Daily Currency Update

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A new day, a new month

By Nick Parsons

Another day dawns and the past 24 hours have once again seen the NZD the worst performer (just) amongst all the FX majors (though see CAD comment below). Those who like to clutch at straws will doubtless point out that the lows of Friday, Monday and Tuesday were at successively higher levels (USD0.6829, 0.6837 and 0.6839 respectively) but this price action is much too tentative to suggest any real bottom formation has yet been completed. Some comfort might also be taken from the fact that the recent highs in AUD/NZD have also been at successively lower levels (1.1288, 1.1229, 1.1219 and 1.1211) but as we noted in our AUD commentary, this more likely reflects long liquidation of Aussie positions than any new-found enthusiasm for the Kiwi. This morning we’ll get a read on the New Zealand labour market in Q3 but this will probably serve just as the starting point for the as-yet unwritten analyses of the similarly not-yet announced policies of the new Labour government. In any case, a quarterly snapshot is by definition only a slow-moving measure of a more dynamic economic variable and it’s unlikely that we’ll see anyone rushing immediately to change their outlook on the currency.

We mentioned yesterday a few reasons why the Aussie Dollar was struggling; the dominant one being liquidation of stale long positions in a local macroeconomic environment where persistently low inflation is countering any hopes of a lift from higher interest rates. We’ll get a fresh update on the latest RBA thinking at next Tuesday’s Board meeting but for many currency investors this is just too long to wait. Amidst a raft of positive news on rates and/or economic growth in the Eurozone and United States, that dull noise which reverberates around the AUD market is the sound of towels being thrown in. Locally this morning we’ll get a couple of readings on manufacturing activity with CBA’s PMI and the AiG indices both released. Quite why we need two indices to measure pretty much the same thing is a bit of a mystery though at least there’s a 30-minute time difference between the two data releases. As for price action in the FX market, a high of USD0.7696 around 11am Sydney time Tuesday was as good as it got and dealers in both London and NY were steady sellers through their respective days. The month-end ‘fix’ for AUD/USD saw a 13 pip jump to a high of 0.7669 which was subsequently reversed and it remains below all four of its main moving averages (20, 50, 100 and 200 day).

Once again, the GBP finished the day as top performer amongst the FX majors with 100+ pip gains for GBP/AUD, GBP/NZD and GBP/CAD. The pound broke above last Thursday’s 1.3274 high just ahead of the 4pm month-end ‘fix’ in London and the regulators might well be pleased to see this wasn’t the type of ‘pump and dump’ price action which has brought the wholesale FX market into such disrepute over the past few years. Instead, the pound held on to its gains for long enough to quell any lingering suspicions and though it subsequently gave back some ground, this can legitimately be explained as profit-taking ahead of a rate-hike decision on Thursday which is pretty much 100% fully discounted. As the new month begins, so it’s that time when we look forward to the release of Purchasing Managers Indices around the globe. China kicked off on Tuesday with disappointing manufacturing and service sector numbers and after Australia first thing this morning, it will be the turn of the UK and US to report on manufacturing later today before the Eurozone numbers on Thursday. The UK has actually been quite resilient over the last few quarters with healthy external demand for UK products offsetting a somewhat weaker domestic picture. The read-across into FX ought to be straightforward (famous last words!) and with a consensus of 55.8 for Octobers survey after 55.9 in September, a beat/miss on the number should push GBP up/down.

Fast forward another 24 hours in the ‘Trump-Russia’ story and it really still doesn’t seem much clearer than it did yesterday, though it has served to reinforce prejudices even further. The President’s supporters love him just as much as they did previously and his detractors hate him perhaps even a tiny bit more (if that is possible without moving the needle off the dial). Financial markets, meantime, continue their search for correlation and causality, parsing information across asset classes which might give them a trading edge. Unfortunately, with virtually no change in 10-year US bond yields or cash equity indices, there was no great directional indicator for the currency and the USD index spent all of Tuesday in a very tight range from 94.25 to 94.40. The next economic data point to be watched for interest rates, asset markets and the USD will be the ISM report on manufacturing. September printed at a fresh cycle high of 60.8; signaling the fastest pace of expansion in 13 years. This was driven by a jump in new orders to 64.6 whilst production was back close to its best level of the year and prices paid surged to 71.5. Expectations for the October number centre on a median forecast of 59.4 for the headline index.

Europe yesterday basked in the glow of a sparkling set of economic numbers kicking off with a very solid 0.5% q/q increase in French GDP in Q3. The result was in line with consensus forecasts but upward revisions to the second quarter of this year and the fourth quarter of last year - both by 0.1 percentage point to 0.6% - helped lift the y/y growth rate to 2.2%; its fastest pace since 2011. For the Eurozone as a whole, Q3 GDP was a tenth higher than expectations at 0.6% q/q (or 2.4% annualised as our American friends would describe it) whilst the second quarter was revised up by a tenth from 0.6% to 0.7%. Capping off a very encouraging day for economic news, unemployment in the Eurozone fell below 9 per cent for the first time since the beginning of 2009 and is now down more than 3 percentage points from its 12.1% peak in early 2013. EUR/USD edged marginally higher after the numbers though EUR/AUD jumped over 70 pips to a high of 1.5230 and EUR/NZD shot up to 1.7059. The currency reaction would have been a lot more positive had not Eurozone CPI been a tenth weaker than forecast but the ECB has already set out its stall on QE and rates so slightly lower inflation really ought to be ignored given the strong output story.

We wrote here yesterday morning about the upcoming Canadian GDP figures which Statistics Canada impressively manages to release on a monthly basis. Sadly, the numbers themselves were distinctly unimpressive, managing to miss even very low consensus expectations. Analysts had looked for just a +0.1% m/m increase in August GDP after no change in July. Instead, the outturn was a -0.1% m/m drop as declines in oil and gas and manufacturing more than offset small gains in a majority of other industries. Manufacturing was a particular soft spot, with chemical manufacturing posting its biggest one month decline in 20 years, and other types of manufacturing being down because of planned maintenance shutdowns. The service sector eked out a small gain of 0.1% and has now expanded for 17 months in a row but this was the first monthly contraction for the economy overall since October 2016. The FX reaction was pretty brutal – USD/CAD jumped almost 70 pips to be back once again on a 1.29 handle whilst AUD/CAD managed a 10 day high of 0.9886. NZD/CAD, meantime ended virtually unchanged as investors decided that in the ugly contest for currencies, they were both equally unattractive.