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USD breaks its 5-day winning streak; NZD surges on new RBNZ Governor, GBP opens higher but can it last?

By Nick Parsons

As a new week begins, let’s remind ourselves about Friday’s moves in the GBP. We’ll look at GBP/USD but it was a similar story against all the major currencies we track here. Having risen from 1.3330 on Thursday morning, the pound extended its gains to 1.3512 as Theresa May gave her Press Conference in Brussels. By lunchtime it had lost a full cent and by the London close was down at 1.3366. This classic “buy the mystery, sell the history” price action came as investors reflected on what seemed a poor and expensive deal for the UK and whether indeed all the Government’s own MP’s would agree upon its terms.

Over the weekend, with the Foreign Secretary away in Iran, the Minister for Exiting the European Union, David Davies, described the agreement as a “statement of intent” which was not legally enforceable, suggesting that the government could walk away from the deal. He also said that Britain would not pay a divorce bill without securing a trade deal with the EU in return; in contrast to the chancellor, Philip Hammond, who said last week it was “inconceivable” that Britain would fail to honour its international obligations. Mr. Davis said of the bill, “It is conditional on getting an implementation period. Conditional on a trade outcome. No deal means that we won’t be paying the money.”

What sounds good to a domestic political audience can sound very different in the capitals of Europe and it would be no surprise now to hear some push-back from across the Continent. As investors in the currency markets also have to deal this week with incoming economic data - CPI, average earnings and retail sales are all due before Thursday’s BoE MPC meeting – there’s plenty of scope for the recent volatility in the GBP to continue for a few days yet. It opens in London this morning at USD1.3425 with GBP/EUr at 1.1385.

The US Dollar last week rose for five consecutive days. Friday’s gain might need the aid of a magnifying glass to be accurately observed, but the USD index ended the week at 93.50 having begun around 92.80. The stock-market sell off 10 days ago proved to be very brief and by last Monday’s close of business, the S+P 500 index was at a fresh all-time high, talk of a Presidential impeachment had disappeared and the dollar’s troubles were behind it.

A decent US service sector PMI report on Tuesday was followed on Thursday by the third straight decline in weekly jobless claims and was the 144th consecutive week that claims remained below the 300,000 threshold. Friday’s employment report showed non-farm payrolls rose 228k versus expectations of a more modest 195k increase whilst the unemployment rate remained at a post-GFC low of 4.1%. This seems only a pause in a downward trend; if payrolls continue to rise at the average pace of the last 3-6 months, then the unemployment rate will fall around one-tenth each quarter.

In overnight trading this Monday morning, the USD has slipped from Friday’s close with its index against a basket of major currencies down just over a tenth of a point at 93.40. The Fed begins its two-day FOMC meeting tomorrow and it is a near-certainty that rates will be raised 25bp. On this week’s US economic data calendar, CPI is released Wednesday, Thursday brings retail sales and Friday is industrial production. If the stock market can withstand higher rates and a new set of interest rate projections for 2018, the US Dollar ought to find some support though we wouldn’t rule out a move down to 93.00 in the meantime.

 

The Euro opens in London this Monday morning after a bad week which - even with the benefit of 20:20 hindsight – is not easy to explain. There were no ECB speakers resetting or finessing investors’ monetary policy expectations and the incoming economic data were almost without exception positive. EUR/USD began at 1.1875 but this proved to be its best level of the whole week even though surveys of confidence and activity showed the economic recovery in the Eurozone to be broadening and deepening. None of this helped the EUR at all. It traded sideways on Monday, lower on Tuesday with accelerating downside momentum dragging it to a low of 1.1737 on Friday morning before closing in New York at USD1.1775 and GBP/EUR1.1365.

For this week, there’s an ECB Council Meeting at lunchtime on Thursday at which new staff economic projections will be unveiled. Before that, tomorrow its Germany’s ZEW survey of professional investors and we’ll get the ‘flash’ December PMI’s on Thursday morning. On Wednesday, European Commission President Juncker and European Council President Tusk are scheduled to brief members of the European Parliament about Brexit negotiations ahead of the EU Economic Summit in Brussels on Friday. At the start of business in London today, the EUR opens somewhat mixed; up very slightly against the USD at 1.1790 but a touch weaker against the GBP at 1.1385.

The Australian Dollar is a bit firmer in London this morning after a week which wasn’t dramatically bad but nonetheless saw the currency slide to 6-month lows against the US Dollar (0.7503) and its worst level in almost 18 months against the British Pound (1.7985).

It began last Monday clinging on to a US 76 cents big figure as it awaited the final RBA Board meeting of the year and the high of the week at USD0.7650 came as investors scoured the Statement for clues about monetary policy. In truth, there were only some very minor tweaks to the Central Bank’s language. Wednesday’s GDP figures with a headline figure of +0.6% q/q pushed the AUD down to 0.7560 and Thursday’s trade numbers were yet another disappointment, falling to a surplus of just $105 million in October from $1.6 billion the previous month. AUD/USD broke through technical support at 0.7540 and with pressure continuing on Friday, it reached a low of 0.7503; the weakest since early June.

The third Ashes test begins in Perth on Thursday, just a couple of hours after the latest Australian employment report is released. It’s a toss-up which will be the bigger focus of attention in currency markets, though we suspect nostalgia about the final big match to be held at the WACA will probably get more column inches than a dull economic statistic. The AUD opens this hot Summer week at USD0.7525 whilst the Barmy Army convert their pounds at a rate of 1.7825.

The Canadian Dollar opens steady in London this morning after a week in which it reversed all its prior strength after the really good employment report on the very first day of the month. Last Tuesday morning it reached a best level of USD1.2644 as investors anticipated the possibility of a hawkish surprise from Wednesday’s Bank of Canada policy meeting. This did not materialize. Instead, BoC noted 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”.

USD/CAD jumped up to 1.2800 almost immediately and by the New York close on Friday it was up at 1.2850; almost exactly where it was just before the jobless report. The week ahead is pretty light in terms of economic data with just new house prices on Thursday and the monthly survey of manufacturing on Friday. After a very quiet session in Asia, the Canadian Dollar opens in London this morning at USD1.2835 and GBP/CAD1.7225.

The New Zealand Dollar ended last week lower, but with some pretty large intra-day volatility which was never fully explained by the incoming economic data. NZD/USD began at 0.6880 and ended at 0.6837 but it jumped around from top to bottom of each day’s performance tables in what at times looked quite a random fashion.

Overnight, the volatility of the NZD has continued, and it is back at the top of the pile; up against every major currency. This time, at least, there is some genuine news to explain the move: the appointment of a new Governor of the RBNZ. Finance Minister Grant Robertson has announced Adrian Orr – a well-respected and highly experienced professional economist, former head of financial stability at the RBNZ and currently head of the NZ Superannuation Fund - will take up the post in the New Year. The new Labour-led government in New Zealand wants to add full employment to the bank’s inflation-fighting mandate and change its governance structure, including the appointment of outside experts to its policy committee. The appointment of a classically-trained insider to be the new Governor will help calm investor fears about a too-radical shift of direction. NZD/USD is up around 80 pips at 0.6920 with GBP/NZD down over 1½ cents at 1.9390.