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Data today could break Aussie's slump

By Nick Parsons

The past five days have been one of the quietest periods in recent memory for the Australian Dollar. Ever since 2am Sydney time last Friday morning, the AUD has been stuck on a USD 76 cents big figure and the entire trading range has been from just 0.7636 to 0.7696. We’ve spoken here all week about the liquidation of stale long AUD positions and how the local economic data and Central Bank meeting were too far away for global investors being gripped by the Fed, Bank of England, Bank of Japan and top tier economic releases such as PMI Surveys and the US non-farm payroll report. Finally, we get to see some Australian economic data this morning when building approvals and international trade data are released. The first of these is an unfortunately very volatile number month-to-month so most attention will probably be on the trade numbers. Iron ore volumes are seen steady on the month but there are reports of large coal shipments and some strength in LNG exports and consensus expectations are for a seasonally adjusted monthly trade surplus around $1,200m after +$989m in August and +$808m in July. Though the trade balance feeds directly through into GDP, it’s often a misleading indicator of domestic demand (as its obviously mainly an export story) and the mining and LNG sector is not a huge employer so there’s no strong and immediate link back to spending at home. AUD/USD remains below all four of its main moving averages (20, 50, 100 and 200 day) but at some point this sideways range will be broken, perhaps dramatically. Is it today’s numbers, tomorrow’s retail sales or the RBA meeting which will be the catalyst ?

Wednesday’s Q3 employment report might not have been a game-changer for the New Zealand Dollar but it certainly helped put a floor under some of those falling knives we had spoken of. Picking the sharpened steel off the ground is a lot less hazardous than trying to catch it with bare hands as it flashes past. NZD/USD jumped 50 points from 0.6846 to 0.6895 as soon as the numbers were released and went on to trade up to a high of 0.6926. In truth this looked and felt more of a short-covering rally than any new-found enthusiasm for the Kiwi and it was interesting to see it give back almost 40 pips of its gains during the London and New York sessions. In the week prior to the NZ Election, NZD/USD was trading around 0.7350 and it has fallen so far, so fast that it would have to rally more than a cent from current levels just to get back to the lowest of its four main moving averages (20, 50, 100 and 200 days). There’s nothing of note on the domestic economic calendar in New Zealand today. The question for longer-term investors (or those looking to pick up some now cheaper Kiwi Dollars) is whether last night really did mark the bottom. The answer, as always in foreign exchange, is that it’s too soon to tell. If you do have to buy NZD, take comfort that its 10% cheaper than it would have been just over 3 months ago.

Wednesday proved very much to be a day of two halves for the British Pound – up once again in the morning but reversing lower through the New York session to end lower than it had begun. The latest manufacturing PMI data proved to me much stronger than expected with a headline number of 56.3. Markit (who compile the data) noted that, “The UK manufacturing sector started the final quarter of the year on a solid footing. Production and new order volumes continued to rise at robust rates, as companies benefited from strong domestic market conditions and rising inflows of new export business. Price pressures remained elevated, however, with rates of inflation in input costs and output charges both accelerating and staying well above historical series averages”. All of this makes a Bank of England rate hike today a virtually nailed on certainty. The big issue is how the Governor handles the subsequent Press Conference which will be given to present the Bank’s latest Quarterly Inflation Report. If he errs on the side of “one and done” and emphasizes a slow and gradual pace of future tightening, the pound could slip back further. If, instead, he adopts a more hawkish tone, the threat of more hikes in 2018 (which are not yet priced in to the market could set the GBP on another tear higher. Perhaps the least likely outturn is that the pound ends the day unchanged: it could be quite a volatile 24 hours ahead.

There was never any realistic prospect of the Fed meeting today delivering a rate hike. We can’t remember it ever doing so in the modern era when it was less than 50% discounted in market pricing and certainly there hasn’t been a rate hike without a Press Conference to explain why. Neither of those conditions were met now though we do at least have a new FOMC Statement to pore over. They key phrase is that, “Hurricane-related disruptions and rebuilding will continue to affect economic activity, employment, and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further”. The US Dollar index liked what it saw in the Statement and pushed up towards the top of its daily trading range (94.30-94.56) which was the best level since Friday evening. If the equity market manages to hold in around records highs and Fed officials don’t see any need to start “finessing” the message, then the USD might be able to extend its gains a little further.

November 1st is All Saints Day and was celebrated as a holiday across much of Continental Europe. European stock markets remained open though, and registered solid gains across the Continent, led by a very punchy +235 point increase in Germany’s DAX which stands at a record high of 13,465. French equities were up 0.2%, Italy was up +0.8% and the EuroStoxx index closed 0.6% higher. In foreign exchange markets, however, the EUR has been much more subdued, sliding during the European and New York morning sessions even before the release of the latest FOMC Statement. From a best level in Sydney yesterday of 1.1653, the pair moved down to a low of 1.1612; hardly a dramatic decline but investors appear in no hurry yet to be playing the euro from the long side. This has meant that both AUD/EUR and NZD/EUR have managed to rally 28 and 17 pips respectively over the last 18 hours though we wouldn’t expect selling of the EUR to accelerate unless the post-ECB low of USD1.1580 is broken to the downside. Eurozone manufacturing PMI’s are released Thursday and we should also get a monthly update on the booming German labour market.

The Canadian Dollar has recovered around one-third of its losses suffered in the post-GDP mauling but it still faces plenty of domestic economic headwinds. The latest of these came with the manufacturing PMI Survey which dipped to 54.3 in October from 55.0 in September. Although continuing to signal stronger business conditions at the start of the fourth quarter, the latest improvement in the health of the sector was the weakest since January. Markit noted, “Both output and new orders rose at slower rates during October. Production increased for the twelfth successive month, but at the weakest pace since January. Where output rose, this was mainly linked to higher new orders. Export sales were particularly subdued, meaning that manufacturers were reliant on domestic demand to drive growth during October.” USD/CAD is at 1.2866 after printing 1.29 just after GDP whilst AUD/CAD is down at 0.9870 from an earlier high of 99.13. NZD/CAD stands at 0.8857 after reaching a high in Europe earlier of 0.8925.