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GBP steady though EU rules out any post-Brexit deal for financial services. USD slips further as EUR reaches for USD1.18

By Nick Parsons

The British Pound had a good start to this pre-Christmas week. It opened in Sydney on Monday morning at 1.3320 and by mid-afternoon London time had reached a best level of 1.3415. It gave up some of these gains in New York but nonetheless finished as the day’s strongest performer amongst the major currencies we track closely here.

Although Prime Minister Theresa May has consistently declined to give what she calls a “running commentary” on Brexit negotiations, she always gives a statement to the House of Commons after EU summits. These used to be extremely dull, with little information content, but they have now become major set-piece Westminster events. The published text of her remarks to Parliament says, “the guidelines published by President Tusk on Friday point to the shared desire of the EU and the UK to make rapid progress on an implementation period, with formal talks beginning very soon… We will now work with our European partners with ambition and creativity to develop the details of a partnership that I firmly believe will be in the best interests of both the UK and the EU”.

Though this speech gave a pre-Christmas lift to Conservative MP’s and their supporters, it doesn’t take much textual analysis to spot the two big problems: The phrase “very soon” is not defined and could actually mean many months pass before even the most tentative agreement is reached. More importantly, there appears no desire on the EU side to work with creativity.

In what is billed as an exclusive in this morning’s Guardian newspaper, the European Union’s chief Brexit negotiator, Michel Barnier, said Britain cannot have a special deal for the City of London. “There is no place for financial services. There is not a single trade agreement that is open to financial services. It doesn’t exist.” He said the outcome was a consequence of “the red lines that the British have chosen themselves. In leaving the single market, they lose the financial services passport.”

With no economic data scheduled for release in the UK today, the pound opens in London at USD1.3385 with GBP/EUR at 1.1345 and GBP/AUD at 1.7435.

The Dollar had a poor day on Monday even if, with the benefit of hindsight, it is hard to pin the blame on any specific factor. Indeed, we’d repeat the wise words of Janet Yellen that “correlation does not imply causality”. Having opened in Sydney at 93.50, the USD’s index against a basket of major currencies reached a high of 93.55 in the first couple of hours of trading but from then on it was downhill all the way; falling in all three time-zones to a low of just 93.03 before rallying to close at 93.25.

The blame for its decline cannot be placed on the equity market. The S+P 500 index added almost 20 points to yet another all-time record high with the Dow Jones Industrial Average up almost 200 points to make its 70th record close of the year. Nor can the finger of blame be pointed at the bond market. Ten-year US Treasuries were steady at 2.38% whilst 2-year yields climbed a couple of basis points to 1.83%. If political nerves were the culprit, this would surely have been reflected in a lower, not a higher, stock market. As for the day’s economic data, the NAHB homebuilders index smashed consensus expectations of 70 and rose to 74; its highest since December 1999.All we can say with confidence is that the Dollar fell. Be very wary of anyone who claims to know why.

Having traded up to 93.30 in Asia, the US Dollar index opens this morning in London at 93.20 with all eyes still on the passage through Senate of the tax reform bill. US economic data for Tuesday are housing starts and building permits; rarely market movers but – as we saw Monday – sometimes markets move for no obvious reason at all.

 

The euro had a good day on Monday, rising first in Asia, then in Europe and early in the New York day reaching its best level since just before last week’s ECB meeting. From an opening level around 1.1745, it reached 1.1818 before sliding back late in the day to the high 1.17’s. This strength in the Single European Currency came despite a very dovish speech from ECB Council member and Bank of Finland Governor Erkki Liikanen and the details of the final Eurozone CPI numbers for November.

Ms Liikanen said the recovery of the Euro area economy and reduction of economic slack supports confidence in inflation converging towards our inflation aim in due course but, “An ample degree of monetary stimulus is still required for underlying inflation pressures to continue to build up and support headline inflation developments over the medium-term”.

Inflation in the Eurozone was confirmed at 1.5% y/y in November. This was boosted by higher energy prices (which are now up 4.7% y/y) whilst food, alcohol and tobacco eased back to 2.3%. Core CPI rose just 0.9% y/y, in line with the preliminary estimate and it is for this reason that the ECB persisting with a very easy monetary policy even as the real economy is accelerating at a pace not seen since well before the GFC.

