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AUD rate hike hopes not rekindled

By Nick Parsons

Rekindling, ridden by Corey Brown, burst down the home straight at Flemington Racecourse on Tuesday to be only the second Irish horse in 24 years to win the Melbourne Cup. For the Reserve Bank of Australia, however, interest rate expectations were most certainly not ‘rekindled’. Its Statement yesterday noted, “forecasts for growth in the Australian economy are largely unchanged… The higher exchange rate is expected to contribute to continued subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.”

The RBA reiterated its forecast for GDP growth to pick up and to average around 3 per cent over the next few years but currency markets were not slow to take the hint and marked down the AUD exchange rate.

AUD/USD has been on a one-way path lower over the last 24 hours; falling from 0.7690 at yesterday’s Sydney open to a low in London of 0.7628 before a very modest 10 pip rally into the New York close. With no domestic economic data scheduled Wednesday, any move off a US 76 cent handle is more likely to be to the downside than back up on to the 77 cents seen briefly last Thursday.

The 52nd Parliament in New Zealand was formally opened on Tuesday in Wellington. Today, another ceremony - the state opening of Parliament - will take place. The Governor General will attend this ceremony and deliver a Speech from the throne which sets out the Government's priorities for the term.

As promised during the election campaign, Finance Minister Grant Robertson has launched a review of the Central Bank’s mandate to include maximizing employment as a monetary policy goal. However, he said there was no plan to include the New Zealand dollar, the world’s 11th most traded currency, in the bank’s revised mandate. Mr Robertson also said he did not expect the proposed alterations to have any immediate impact on monetary policy, but acknowledged that in a situation of high unemployment and slightly higher inflation, rates could be lowered though, “My view is that this shouldn’t have a dramatic impact, certainly in the near-term”.

Whilst the FX market was busy selling Aussie Dollars over the past 18 hours, its Kiwi counterpart held pretty steady against the USD; moving only between 0.6888 and 0.6940. This combination at one point pressured the AUD/NZD cross down to 1.1057; its lowest point in almost three weeks before a very slight recovery in the last hour of NY trading. For local FX markets, however, the next key event is still Thursday’s RBNZ meeting.

The British Pound fell for almost the whole of Tuesday’s London trading session, weighed down by soft retail sales data from the BRC and further reflection on the very poor car sales numbers which we highlighted earlier in the week. In another sign that shoppers are cutting back, sales at John Lewis’s department stores fell by 3.7% last week compared to a year earlier. Revenues in the seven days to 4th November fell to £102.03m, from £105.98m in 2016. Homeware sales shank by 7% and electrical and home technology takings tumbled by 8.4% despite the iPhone X launch boosting mobile phone sales.

GBP/USD reached a low point of 1.3111 before rallying around 40 pips during the New York afternoon to end the day only modestly lower than it had begun. Against the Australian Dollar, the GBP fared much better, reaching a high in New York of 1.7225; a level not seen since last Thursday.

As the so-called ‘Paradise Papers’ continue to cast the UK in an unfavourable light over its stance on tax-havens, it is perhaps fortunate for Prime Minister Theresa May that the UK Parliament has just risen for a week’s holiday. This won’t keep politics out of the newspapers, but she avoids the danger of once again coming off second-best to Opposition Leader Jeremy Corbyn in the weekly pantomime that is Prime Ministers’ Questions. Whether the GBP can similarly breathe a sigh of relief remains to be seen…

As Mr Trump moved on from Japan to South Korea, he spoke at a joint press conference with President Moon Jae-in on Tuesday after private meetings in which the two leaders reaffirmed their nations’ “ironclad” alliance. Mr. Trump said he would not allow Pyongyang to threaten South Korea’s safety and that Mr Kim was “threatening millions and millions of lives so needlessly”. Though he stressed that the US had immense military capabilities, Mr Trump said, “we hope to God we don’t have to use military force”.

With the euro sliding back (see below) the USD index at one point yesterday moved up to 94.85; its best level since last Friday before slipping back to close in New York around 94.66.

In economic data, the number of job openings in the US rose slightly in September to 6.09 million, keeping them near a record high. Job openings have now topped 6 million for four months in a row for the first time ever. A December rate hike appears very much a done deal (the CME online calculator pins the probability of a 25bp rise at 93%) and it would take either a huge external shock or a sudden sharp decline in the stock market to make investors rethink their views. Keep an eye on tax reform progress, though, for near-term clues on the USD.

It’s recently been quite a rare sight for German economic data to fall short of consensus expectations but that’s exactly what happened Tuesday. After a 2.6% m/m jump in August, industrial production fell -1.6% in September compared to forecasts of a more modest - 0.9% m/m decline. EUR/USD had briefly dipped on to a 1.15 big figure overnight in Asia but then after the economic numbers, it took out the overnight low of 1.1584 to move down to a low of 1.1557; its weakest in almost 10 days.

The ECB’s Sabine Lautenschlaeger told Bloomberg TV, “We have a strong growth momentum, we have growth for 17 quarters and now the labour market has a solid recovery, the sentiment factors are positive, the financial conditions for firms and households are very favourable so I’m very confident that the inflation rate will pick up. I think it was correct to reduce the amount [of QE assets] purchased from January onwards. I would have liked to see a clear exit”.

Draghi’s speech in Frankfurt was about banking supervision rather than monetary policy and he was unsurprisingly quite upbeat about progress made since the financial crisis. During the North American session, the EUR managed to claw back around 30 pips against the USD to 1.1587 but still sits below its 20, 50 and 100 day moving averages. Major support from the 200dma is not seen until 1.1410.

Bank of Canada Governor Stephen Poloz is one of the more interesting and insightful Central Bank Governors around. Though we [only half] jokingly suggested that the best way to forecast inflation in the short-term is to drive past a gasoline station and look at the price on the pump, his speech yesterday evening to the Montreal Council on Foreign Relations was a more scholarly affair.

Mr Poloz concluded a fascinating speech by noting, “The popular perception that inflation has become inexplicable has been greatly exaggerated. In part, this perception reflects a misunderstanding of the accuracy with which economists can predict inflation, and a misunderstanding of the precision with which central banks can control it. Fundamentally, we know how inflation works - the laws of supply and demand have not been repealed… The bottom line is that inflation targeting has worked, through good times and bad, for more than 25 years. It continues to work today”.

Currency traders will have been a bit disappointed there were no clear signals for the CAD in the speech though USD/CAD did come off its highs of the day to end around 1.2780 with AUD/CAD little changed over the past 24 hours at 0.9768. Canadian gasoline, meantime, Mr. Poloz, is C$1.36 per litre…