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UK and EU agree “sufficient progress” has been made to move onto next phase of Brexit talks; GBP extends rally

By Nick Parsons

The British Pound began the latest leg of its move higher around 11.30am London time on Thursday and from its low of USD1.3333 it rallied almost two cents to an overnight high of 1.3512; not quite matching last Friday’s high of 1.3542.

Prime Minister Theresa May is in Brussels for talks with European Commission President Juncker whose chief of staff Martin Selmayr tweeted pictures of white smoke rising from a chimney stack, indicating a deal was done. The two leaders have apparently signed off a 15-page “progress report” that will allow EU negotiators to recommend opening a second phase of talks on post-Brexit relations.

According to the formal Statement, “The European Commission has today recommended to the European Council (Article 50) to conclude that sufficient progress has been made in the first phase of the Article 50 negotiations with the United Kingdom. It is now for the European Council (Article 50) on 15 December 2017 to decide if sufficient progress has been made, allowing the negotiations to proceed to their second phase…. In line with the Guidelines of 29 April 2017, and once the Member States agree with the Commission’s assessment, the Commission stands ready to begin work immediately on any possible transitional arrangements and to start exploratory discussions on the future relationship between the European Union and the United Kingdom.”

In plain English, Phase Two of the Brexit negotiations can now get underway. The good news for the GBP is that a collapse of the talks has been averted and hopes for a 2-year transitional deal post-2019 are very much alive.

Whether this is good enough to sustain the GBP at current levels remains to be seen and may well depend on the reaction of the Government’s own MP’s over the weekend. The pound opens in London this morning at USD1.3465 and EUR1.1460.

The USD Dollar marginally extended its gains for a fourth consecutive day on Thursday and is up again overnight. It’s index against a basket of major currencies closed in New York around 93.40 and has been up to a 2-week high of 93.52 during the APAC session.

It was helped by a stock market which regained its losses of the last two sessions and by a decent set of weekly jobless claims figures ahead of Friday’s November labour market report.

Initial claims for state unemployment benefits slipped 2,000 to a seasonally adjusted 236,000 for the week ended Dec. 2, the Labor Department said. Data for the prior week was unrevised. It was the third straight weekly decline in claims and was the 144th straight week that claims remained below the 300,000 threshold. That is the longest such stretch since 1970, when the labour market was of course much smaller.

According to a Reuters survey, non-farm payrolls probably increased by 200,000 in November after surging 261,000 in October. Job growth in October was boosted by the return to work of thousands of employees, mostly in low-wage industries like hospitality and retail, who had been temporarily dislocated by Hurricanes Harvey and Irma. The unemployment rate is expected to remain steady at 4.1%.

Markets usually approach the monthly US labour market report in a state of eager anticipation but it’s hard to see anything – however dramatic – shifting the Fed from a 25bp hike next week. More of the same hasn’t been a bad backdrop for the stock market in 2017 and equities need to advance less than 1% to be back at fresh all-time highs. The USD should continue to find support if stocks hold up.

 

The euro continues to grind lower without getting any support from further strength in incoming economic data. Yesterday brought the final estimate of third quarter Eurozone GDP which fleshes out the provisional numbers in a little more detail.

The very encouraging feature of Q2 had been a 2.2% jump in investment spending. Q3 has added to this with a further 1.1% gain. Household consumption and investment both contributed around 0.2% to the 0.6% q/q total, with net trade and government both contributing +0.05% and inventories 0.1%.

Within the Eurozone, the fastest quarterly growth rates were registered in Malta (+1.8%) Slovenia (+1.0%) and Cyprus (+0.9%) whilst the slowest were Belgium, Estonia and Greece (+0.3%). Broadening the analysis to the EU 28, Romania grew a hugely impressive 2.6% q/q whilst at the other end of the table, Denmark was the only economy which contracted in Q3.

EUR/USD briefly rallied back on to a 1.18 handle in the New York session before giving up all its gains and more into the close; another very frustrating day for trend and momentum traders and equally difficult for those who place more weight on fundamental indicators. It opens in London this morning at a 10-day low of 1.1764 with GBP/EUR up at 1.1477.

The Aussie Dollar is having a bad week, with plenty of reasons to justify the currency’s weakness. Poor GDP figures then a disappointing set of trade numbers have pulled the rug from under the AUD at a time when we’re already seeing signs of softness in consumer confidence, wages and the residential property market.

That’s a pretty long list of negative factors even before we factor in an inquiry into the country’s major banks. On Thursday, AUD/USD fell from 0.7566 in Sydney to end the Northern Hemisphere day in New York at a 5-month low of 0.7507. Overnight it couldn’t get much support either from better than expected home loans data (a -0.6% m/m drop beat consensus forecasts of a -2.5% fall) or from much better China trade figures which are often seen as a bellwether for the global economy in general and Australia in particular.

China’s exports in November rose 12.% y/y, the fastest pace in eight months, led by strong sales of electronics and high-tech goods, while commodity purchases helped imports grow 17.7%. AUD/USD opens in London around USD0.7510 but the old technical support point of 0.7540 now becomes an area of upside resistance. GBP/AUD opens in London at 1.7940 having touched a fresh 18-month high overnight of 1.7990.

The CAD fell again on Thursday as local media reflected further on the more dovish comments in the BoC Statement. It drew no support from an oil price which rallied around 70 cents on the day with NYMEX crude finishing around $56.70 per barrel. Nor did it benefit from the latest data from the construction sector.

A 3.5% m/m increase in October building permits far exceeded consensus forecasts for a gain of 1.5% whilst September was upwardly revised to 4.9% from a previously reported 3.8% rise. Non-residential building permits jumped 5.5%, led by intentions for commercial buildings, as Quebec and Ontario planned more warehouses and office buildings.

Both provinces have seen their unemployment rates fall as their economies have picked up. Permits for industrial buildings also rose 14.2 percent on construction intentions for factories and plants in Alberta, which is recovering from the oil price shock two years ago.

As for the purchasing managers survey, this shrank only very modestly from 63.8 to 63.0 in November whilst the gauge of employment rose to an adjusted 53.9 from 52.0, boding well for further job gains. As with the New Zealand Dollar, the Canadian Dollar did what it did on Thursday despite the data, not because of it. The CAD opens in London this morning at USD1.2860 and GBP/CAD1.7350 ahead of data this afternoon on housing starts and capacity utilization.

The Kiwi Dollar had a poor day on Thursday even though – as in Canada – the economic data this week have been pretty good.

The job vacancy numbers Tuesday were sound and Wednesday we learned that building activity in the Wellington region grew strongly over the past year. Yesterday, Stats NZ reported that seasonally adjusted total wholesale trade sales value rose 1.1 percent in the September 2017 quarter, after rising 1.6 percent in the June 2017 quarter.

This was the sixth consecutive quarterly rise, driven mainly driven by fruit exports and grocery wholesaling. With a half decent dairy auction too, after 4 consecutive declines, it would have been reasonable to expect the NZD to outperform the AUD but that’s not how it turned out. NZD/USD ended the New York session at its low of the day at USD0.6825.

Overnight, we have seen the last of the so-called ‘partial data’ which feed into the GDP data as Stats NZ released the survey of manufacturing for the September quarter. This shows the volume of manufacturing sales rose 0.3% in Q3, after a 1.0% rise in the June 2017 quarter. Of the 13 manufacturing industries, seven fell and six rose in the latest quarter. NZD/USD opens in London this morning around 0.6835 with GBP/NZD at 1.9720.