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AUD and NZD have a strong start to the week. USD eases back after Friday’s late surge. GBP and EUR both mixed at the European open.

By Nick Parsons

The British Pound had a very volatile but ultimately pretty poor week. It began last Monday at USD 1.3385 but was weighed down by concerns over whether Conservative MP’s would accept the deal agreed in Brussels the previous Friday by UK Prime Minister Theresa May. Tuesday’s CPI switched the focus to falling real incomes whilst Wednesday brought the Government’s first Parliamentary defeat on Brexit. Thursday saw the Bank of England leave interest rates unchanged and after a steady start Friday, the pound plunged late afternoon as the US appeared close to agreeing tax reform and a surging equity market lifted the Dollar. The GBP ended the week as the worst performer amongst all the major currencies.

This morning, (542 days after the referendum) a UK government subcommittee is going to hold talks on what kind of relationship Britain wants to have with the EU. This comes one day ahead of a full Cabinet meeting to decide what it wants from the negotiations. The Brexit secretary, David Davis, has suggested a “Canada plus plus plus” deal, broadly based on the EU’s trade deal with Ottawa, but covering services, including financial services, and allowing closer ties because the volume of trade covered is so much larger.

Foreign Secretary Boris Johnson wrote yesterday in a newspaper article that, “What we need to do is something new and ambitious, which allows zero tariffs and frictionless trade but still gives us that important freedom to decide our own regulatory framework, our own laws and do things in a distinctive way in the future”.

Whatever is decided on the UK side, the EU still holds all the aces in the Brexit negotiations. According to The Times, Michel Barnier, the lead EU Brexit negotiator, told Prospect magazine that “no way” could there be a bespoke trade deal that mixed those that applied to Canada and Norway. “There won’t be any cherry picking,” he said.

A long time has passed since Foreign Secretary Boris Johnson’s confident claim that he was “pro-cake and pro-eating it”.

After Friday’s very weak close in thin liquidity conditions, the GBP opens around a quarter of a cent higher in London this morning at USD1.3345. Against the EUR it is little changed at 1.1340 while against the Australian Dollar it is a quarter of a cent lower at 1.7405.

The Dollar had a very volatile week but its index against a basket of major currencies ended almost exactly where it had begun at 93.50. Record highs for the stock market brought the dollar’s high for the week on Tuesday at 93.81 before a Senate election defeat in Alabama questioned the President’s judgment and reduced the Republican majority in the Senate to just one seat. The USD turned lower and despite what looked to be a very non-controversial FOMC Statement and subsequent Press Conference, extended its decline in the last 2 hours of trading in New York, with the index falling to a 1-week low of 92.95.

From the New York opening on Friday, however, stocks began to surge on news that the last Republican hold-out on tax reform was now going to offer his support after being offered some concessions on child care provisions. The S+P 500 index jumped a stunning 25 points to a fresh closing high, dragging the USD index up three-tenths to end a volatile week exactly where it had begun at 93.50.

Overnight in Asia the US Dollar has slipped a little to 93.30. All eyes are on the passage through Senate of the tax reform bill. Vice President Mike Pence has delayed a trip to the Middle East as the Republican majority is so slim the party can’t afford even to have one Senator away…

 

The Euro had another generally disappointing week, failing to gain any upside traction even as incoming data continued to show the economic recovery in the Eurozone to be broadening and deepening. It opened in Asia last Monday morning at USD1.1765 but on Tuesday it fell to the week’s low of 1.1724 on Italian Press reports that parliamentary elections would be held on March 4th. Wednesday’s post-FOMC Dollar sell-off saw EUR/USD jump more than a cent, and on Thursday morning, it reached its best level of the week at 1.1843, helped by very strong purchasing managers surveys.

At the ECB meeting, new staff economic projections showed upward revisions to growth forecasts although inflation projections for 2019 and 2020 were left unchanged at 1.5% and 1.7% respectively. The significance of the CPI forecasts is that on a 2-year horizon, inflation is not yet back at the ECB’s target of “close to but just below 2%”. This provides the justification for continuing the very accommodative monetary policy. By Friday’s close, the EUR had given up all of Thursday mornings gains and more; ending in New York at the session lows of USD1.1751 as the USD surged in a very liquid market.

In overnight trading in Asia this Monday morning, the EUR has gained around 20 pips to 1.1765 with GBP/EUR unchanged at 1.1337. Today brings the final Eurozone CPI numbers and the highlight of a fairly sparse economic data calendar will be Tuesday’s German ifo survey.

