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RBA and Melbourne Cup day

By Nick Parsons

As the US Dollar turned lower during the New York afternoon, so the AUD was able to regain some of the ground it lost last week, even though with a high of 0.7681 it still wasn’t able to claw its way on to a US 77 cents handle.

It’s been interesting to watch local analysts who wrongly forecast an increase in retail sales blaming their error on the late release of the iPhone X but it is hard to believe the central bank will spend sleepless nights worrying whether the latest smartphone warrants a change in monetary policy. It’s only a short stroll from the RBA head office in Martin Place down to the Apple store on George Street if they really want to check out how busy it is!

More regular economic data scheduled for this morning is the AiG performance of Construction index for October and the weekly Roy Morgan consumer confidence index, though no published consensus is available for either of the two data points. Despite the slightly better performance of AUD/USD in New York, the key AUD/NZD cross edged lower throughout the session and is once again back on a 1.10 big figure. Recall that a couple of weeks ago it was as high as 1.1280…

The New Zealand Dollar was knocked back yesterday by the RBNZ’s latest survey of inflation expectations. Whilst year-ahead inflation expectations rose from 1.77% to 1.87%, the more closely-watched 2-year expectations (which align more closely with the RBNZ’s mandate) fell from 2.09% to 2.02%. These figures are quite important given that on Thursday is the RBNZ meeting when we’ll get updated forecasts on interest rates and CPI.

In Monday’s Asian session, the New Zealand Dollar was at the bottom of the pile with NZD/USD slipping from an opening level around 0.6910 to a low of 0.6876. It recovered through London trading on to a 69 cents handle and as the USD began to slip in New York, it has been able to push on to a best level of 0.6924.

The Crown Financial Accounts published this morning will be interesting as, along with last week’s employment numbers, they show the economic starting point for the new Labour administration. For currency markets, however, the key event is still Thursday’s RBNZ meeting.

UK Prime Minister Theresa May’s Conservative Government, which now relies on Ulster’s Democratic Unionist Party to keep it in office, is currently engulfed (along with its Labour Party Opposition) by scandals involving allegations of improper sexual conduct dating back over many years. There was a palpable sign of relief in London on Monday morning that there had been no further revelations or resignations over the weekend and having held in a very tight range between 1.3063 and 1.3078 during the Asian session, GBP/USD was able to press ahead to a best level in New York of 1.3168 with GBP/AUD reaching a high of 1.7142.

The bigger picture for the UK economy, though, still seems to be one of weakness. Latest figures released Monday morning showed total car sales in the UK are down 12.9% y/y; the seventh consecutive month in which fewer cars were sold relative to the same month a year ago. For the first 10 months of 2017, a total of 2,224,603 vehicles were sold compared with 2,330,663 in the same period in 2016. Along with house prices, nothing quite shows consumer confidence as clearly as shiny new cars on the driveway. A double-digit y/y decline is a vivid illustration of the current fragile state of the UK economy.

President Trump is now three days into his ten day, five country, economic and foreign policy trip to Asia and thus far it has passed without much controversy. His first meetings were with fellow golfer Japanese Prime Minister Shinzo Abe and public comments after their 9-holes focused on issues of trade between the two nations. The US has urged Japan to buy more American military equipment and build more cars in the United States whilst the Japanese side countered that 75% of its cars sold in the US are already manufactured there.

The US Dollar index against a basket of currencies held firm though Monday’s Asian and European sessions but then lost a quarter of a percentage point through the North American day to a low of 94.47 from 94.78.

We warned here yesterday that “as President Trump continues his Asia trip with visits to China and South Korea later in the week, it will be important to keep an eye on what the Republican Party are doing back home. Any signs of squabbling and delay on tax cuts will keep a lid on further USD strength”. With House Ways and Means Chairman Kevin Brady telling his panel that it faces a “monumental challenge” this week, investors duly reacting by marking down the USD even as stock markets continue to rally. There’s no major US economic data scheduled for Tuesday so it’s once again all about Trump and taxes.

The euro’s remarkable run of being stuck on a USD 1.16 handle finally came to an end in London trading Monday morning, with a low of 1.1594 seen before the EUR bounced back on PMI services data which showed the pace of job creation at its fastest pace in a decade. The New York session saw it slip further to a low of 1.1583 before nervousness around the prospects for US tax reform pulled the rug from under the US Dollar later in the NY afternoon. Nevertheless, the EUR could not get any higher than 1.1613 and struggled on all its major crosses to be the worst performing currency on the day.

Looking forward, there’s not much more economic data to be released. ECB speakers include Draghi, Lautenschlaeger, Nuoy, and Angeloni on Tuesday whilst it’s the turn of Bank of France Governor de Galhau and Bundesbank President Weidmann on Thursday.

Often these speeches are used to ‘reset’ perceptions of policy and to help correct any unwelcome post-ECB movements in foreign exchange and interest rate markets. The German Bundesbank, as usual, is likely to be the most “hawkish” of the speakers but we’d expect an otherwise fairly relaxed commentary which might not give the EUR much near-term support.

The Canadian Dollar yesterday extended the gains it made at the back end of last week, and benefitted in particular from a weaker USD later in the day. Having closed on Friday at USD/CAD1.2762, it printed down at a low of 1.2718 during the New York afternoon.

The weekly data published by the CFTC show that investors have been running net long Canadian dollar positions since the beginning of May. So-called ‘speculative longs’ peaked at 98,079 contracts in the week of October 10th and the latest numbers published over the weekend show they have only been very gradually scaled back to 72,097 contracts. Investors are clearly rattled by the sharp slowdown in the Canadian economy since the BoC’s two surprise interest rate hikes, but these concerns have been offset somewhat by firmer oil prices which are a benefit to its shale oil producers.

NYMEX crude yesterday rose 2.8% to $57.24 per barrel whilst natural gas futures were over 4% higher. BoC Governor Stephen Poloz is scheduled to give a speech Tuesday on “Central Banks’ ability to understand inflation”. We’d humbly suggest the easiest way right now is to drive past a gas station and look at the price on the pumps.