/USD opens in London this morning at 0.6850 with GBP/NZD at 1.9520.