The Australian Dollar opens this morning after its best week for several months; rising for four consecutive days then only finally giving ground to a resurgent US Dollar in the last few hours of trading in New York on Friday. Having opened the week at 0.7515 and moved steadily higher, AUD/USD jumped to 0.7668 immediately after the employment numbers were published on Thursday and then onto a high of 0.7689 on Friday; its best level since November 10th.

Soaring US equity markets on Friday dragged up the USD in their wake to leave the AUD at USD0.7641 at the New York close. Over the course of the whole week, the Australian Dollar was the second-best of all the major currencies we track here; just knocked off top spot by the Kiwi Dollar.

The main event in Australia today was the Government’s Mid-Year Fiscal and Economic Outlook (MYEFO). This update traditionally gives the Government a good opportunity to make soothing noises to the international ratings’ agencies about economic growth and debt sustainability. In this regard, today’s MYEFO was exactly as expected.

The Government continues to forecast a return to budget balance in 2019-20 and then a surplus of $10.2bn in the 2020-21 fiscal year. A slowdown in the housing market and slower growth in wages have reduced the estimate of 2017-18 GDP from 2.8% to 2.5% though the unemployment rate is now see a quarter of a percent lower at 5.5% and CPI has been left unchanged at 2.0%.

The initial reaction from the credit agencies was broadly positive. Moody’s said, “Overall, the modest changes in Australia’s fiscal and economic outlook maintain a credit-positive commitment to returning the budget to a surplus in fiscal 2021.

Moody’s continues to see risks that fiscal deficits will be wider for longer than the government projects. This reflects our expectation for more subdued nominal GDP growth than over the past decade, a consequent dampening of revenue generation and a testing climate for spending restraint. The mild reduction in the expected profile for wages growth embodied in the forecasts remains a concern.”

The AUD opens in London this Monday morning at USD0.7665 with GBP/AUD at 1.7405.

The Canadian Dollar spent the first few days of last week in a fairly narrow range, pulled up and down solely by movements in crude oil prices ahead of a keenly-anticipated speech on Thursday from Bank of Governor Stephen Poloz.

Overall, the context of his speech was that the Canadian economy is doing extremely well and is at a “sweet spot” in the economic cycle. “The economy has made tremendous progress over the past year, and it is close to reaching its full potential. We are very encouraged by this, and we are growing increasingly confident that the economy will need less monetary stimulus over time.”

Currency markets loved this speech. USD/CAD tumbled a full cent to a one-week low of 1.2735 and it was the best performing currency of the entire day, gaining even against a buoyant Australian Dollar. On Friday, however, the CAD was unable to resist in the face of the US Dollar’s late surge and USD/CAD ended the week very little changed from where it had begun at 1.2870.

For the week ahead, there’s still plenty to come on the Canadian economic data calendar. Wednesday is wholesale trade, Thursday is CPI day and on Friday it’s the monthly GDP numbers for October. First up today, though, are numbers on international securities transactions and consumer confidence. The Canadian Dollar opens in London this morning at USD1.2850 with GBP/CAD at 1.7150.

The New Zealand Dollar ended a volatile week at the top of the pile; the best performer amongst all the major currencies.

NZD/USD jumped almost a full cent to 0.6930 during the first Asian session of last week on news of a new Governor at the RNBZ. Late in Monday’s US session, the pair broke above the late November high of 0.6943 and the much-improved technical chart picture left it well positioned to capitalise on the USD weakness after the FOMC Statement on Wednesday evening. By the New York close, NZD/USD was on a 70 cents handle for the first time since October 19th.

Thursday saw a reversal lower in the NZD as the Government released its Half-Year Economic & Fiscal Update which was generally seen as being far too optimistic. Whatever the case, the NZD soon rebounded and by lunchtime in London on Friday it reached a fresh high for the week of USD0.7027 before succumbing to the US Dollar’s late surge to finish the week in New York at 0.6990. With the AUD/NZD cross falling very modestly from 1.0975 to 1.0930, this meant the Kiwi Dollar took the prize as the strongest currency of the week. The week ahead is packed with economic data as the official statisticians clear their diaries ahead of the local holiday season. Q3 GDP figures will finally be published on Thursday, whilst Tuesday we’ll get to see if the sharp fall in November business confidence has been at all reversed. Before then, today we get the performance of services index which will be watched to see if it can match the resilience of its counterpart in manufacturing.

NZD/USD opens higher in Europe this morning at 0.7017 with GBP/NZD at 1.9010.