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USD rallies as stock markets reach fresh all-time highs. GBP awaits CPI figures for direction, NZD extends gains to 4-week high

By Nick Parsons

It is a rare day when Brexit doesn’t make the lead story on the front page of the major UK newspapers but that’s the situation this morning and one which will doubtless bring some relief in Downing Street. It has allowed the pound some respite, too, after yesterday’s fall, with GBP/USD trading broadly sideways in the Sydney session to open this morning in London around 1.3350.

It may well be only a temporary reprieve, both politically and for the currency. Monday was the 6th day of Parliamentary debate over the Brexit Bill; what is known as the Committee Stage. The trickiest votes have been scheduled for tomorrow and for next Wednesday. Though the Government has either backed down with concessions or narrowly won all of the procedural stuff so far, there is a proposal by the former Attorney General that would require the Prime Minister to write the terms of her Brexit deal into a law that would have to be passed by Parliament. This could well be the moment for a more serious rebellion than the votes thus far which have been on the scale of what colour paperclips to use.

As the week progresses, there’s a busier economic data calendar than we’ve seen recently. Average earnings and retail sales are all due before Thursday’s BoE MPC meeting whilst today brings the November CPI figures. If consensus expectations of an annual inflation rate of 3.0% prove correct, the Governor of the Bank of England will narrowly avoid having to write a letter of explanation to the Chancellor. If it is above 3% (and our own back of the envelope projections suggest higher petrol prices might outweigh Black Friday discounting) then the UK Press will also be full of stories about a worsening squeeze on real incomes.

The Pound opens in London this morning at USD1.3350 and EUR1.1335, with the CPI figures published at 09.30 local time.

The USD gave back some of its gains during the London session on Monday, largely because a 30 pip rise in the EUR/USD exchange rate outweighed a 30 pip fall in GBP/USD. If we look in detail at the US Dollar’s narrow trade-weighted index against a basket of currencies, the EUR has a 57% weight. The Japanese Yen has a 14% weight, GBP 12%, CAD 9%, with the Swedish Krone and Swiss Franc both at 4%.

By the New York close, the Dollar had regained these losses as equity markets rallied once again. The S&P 500 Index ended the day up 0.32% at 2,659, a new record close, led by the telecoms, technology and energy sectors. In particular, a 2 per cent gain for Brent, the global oil benchmark, helped to lift energy stocks on optimism about higher oil prices after a shutdown of a major pipeline in the UK’s North Sea. The Dow Jones Industrial Average added 0.23 per cent to 24,386; another all-time closing high.

The Fed begins its two-day FOMC meeting today and it is a near-certainty that rates will be raised 25bp. The only reason that some of the online calculators show an 88% probability of a 25bp hike is that the residual 12% reflects a 1-in-8 chance of a 50bp move. Now that would be a shock!

On the US economic calendar this week, the NFIB Survey of small business optimism comes later today, 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 continue to find some support, especially given the constructive price action seen on Monday.

 

After a pretty poor performance last week, the EUR rallied for almost the whole of the London session before giving back nearly all its gains in the New York afternoon. It rose from USD1.1770 to a best level of 1.1801 but couldn’t hold on to a 1.18 big figure and slid around 30 pips to finish pretty much where it began.

There was some talk at the weekend that the euro’s poor recent performance might have been linked to the European banking sectors’ seasonal demand for USD financing ahead of year-end; a phenomenon which has seen the cross-currency basis swap move sharply lower (USD more expensive to borrow) in each of the last two calendar years and which seems to be repeating again in 2017. The very last working day of 2016 proved to be especially painful for many international bank funding desks and there may be a willingness to pay up early for year-end money rather than suffer the extreme and very expensive volatility of end-Dec 2016.

Over the next few days, there’s an ECB Council Meeting at lunchtime on Thursday at which new staff economic projections will be unveiled. Before that, today 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 little changed from the New York close. It stands at USD1.1775 and GBP/EUR1.1335.

The Australian Dollar had a decent day on Monday in the Northern Hemisphere. Having stabilized in the low 75’s against the US Dollar Friday afternoon, it traded better right from the off and once it broke through Friday’s 0.7528 high, an improving technical picture helped lift the pair up to a best level in New York of 0.7542 before slipping into the close against a generally well-bid US Dollar.

Though it is now in technically somewhat better shape, the Aussie still needs some better fundamental news if it is to build on yesterday’s gains. With the Reserve Bank of Australia clearly in no rush whatsoever to tighten monetary policy (and now not having another Board meeting for almost two months), the incoming economic data in Australia have been disappointing recently. Last week saw GDP and trade data fall shy of analysts’ expectations whilst the previous week saw softness in consumer confidence, wages and house prices.

Overnight we have seen the latest NAB Business Survey. In the previous survey a month ago, Business Conditions jumped fully 7 points to +21; the highest in its 20-year history. The puzzle then was that Business Confidence was unchanged at +8; only barely above its long-term average. Today the puzzle is solved: the surge in Business Condition was more than fully unwound, tumbling 9 points to +12 whilst business confidence fell 3 to +6. Despite the softness in the headlines, the AUD has taken some comfort from stable employment (+7) and the fact that most measures of activity and confidence are still above their longer-term averages.

For today, AUD/USD opens in London around 0.7545. The two notable technical levels to watch are the 20-day moving average at 0.7577 then last Tuesday’s RBA high of 0.7650. England cricket fans travelling to the WACA in Perth for the third Ashes Test would have done well (and certainly better than their team…) if they’d converted their GBP into AUD last Friday morning. At that point, GBP/AUD was trading at 1.7990 compared to just 1.7690 this morning. A 3-cent move won’t make a huge difference to the price of those consolation beers but every little helps in a crisis!

The Canadian Dollar was pretty much sidelined throughout Monday, 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. The surprising feature of the CAD’s price action yesterday was its failure to gain any support from a big jump in oil prices which came on news that the North Sea Forties Pipeline System – which carries 400,000 barrels per day of oil to Scotland – is being closed for repairs after the discovery of a serious crack whose repair will likely take weeks rather than days.

The Norwegian Krone and Russian Ruble – two of the three currencies which traditionally benefit from higher oil prices – both rose yesterday but the CAD was largely unmoved. NYMEX crude (not a perfect substitute for Brent but still highly correlated to it) is up from $57.16 less than 254 hours ago to an overnight high of $58.47 and opens this morning at $58.38. USD/CAD is down just 20 pips at 1.2843 in London this morning with GBP/CAD at 1.7135.

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. Bank of Governor Stephen Poloz has a fascinatingly titled speech “Issues keeping me awake at night” on Thursday lunchtime in Toronto.

After a very choppy week, the volatility of the NZD continued on Monday and it was way out at the top of the FX pile; up against every major currency. This time at least, after the frustrations of last week, there was some genuine news to explain the move: the appointment of a new Governor of the RBNZ. 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 which have weighed on the NZD since the election on September 23rd.

Monday’s price action for the Kiwi Dollar was little short of spectacular: NZD/EUR rallied 55 pips, NZD/USD was up 80 pips, NZD/CAD rose 100 whilst GBP/NZD plunged more than 2 ½ cents. Overnight in Asia the NZD has extended these gains even further and it opens in London at a 1-month high of 0.6937. Against the British Pound, the cross is down at a 3-week low of GBP/NZD1.9235.