The EUR opens in Europe this morning at USD1.1793 and GBP/EUR1.1345. The main economic news today will be the German ifo Survey which last month jumped to an all-time high of 117.5 and is expected unchanged at this level in December.

The Australian Dollar had quite a good day on Monday although it couldn’t quite get back to Friday’s 0.7688 high - which was the best level since November 10th – on a day when the US Dollar itself was the weakest of all the major currencies. Each of the three main global time zones saw AUD/USD trade sequentially higher and it finished in New York around USD0.7665.

Overnight, the Minutes of the RBA’s December 5th Board meeting have been released. The Central Bank was generally upbeat on the labour market, noting conditions had remained positive and had been stronger than expected over the previous year. Employment had increased a little in October and growth over the previous year had been well above average. Full-time employment had risen sharply and was growing at around its fastest pace in a decade. The unemployment rate had edged lower to be 5.4 per cent in October, which was its lowest level since 2013, and unemployment rates had been on a downward trend in most states. Forward-looking indicators of labour demand suggested employment growth would be somewhat above average over the next few quarters.

For all the strength in employment, however, “growth in consumption was expected to have slowed in the September quarter and the outlook for household consumption continued to be a significant risk, given that household incomes were growing slowly and debt levels were high.” The RBA, it is clear, will not be raising rates until wages pick up: “How far and when stronger conditions in the economy and labour market might feed through into higher wage growth and inflation remained important considerations shaping the outlook.”

The AUD opens in Europe this morning at USD0.7671 with AUD/NZD at 1.0950 and GBP/AUD1.7440.

After last week’s very well-received speech, the Governor of the Bank of Canada, Stephen Poloz, gave an interview to the Globe and Mail newspaper this last weekend in which he played down the importance of so-called forward guidance. “I'm confident that other central banks, now that we are getting much more into normalcy, will gradually temper down the details around their forward guidance, too… I'm not going to judge whether the market got it right or not. But it does seem like the market has a tendency to seize on a new word as if it's a new secret code. Caution does not mean sitting back and doing nothing.”

For the moment, the Canadian Dollar hasn’t really responded to these latest comments. It spent all of Monday trapped in a range from USD1.2848 to 1.2878; shrugging off a 30c fall in oil prices but failing to get any real traction from Mr. Poloz’s call on interest rates that, “We need to get ourselves up there for real, and to the 2-per-cent zone, so we have room to manoeuvre for the next shock that comes along."

For the rest of the week, there’s still plenty to come on the Canadian economic data calendar. Wednesday is wholesale trade, Thursday is CPI and retail sales and on Friday it’s the monthly GDP numbers for October. After an overnight trading range in Asia which has seen USD/CAD stuck between 1.2860-1.2873, the Canadian Dollar opens in London this morning at 1.2860 with GBP/CAD at 1.7205.

After its very strong performance last week, the New Zealand Dollar was much more mixed on Monday. It rose against the US and Canadian Dollars, was down a little against the euro and Australian Dollar and fell somewhat more against the British Pound. As with the AUD, it couldn’t get back to Friday’s highs against the USD with an intra-day high of 0.7027 a couple of pips shy of last week’s best level.

Overnight we have seen ANZ’s business confidence survey. It was this which did the greatest damage to the Kiwi Dollar a month ago when the headline measure plunged 29 points to an 8-year low of -39. Unfortunately, there was no discernable pick-up in December: a net 37.8% of respondents expected the economy to deteriorate over the year ahead. Digging into the details of the survey reveals one bright spot. Business expectations for their own firms to grow in the next year picked up to a net 15.6% of respondents, from 6.5% in November. The historical average for this series is +28. As the ANZ noted in their Press release, “The economy is doing the hard yards at the moment. Positive forces remain, but the turn in housing, flattening off in net migration and lack of capacity in the construction sector are all dampening near-term growth."

NZD/USD opens in Europe this morning at 0.7005 with GBP/NZD at 1.9105. In a busy week for new Zealand economic data, tomorrow brings the trade balance and finally on Thursday we’ll get Q3 GDP.