Home Daily Commentaries More Brexit nerves for GBP; NZD now top of the pile with AUD mixed after RBA Statement

More Brexit nerves for GBP; NZD now top of the pile with AUD mixed after RBA Statement

Daily Currency Update

We said here yesterday about the RBA Board meeting that, “Re-reading the November 7th Statement, it is not obvious which paragraphs need much of a tweak either way”. Putting the December Statement side-by-side with it, you’d need a magnifying glass to discern much of a difference.

“Recent data suggest that the Australian economy grew at around its trend rate over the year to the September quarter. The central forecast is for GDP growth to average around 3 per cent over the next few years. Business conditions are positive and capacity utilisation has increased. The outlook for non-mining business investment has improved further, with the forward-looking indicators being more positive than they have been for some time… Employment growth has been strong over 2017 and the unemployment rate has declined. Employment has been rising in all states and has been accompanied by a rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead.”

The Aussie Dollar did well through Tuesday’s Sydney session but the day’s high of USD0.7650 came just before London traders arrived at work and it was downhill all the way from there against a generally better-bid US Dollar. By the New York close, the pair was struggling to hold on to a 76 cents handle though the AUD had made net gains against the CAD, GBP and EUR.

The big number today will be Q3 GDP with most analysts’ forecasts centering on a 0.7-0.8% q/q increase to leave the year-on-year rate at 3.0%. Famous last words, but the read-across to the AUD should be quite straightforward and we can get on with the serious business of watching the cricket.

Key Movers

Foreign exchange can be a very frustrating asset class at times. Having ended Monday as the worst performer of the major currencies we track here, it was very much a case of ‘Turnaround Tuesday’. The New Zealand Dollar finished top of yesterday’s FX pile even though arguably very little has changed other than RBNZ Acting Governor Grant Spencer’s speech on “Low inflation and its implications for monetary policy”.

He told the Institute of Directors in Auckland a series of factors "may be reducing the leverage monetary policy has over inflation" and said the bank's flexible inflation targeting approach is becoming more flexible and relatively more weight is being attached to "output, employment, and financial stability." The Governor painted different scenarios where both rate cuts and rate hikes might be necessary, but said the central bank is now "assuming greater persistence in low global inflation" and that is contributing to its current flat interest rate track. The RBNZ’s latest forecasts show it doesn't expect to raise rates until mid-2019 at the earliest.

The NZD rose from USD0.6860 to a high of 0.6907 overnight during local trading hours Tuesday and though NZD/USD subsequently gave back around 30 pips of these gains to a stronger USD, the Kiwi ended the Northern Hemisphere day up against every currency. For Wednesday, the confidence of NZD traders in predicting movement either way is probably no more than a coin-toss. It could once again just as easily finish top or bottom of the pile…

The volatility in the British Pound shows no sign of abating. Though the Kiwi Dollar goes up one day and down the next, the GBP does it both in the same day! It jumped then plunged on Monday on news that UK Prime Minister Theresa May was unable to offer an agreement on the Irish border issue to European Commission President Jean-Claude Juncker. On Tuesday it fell further then rallied in the belief that a form of words would somehow be found by the end of the week to bring the Government’s Ulster Unionist coalition partners back with their support. GBP/USD fell to lows during the London morning of USD1.3384 and AUD1.7505 but by the New York close it had recovered to USD1.3440 and AUD1.7685.

The London-Dublin agreement on so-called “regulatory alignment” post-Brexit may have looked a clever form of words but Arlene Foster, the DUP leader, said that they spent five weeks trying to get hold of a draft text of the UK-EU Brexit deal and that, when it finally saw it yesterday, it was a big shock. “When we looked at the wording and had seen the import of all that we knew we couldn’t sign up to anything that was in that text that would allow a border to develop in the Irish Sea.” When it was put to her that the Irish Government has said it would not budge on the substance of these matters, she said, “The Irish prime minister can be as unequivocal as he likes. We’re also unequivocal in relation to these matters.”

Somewhere, it seems, there’ll be tears before Friday and they might well be shed as much by foreign exchange traders as by angry politicians. It’s a big call but the GBP could move as much as 3-4% in either direction depending on whether there’s movement to a transition Brexit deal or the collapse of the Coalition Government and a fresh General Election.

The US Dollar had a good day on Tuesday. It’s index against a basket of major currencies rose from 92.75 to 93.11; its best level in almost two weeks. It gained some support early in the day from a rally in equity index futures but as stock market enthusiasm faded, a weaker GBP and EUR helped the USD rise almost by default. The latest reading on the service sector of the US economy did no harm either, signaling the 95th consecutive month of expansion in activity. The headline index fell 2.7 points to a still-elevated 57.4 whilst the business activity sub-index slipped just 0.8 to 61.4; reflecting growth for the 100th consecutive month. New orders and export orders were at 58.7 and 57.0 respectively whilst employment slipped a couple of points to 55.3.

One of the really good but somewhat obscure indicators of the US economy is a model developed by the Atlanta Fed. This takes incoming high-frequency US economic data and updates in real-time its forecast of the current quarter’s GDP number. As Tuesday brought not just the ISM survey, but also the merchandise trade deficit for October, they published a new forecast of Q4 GDP yesterday evening; downgrading their estimate from 3.5% to 3.2%. This is still a pretty decent number; higher than anywhere else in G7 and helps to support bond yields and the US Dollar into next weeks FOMC meeting.

The euro had a poor day Tuesday, losing almost half a cent to the USD to finish around 1.1813 and falling against every other currency to take the wooden spoon in the one-day performance table. This came despite figures which confirmed the eurozone service sector registered quicker output growth in November, with the final PMI matching the flash estimate of 56.2.

The final Eurozone composite index was also confirmed at 57.5 with the Press release noting breathlessly, “The rate of euro area economic expansion moved up a gear in November. Output growth accelerated to the fastest in over six-and-a-half years, while rates of increase for all of the main survey indicators covering demand, employment and inflation also hit multi-year highs… Growth was again led by a resurgent manufacturing sector. Manufacturing production rose at the quickest pace in almost seven years in November and the headline index from the manufacturing survey – the Manufacturing PMI – posted a level bettered only once in its 20-year history.”

After a 2-day surge, the Canadian Dollar had a more mixed performance on Tuesday; rising against the GBP and CAD but falling against the US, Kiwi and Aussie Dollars. It finally decoupled from the oil price somewhat, rising as crude fell during the European morning and reversing course thereafter. Its’ early strong performance was related to comments from Prime Minister Justin Trudeau that he and his counterparts in China have made good progress on a free trade deal, though no details about substance were forthcoming.

Looking forward, the Bank of Canada holds its 8th and final monetary policy meeting of the year on Wednesday. Compared to the economic situation at its last meeting in October, retail sales, the labor market, housing market, manufacturing activity, trade and oil prices have all improved somewhat though inflation has eased a bit lower. Before last week’s stunning employment numbers, markets were pricing around a 47% probability of a rate hike in January. This has now risen to a little over 50% and the Canadian Dollar opens in the APAC time zone this morning at USD1.2692 and AUD/CAD0.9655.

Expected Ranges

  • AUD/NZD: 1.1040 - 1.1110 ▼
  • GBP/AUD: 1.7500 - 1.7800 ▼
  • AUD/USD: 0.7580 - 0.7650 ▼
  • AUD/EUR: 0.6410 - 0.6460 ▼
  • AUD/CAD: 0.9630 - 0.9690 ▼