Bank of England in the spotlight
Friday 3 November, 2017
Daily Currency UpdateForeign exchange markets have already been open for 12 hours and there’s now over 100 hours of uninterrupted trading until close of business in New York on Friday evening. Thus far, GBP/USD has traded in a fairly narrow range from 1.3106 to 1.3149 whilst against the Australian Dollar, only 24 pips separate the high and low between 1.7103 and 1.7127. The key event this week is of course the meeting of the Bank of England’s Monetary Policy Committee on Thursday. BoE Governor Mark Carney was memorably called an ‘unreliable boyfriend’ by the former Chairman of the influential UK Treasury Select Committee, Andrew Tyrie. This was a reference to his frequent unfulfilled promises to raise UK interest rates but then never to deliver on them. Against this background, the Governor and his committee have effectively been boxed into a corner by their recent warnings about the need to raise interest rates to deal with rising inflation and Mr. Carney’s credibility risks being shot through if he doesn’t deliver on his latest threat. UK interest rate markets currently reflect a 90% probability of a 25bp hike on Thursday though the MPC vote is unlikely to be unanimous, with most analysts expecting a 7-2 split on the Committee. If Mr. Carney is at pains to stress a “slow and gradual” pace of rate hikes, then much of the positive impact on the currency may be quickly unwound. The GBP needs tough talk if it is to move sustainably higher from current levels.
Key MoversThe USD put in a very strong performance last week, buoyed both by the ECB’s dovishness and another strong set of US GDP figures. The third quarter was undoubtedly flattered by a 0.7% contribution from inventories which could well be reversed in Q4 but back-to-back prints of 3% growth ought to cement expectations for a Fed rate hike in December. Whilst Dr. Janet Yellen will still be in charge at the Fed for that meeting, the White House has said that President Trump will announce his pick for the next Fed Chair before he departs for a trip to Asia on Nov 3rd. The USD Index surged from a low of 93.29 on Thursday morning to a high of 94.91 on Friday afternoon; its best level since July 19th. This week’s economic data from the ISM on manufacturing and service sector activity should see both indices at or close to cycle highs whilst October’s non-farm payrolls on Friday should see a strong rebound from last month’s hurricane distortions. There’s an FOMC meeting, too, on Wednesday and whilst investors can be confident there’ll be no change in monetary policy, the statement will be watched carefully for clues about a December rate hike. The President’s Twitter feed is the great unknown for FX this week but keep an eye too on US equities. Thus far they have shrugged off the rising dollar but any sign of a wobble might be enough to send it into modest reverse.
The British Pound gained ground steadily against the euro last week with EUR/GBP falling from a high of 0.8972 on Tuesday to close right on the lows at 0.8835; its weakest level since October 3rd. For much of the past few months, the debate has been how the ECB could communicate a scaling-back of QE without signaling a tightening of monetary policy. Last Thursday’s Press Conference saw Mr. Draghi signal a “dovish taper”; a reduction in the pace of bond buying but a commitment that interest rates would not be raised until well after QE finally comes to an end. In plain English this means another 12 months without a rise in Eurozone interest rates, even as the economic recovery becomes more broadly based and the pace of activity continues to pick up. On Friday and through the weekend, the constitutional crisis in Spain presented a fresh set of uncertainties for investors to deal with. It is not clear how much resistance there will be in Catalonia to direct rule from Madrid but anecdotal reports suggest a significant number of companies may be already shifting their operations from the region. EUR/USD has been in an extremely tight range overnight from 1.1594 to 1.1618 but any pick-up from current levels will be more dependent on events across the Atlantic than in the Eurozone itself.
Australia is well away from investors’ minds at the start of this potentially very busy week for global economic data and policymaking. There have been no economic data releases overnight and private sector credit and weekly consumer confidence figures due Tuesday are hardly likely to set pulses racing. As if to illustrate this point, the first 12 hours of trading have seen AUD/USD trapped in an 18 pip range from 0.7864 to 0.7882. The Bank of Japan meets Tuesday, the US Fed on Wednesday and Bank of England Thursday but it’s not until next week that the RBA gets to hold its Board meeting as is traditional on the first Tuesday of each month. With conflicting signals from recent economic statistics on CPI and employment, investors have adopted very much a wait-and-see attitude to the Australian Dollar and will be looking for more clues when Thursday brings September’s Trade Balance (consensus +$1.2bn) and Friday sees Retail Sales (+0.4% m/m). The AUD traded very heavily last week, breaking its 200 day moving average at 0.7705 and falling on to a US 76 cent handle for the first time since July 13th. With the RBA in a period of radio silence ahead of next Tuesday’s meeting and domestic politics adding to the air of economic uncertainty, the AUD looks set to drift sideways near-term. Friday’s USD 0.7627 low is now the key technical support level to watch.
Currencies come and go from fashion quite regularly; often due to unexpected economic or political shocks. The Canadian Dollar is a very good example of this phenomenon. Having surprised financial markets not once but twice with interest rate hikes, the Bank of Canada has subsequently seen a sharp deterioration in most of its main economic indicators. Indeed, the so-called “Economic Surprise Index” has plunged over the past 6 weeks to levels not seen since the fourth quarter of 2016. This may not be solely due to the power of monetary policy: Canada has also suffered from investor concerns about a potential renegotiation of NAFTA whilst there has been a high-profile attempt to curb overseas purchases of property through substantially higher taxes. Whatever the case, the period of outperformance which the Canadian Dollar enjoyed from May to September is now decisively over and USD/CAD has snapped back almost 7 cents higher onto a 1.28 handle. As recently as 10 days ago, GBP/CAD stood at 1.6400 but at one point last Wednesday afternoon had surged to 1.6984. It has subsequently given back around 140 pips of these gains and if this week’s Canadian data on GDP, raw materials prices and manufacturing activity don’t disappoint, then the CAD might find some respite after its recent sharp declines.
The Canadian Dollar has not been the only currency under the cosh recently: the New Zealand Dollar has spent the last couple of weeks as the worst performer amongst all the major currencies. NZD/USD tumbled through its 20, 50 and 100 day moving averages and its 200dma at 0.7155 was decisively broken after the announcement of a new Labour government. There’s been nothing in the legislative programme to lift currency investors’ spirits and the ‘big figure’ of US 70 cents was easily broken for the first time in almost 5 months. Friday’s close of USD0.6878 was the lowest since mid-May and in an otherwise quiet overnight market, the NZD has again been the biggest loser, falling another 40 pips on the day thus far. The GBP/NZD cross rate is up over a full cent from Friday’s 1.9080 close and is holding above its 20, 50 and 100 day moving averages. As ever after any sudden plunge, there’s always a temptation to view the currency as technically oversold at current levels but unless and until they receive more clarity about the government’s economic policy and its stance on the remit of the RBNZ, investors are unlikely to want to play the NZD from the long side anytime soon. Against this background, even a decent set of Q3 employment figures on Wednesday may do little to stem the rot.
- GBP/USD: 1.3120 - 1.3170 ▼
- EUR/GBP: 0.8800 - 0.8870 ▼
- GBP/AUD: 1.7030 - 1.7160 ▼
- GBP/CAD: 1.6820 - 1.6900 ▼
- GBP/NZD: 1.9150 - 1.9250 ▲