Daily & Weekly Market News

Get access to our expert daily market analyses and discover how your currency has been tracking with our exchange rate tools.

USD eases as Republicans lose Alabama Senate Election. AUD up on M&A deal, GBP steady ahead of average earnings data.

By Nick Parsons

As Wednesday drew to a close, a quick look at the GBP/USD exchange rate would suggest it had been a good day for the British Pound. This would be a misleading conclusion. Instead, it was a bad day for the US Dollar which fell ahead of the FOMC Statement and then even more sharply in the final couple of hours of the New York session. The GBP ended the day up against the USD and CAD, unchanged versus the EUR but fell against both the Australian and New Zealand Dollars.

Just as investors were digesting the Fed Statement and listening to Dr. Yellen’s final FOMC Press Conference came news that the UK Government had been defeated on one of last night’s four parliamentary votes on Brexit. The implications of this for the British Pound appear somewhat mixed. On the one hand, any defeat for the Prime Minister is something which will weaken her authority and arguably put her in a weaker negotiating position in Brussels. On the other, the substance of the 24-word Bill is to give Parliament a vote on the final terms of the Brexit deal. Essentially, it means that MPs could reject the terms of any withdrawal — or amend the legislation to delay Brexit — if they are not satisfied with the deal negotiated. In the event of “no deal” the amendment could be used by MPs to try to reverse Brexit. To the extent that it leaves the door open to a rejection of Brexit, this could perhaps be interpreted as a GBP positive, albeit not one which we’d put much weight on right now.

For today, we have November retail sales at 09.30am then the Bank of England MPC announcement at 12 noon. Having raise rates in November for the first time in over a decade, it would be a big surprise if they were to follow up with more hawkish signalling today, other than indicating a very gradual pace of future rate hikes. The MPC vote is expected to be unanimous in favour of no change in Bank Rate.

The Pound opens in London this morning at USD1.3425 and EUR1.1355, with GBP/AUD at 1.7525 and GBP/NZD at 1.9180.

After seven days without a fall (six up and one unchanged) the USD was arguably ripe for a bit of a correction ahead of last night’s FOMC Statement and Press Conference. Having touched 93.81 on Tuesday, its index against a basket of currencies was already slipping back as the CPI figures were released. Headline CPI came in as expected at 2.2% y/y but the core ex-food and energy number fell to 1.7%.

Fully three-quarters of the increase in the all-items CPI from 2.0% to 2.2% was due to energy prices whilst car insurance, new and used vehicle prices also increased. The core measure excludes these items and was depressed further by a 1.3% m/m drop in apparel; the biggest monthly decline since September 1998. Immediately prior to the Fed announcement, the USD index was down almost 0.4% from Tuesday’s high at 93.46.

The Fed Statement noted, “the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong.” In its new economic projections, it revised up 2018 GDP forecasts from 2.1% to 2.5% with further more modest upgrades to the outlook in 2019 and 2020.

Post-FOMC, the Dollar extended its decline, with the index falling to a 1-week low of 93.00 even as the S+P 500 hit yet another all-time high. In Asia overnight, it hit 92.95 before bouncing very slightly to open in London this morning around 93.10.

 

In a pre-FOMC session in which the dollar generally struggled after the core CPI numbers, the euro found it difficult to capitalise. In part this is due to renewed uncertainties around Italian politics and Press reports locally that President Sergio Mattarella will dissolve Parliament this month and set a March 4 election date. Under the Italian Constitution, the vote has to be held before May 20th.

Recent opinion polls show a centre-right coalition ahead, followed by the Five Star Movement and Gentiloni's Democratic Party, but all of them several points away from the 40% bar which is necessary for one party to govern under the new so-called “Rosatellum” electoral law. Given this uncertainty, 10-year Italian bond yields yesterday jumped 10bp. Although there was no contagion into other peripheral Eurozone bonds, investors haven’t recently needed much of an excuse to sell EUR and the Italian news was the trigger for its latest underperformance.

Away from the serious but sometimes very tedious business of politics, there’s an ECB Council Meeting at lunchtime on Thursday at which new staff economic projections will be unveiled. With Eurozone monetary policy likely to be on hold for a very long time, the main interest amongst analysts is the colour of Draghi’s tie. Yes, honestly!! If we look back over the last three years, there have been 5 announcements on QE. On four of these he wore a blue tie, the first three being the same blue tie he wore when he famously vowed to do “whatever it takes” to save the euro”. October was a light purple. Since January 2015, he has never announced a policy easing whilst wearing a red tie. So, if you’re at your screens for 2.30pm Frankfurt time, watch to see how EUR/USD reacts as he walks into the Press Conference…

EUR/USD opens in Europe this morning at 1.1820 with GBP/EUR at 1.1357.

