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USD sharply lower, RBA SoMP awaited

By Nick Parsons

With little fresh news domestically, and helped to a great extent by a much weaker USD (see below) the Australian Dollar initially found some support Thursday from higher than expected inflation figures in China which helped alleviate fears about a further slowdown in the economy which is still the major destination for Australia’s exports of coal, gas and minerals.

After a deflation scare around the beginning of the year, China’s CPI had risen to 1.6% y/y in September. October was expected at 1.8% but the actual number printed on Thursday was 1.9%. It is sometimes a little odd to see investors cheering higher inflation and we wouldn’t want to exaggerate the positive impact of the China data on the Aussie Dollar.

Yes, the AUD/USD pair reached a high of 0.7692 in London but was then sold heavily down to 0.7652 just after the NY open before recovering to 0.7677. Indeed, if we look at Thursday as a whole, the AUD lost ground to both the Canadian and New Zealand Dollars as well as to the EUR.

For the day ahead, the RBA’s Quarterly Statement of Monetary Policy will be the key event for currency traders locally. If AUD/USD manages to get back on to a US 77 cents ‘big figure’ it’s more likely to be because of events in the United States than in Australia. Keep an eye on the AUD crosses for a truer picture post-RBA.

Yesterday’s RBNZ meeting left the Official Cash Rate (OCR) unchanged at 1.75 percent. Its Statement noted, “The exchange rate has eased since the August Statement and, if sustained, will increase tradables inflation and promote more balanced growth... Employment growth has been strong and GDP growth is projected to strengthen, with a weaker outlook for housing and construction offset by accommodative monetary policy, the continued high terms of trade, and increased fiscal stimulus”.

This is all pretty standard stuff and, indeed, could have been written by virtually any Central Bank in the world right now. What piqued the interest of the FX market was the RBNZ’s quarterly forecast track for its official interest rate. A quick look at this showed the Bank now sees rates rising in Q2 2019 rather than in Q3 2019 as it had previously forecast. In reality this is a tiny shift and we’re still talking 18 months away, but it was enough for the Kiwi Dollar to catch a bid immediately after the numbers were released.

After a high of USD0.6971 in the local time zone on Thursday, it went on to a best level of 0.6975 in London. Since then, however, the currency has done little more than track the fortunes of the Aussie Dollar. AUD/NZD has been trapped in less than a 30 pip range from 1.1018-1.1045 for the whole of the past 18 hours with little or no investor interest to trade the pair ahead of today’s RBA SoMP.

It was reported on the front page of The Times newspaper on Thursday that, “European Union leaders are preparing for the fall of Theresa May before the new year… Fears are growing in Brussels that the instability of Mrs May’s government raises the real prospect of a change of leadership or elections leading to a Labour victory.”

One European leader told the newspaper that, “Britain is very weak and the weakness of Theresa May makes [Brexit] negotiations very difficult.” The appointment of a female pro-Brexit supporter to fill the latest vacant post has allowed the Prime Minister to maintain the balance between the sexes and also between so-called Leave and Remain figures in her cabinet but this is not a Government formed from a position of strength.

Formal Brexit negotiations are due to resume later today and it would be reasonable to suppose that the EU side would press home its clear advantage. In the foreign exchange markets, the British Pound has had a wild ride over the past 24 hours. It opened in Sydney yesterday around USD1.3117 and has been as low as 1.3088 before rallying to 1.3164 as the USD itself came under pressure.

Overall the GBP’s performance has been mixed: up against the USD, AUD and NZD but down against the EUR and CAD. Economic data in the UK on Friday are industrial production and the merchandise trade balance. We’d expect most interest to focus on the net drag on GDP from the trade deficit. Spoiler alert – it’s likely to be a bad news story.

The USD has had a pretty grim overnight session. In our North American opening commentary (OFX never sleeps!) we said “Its index against a basket of currencies at 94.30 has broken down below the 94.40-94.85 range… The end-October low of 94.22 and the 20-day average of 94.10 now become the immediate downside targets”.

Well, here we are at the Sydney open and the USD Index stands at 94.17 having touched an intra-day low of 94.15. Foreign exchange is a humbling asset class and we’ll try to resist the temptation to crow about this call! The big problem for the USD hasn’t been President Trump’s Asia visit or what he did or didn’t say with Premier Xi in Beijing. Instead, it’s all about the lack of progress on tax reform in the United States, upon which so many hopes had been pinned.

In a piece of legislative text guaranteed to make the heart sink, the House Ways and Means Committee has released the updated GOP tax bill. The very first sentence reads, “An Amendment to the Amendment in the Nature of a Substitute to HR 1 Offered by Mr. Brady of Texas” and - believe your author – it doesn’t get any better from there. As we go to print the S&P 500 index is off its worst levels of the day but tax reform worries are weighing heavily on the US Dollar. We’ve warned all week here about this and thus far it is outweighing anything the President has said or done on his Asia trip.

In Europe yesterday, the European Commission released updated economic forecasts for the Eurozone economy. Back in Spring, it forecast euro area GDP growth of 1.7% in 2017 and 1.8% in 2018. These numbers have now been revised up to 2.2% and 2.1% with next year now seeing the economy growing at its fastest pace in a decade.

European Commissioner Pierre Moscovici said, “We have entered a new phase of the economic recovery, with stronger growth driven by resilient consumption, the global upswing, loose financing conditions and falling unemployment”. Though still very high, unemployment in the euro area is expected to average 9.1% this year, its lowest level since 2009, dropping to 8.5% in 2018 and 7.9% in 2019.

With the US Dollar under pressure and few attractive alternatives elsewhere, we said in our North American commentary that this “ought to provide a favourable backdrop for the euro today though last week’s high of USD1.1671 is still likely to keep a lid on any gains”. Well here we are with the EUR the best performing currency overnight and a high against the USD of 1.1651. Sometimes it just feels so good when a plan comes together!

Friday looks set to be a much quieter day (unless you’re really interested in Slovakian industrial production) and we’d expect EUR/USD to stay on a USD1.16 big figure throughout the day.

The Canadian Dollar has performed very well over the last week. It hasn’t been a one-way trade because of the volatility of incoming economic data but from an opening level of USD1.2904 on October 1st, the pair has moved down to a low of 1.2672. The CAD is also stronger against the Aussie Dollar (down from a high of 0.9908 to 0.9725) and a little less so against the Kiwi Dollar (from a high of 0.8924 to 0.8814 this morning).

The move lower (stronger CAD) was helped by Wednesday’s better than expected numbers on housing starts which rose at an annualized pace of 222.8k against the consensus expectation of 211k and by building permits which rose 3.8% m/m versus forecasts of a more modest 1.0% m/m gain.

Oil prices are again firmer today with Brent crude at $63.89 per barrel and NYMEX futures at $57.17. The day ahead is quiet in terms of scheduled economic data in Canada though it will be seen as a very good performance by the CAD if it can hold on to its gains of the first 10 days of this month.