AUD and NZD both steady a bit, but sentiment remains very fragile
Tuesday 21 November, 2017
Daily Currency UpdateThe Aussie Dollar has steadied a little after last week’s losses but it nevertheless traded very heavily throughout the Northern Hemisphere session on Monday. After its weakest close in more than five months (AUD/USD0.7565) on Friday, it could only rally as high as 0.7569 during the London morning before sliding throughout the New York session. There will be some relief that it didn’t break last week’s intra-day low of USD0.7540 but price action remains pretty poor and it won’t require much - whether a stray comment in Tuesday’s RBA Minutes or in Governor Philip Lowe’s speech to the Australian Business Economists (ABE) annual dinner – to knock the currency through some fairly fragile technical support. The two RBA speeches Monday focused mainly on financial stability rather than monetary policy but the Governor’s chosen title - “Some Evolving Issues” – rings a few alarm bells in your author’s head. Central Bankers are paid to worry and the danger of worrying in public is the audience focuses on the risks rather than their mitigants. Economic data is certainly a little thin on the ground in Australia this week with the so-called “Construction Work Done” series on Wednesday the ‘highlight of an otherwise empty calendar. If the AUD is to find any support, it won’t be from incoming economic news.
Key MoversThe choice facing currency traders when looking at the Australian and New Zealand Dollars at present is which one they dislike least. On Monday, the NZD took second prize in this ‘reverse beauty contest’ which meant the AUD/NZD cross edged slightly lower to 1.1092 after opening the week in Sydney around 1.1115. It does require a magnifying glass to see the movements clearly, though, and it would be a mistake to overinterpret the significance of 20 pips either way on this cross. NZD/USD just about managed to stay on a US 68 cents handle over the last 24 hours (it spent around 10 minutes in the 0.6790’s) but at no stage did it break above 0.6835. It remains below its 20, 50, 100 and 200 day moving averages and would need to trade above 0.6891 to get above its 20-day mark. The only economic data yesterday was BNZ’s Performance of Services Index. This fell 0.3 points to 55.6 from the previous month though the accompanying Press Release sought to put a positive spin on the drop, noting “these are robust results given the prevailing uncertainty surrounding the election, coalition negotiations, and government formation over the period.” For the moment, the FX market has given the NZD the benefit of the doubt though it is too early to be confident about calling the bottom of the market. NZD/USD needs to fall less than half a cent for some “fresh 2017 low” headlines to be written.
The British Pound’s generally positive momentum continued through the London session Monday but then faded later in the day as investors reflected on an important speech from the European Union’s chief negotiator Michel Barnier to the Centre for European Reform conference in Brussels. He said there are two contradictory soundbites from the strongest supporters of Brexit: that the UK will set itself free from EU bureaucracy; and that after Brexit the UK will still be able to participate in the single market, because the UK and the EU have shared common rules for 40 years. This is not a sound basis for going forward: “The UK has decided to give up the free movement of people. That means the UK will lose the benefits of the single market. That is a reality”. With Prime Minister potentially losing an ally in German Chancellor Angela Merkel (see below), it is a difficult background against which Chancellor Philip Hammond must deliver the annual Budget on Wednesday. He has the seemingly impossible task of spending considerably more money by borrowing less against a background of a slowing economy. It might really be a question of how exactly he will fail, rather than whether he can actually succeed. Of course, some of these concerns are already ‘priced in’ to the currency but do be aware of some potentially large swings in the GBP as the week progresses.
The US Dollar had a day of two halves on Monday but this was largely a reflection of the changes in sentiment around the EUR as incoming political news in Germany was assessed and digested. Its index against a basket of currencies opened around 93.50 on Monday morning and edged ahead around 20 pips as EUR/USD fell half a cent. As the EUR then recovered all its losses, the USD Index tumbled to test the big support level we’ve been highlighting at 93.30. In our New York morning commentary (we never sleep!) we wrote “Some talk of a CDU minority government has helped the EUR recover early losses but a sustained return above USD1.18 doesn’t look likely…” In fact, during the European afternoon the EUR then gave back all its earlier gains; allowing the USD index to bounce around 35 pips off its key chart point. There are no US economic data released Tuesday other than existing home sales which rarely shift the market dials much. Instead, the next big US focus is the Minutes of the last FOMC meeting to be released on Wednesday afternoon Washington time. The CME probability calculator shows a 91.5% chance of a 25bp rate hike on December 13th with a scarcely-believable 8.5% probability of a 50bp move. After a quick look through the Fed’s deliberations, it’s then time to think about the Thanksgiving turkey on Thursday and the spectacle of ‘Black Friday’ shopping to end the week.
The euro had a wild ride on Monday. We noted here 24 hours ago that the failure of Chancellor Angela Merkel to form a so-called Jamaica coalition (named after the four colours of the Caribbean island’s flag) would be a potentially big negative for the euro. This proved correct. From a Sydney open of 1.1782, EUR/USD fell to just below 1.1730. It was then a bit of a puzzle to see the EUR rally on talk about the possibility that Ms. Merkel might try to lead a minority government which could be over-ruled on any Parliamentary vote. It was even odder to imagine that new French President might somehow step into the political vacuum to lead Europe forwards. He’s struggling to lead his own country forwards and he must rely on the patronage and support of a strong German leader to shore up his own domestic position. Nevertheless, EUR/USD rallied all the way back up to the high 1.1790’s before Ms. Merkel, who has headed three coalitions since 2005, said she was “very sceptical” about ruling in a minority government and suggested she would stand again as a candidate if elections were called in the new year, telling public broadcaster ARD she was “a woman who has responsibility and is prepared to take responsibility in the future”. EUR/USD promptly reversed course yet again and ended in New York around 1.1733. Right now, you know it’s been a bad day for your currency when it falls against both the Aussie and Kiwi Dollars but that’s exactly what happened to the euro on Monday. AUD/EUR ended 15 pips higher at 0.6432 with NZD/EUR up 20 pips at 0.5801.
The Canadian Dollar continues to track oil prices quite closely and with a generally firmer US Dollar because of German politics (see above), lower NYMEX crude prices had a predictable effect on the external value of the CAD. Oil only ended around 40 cents a barrel lower at $56.37 but USD/CAD advanced around 40 pips to finish in New York Monday around 1.2812; its highest level since November 2nd. The 173rd OPEC meeting starts in Vienna next Thursday and we’re approaching the point where normally there’d be lots of talk about production cutbacks and quota ceilings but it hasn’t happened yet. Last week, Bank of Canada Senior Deputy Governor Carolyn Wilkins said central bank had decided to advance the timing of speeches providing economic updates to “align them more closely” with its interest rate decisions. Unfortunately, these speeches are going to come after BoC meetings in order to “explain the thinking”. A sceptic might call this ‘backward guidance’ as its certainly no help to predicting future decisions! Canadian wholesale sales numbers are out Tuesday with retail sales published on Thursday. As the OPEC meeting approaches, however, keep a close eye on those oil prices for clues to the CAD.
- AUD/NZD: 1.1050 - 1.1120 ▼
- GBP/AUD: 1.7500 - 1.7620 ▲
- AUD/USD: 0.7500 - 0.7590 ▼
- AUD/EUR: 0.6400 - 0.6450 ▼
- AUD/CAD: 0.9620 - 0.9700 ▼