The Aussie Dollar had a good day on Wednesday, getting back on to a US 76 cents big figure for the first time in just over a week even before the FOMC Statement. This was partly because the Westfield takeover has prompted thoughts of some ‘pre-hedging’ of the foreign exchange transactions associated with the deal and partly because traders didn’t want to be caught short of AUD ahead of today’s Australian labour market report.

Those who closed out short positions were right to do so. Consensus estimates were for a 19,000 increase in employment with the jobless rate steady at 5.4%. According to the Australian Bureau of Statistics (ABS), employment actually jumped by 61,600 to 12.4 million in November. It was the largest monthly increase since October 2015, whilst the previous month’s figure of +3,700, was also revised up to show a gain of 7,800.

The figures are arguably not quite as good as they look. Every month the sample of the population in the survey is rotated and it appears the incoming group may have had higher levels of employment than those who left the survey. Nevertheless, the rest of the report was very strong indeed. Full-time employment jumped by 41,900 to 8.5 million, beating a 19,700 increase in part-time employment which rose to 3.9 million. Over the last 12 months, full-time employment has increased by 304,600, far outpacing a 78,700 increase in part-time employment. Combined, total employment increased by a huge 383,300. Reflecting the strong rise in employment, the total number of hours worked by all Australians increased by 9.8 million hours, or 0.6%, to 1.7409 billion hours.

Having reached a pre-FOMC high of 0.7612, the Aussie Dollar extended its gains in New York on Wednesday evening to a best level just above 0.7630 (the highest in 8 days). It has advanced further overnight and opens in London up around half a cent at 0.7665 with GBP/AUD at 1.7520.

There’s been so much to keep the foreign exchange market busy over the past few days that the Canadian Dollar has largely been overlooked. For most of Wednesday, USD/CAD was trapped in a very narrow range even as oil prices fell quite sharply during the North American morning. NYMEX crude fell almost a full dollar to $56.74; its lowest level since last Friday morning even though industry data showed a larger-than-expected drawdown in U.S. crude stockpiles. With the US Dollar in a broad-based sell-off after the FOMC, USD/CAD fell 70 pips to 1.2800 but this was very much about the ‘Big Dollar’ rather than its Canadian cousin.

We’ll finally get to hear what issues are keeping Bank of Canada Governor Stephen Poloz awake at night when he speaks at lunchtime in Toronto today. The consensus amongst analysts locally is that he’ll focus more on the negatives for the economy as the positives would presumably allow him to sleep soundly. Around the same time, we’ll also get to see data on new house prices.

USD/CAD opens in London this morning at at 1.28255 with GBP/CAD at 1.7220.

The Kiwi Dollar had held on to a US 69 cents big figure ever since 06.00am London time on Monday morning and reached a 3½ week high of 0.6995 even before last night’s Fed Statement. After Janet Yellen’s final FOMC Press Conference, the US Dollar suffered a sharp and broadly-based sell-off NZD reached US 70 cents for the first time since October 19th.

Overnight, the new Labour-led Government in New Zealand released its Half-Year Economic & Fiscal Update. It forecast that economic growth would average close to 3 per cent over the next five years, peaking at 3.6 per cent in 2019. Unemployment is also forecast to fall to 4 per cent, despite hikes in the minimum wage pushing wage growth significantly higher. forecast that economic growth would average close to 3 per cent over the next five years, peaking at 3.6 per cent in 2019. The forecast sees revenue growth rising sufficiently to see net debt fall to below 20 per cent of gross domestic product by 2022, a core promise of Finance Minister Grant Robertson.

The general consensus amongst analysts locally is that the Government is being too optimistic and has presented what is more likely a “best-case” scenario. Responding to criticism, Treasury secretary Gabriel Makhlouf said the forecasts assumed the sharp drop in business confidence since the election was assumed to be only temporary and would soon rebound.

NZD/USD is around 25 pips below its best pre-FOMC level and opens in London at 0.7005 with GBP/NZD at 1.9165.