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AUD/USD steadies around 5-month low, but NZD momentum still negative

By Nick Parsons

Momentum can itself be a very important input when analyzing and predicting currency movements. There’s no doubt that momentum for the Kiwi Dollar is very negative right now. NZD/USD is stuck firmly below its 20, 50, 100 and 200 day moving averages, it has taken out the May and October closing lows (0.6830 and 0.6835) and on Friday last week hit a fresh low for the year of just 0.6783 before rallying a little to close in New York at 0.6816. The AUD/NZD cross hasn’t been able to regain the highs of late October above 1.12 as the Aussie Dollar has its own set of difficulties to deal with but the pair did rally more than a full cent off Wednesday’s low to end the week at exactly 1.1100.

We mentioned here on Friday the Quarterly International Visitor Survey and the highlight of the data calendar locally this coming week will be to see how that spending fits in to Thursday’s overall Q3 retail sales numbers. The second quarter got a big lift from the British Lions rugby tour and real sales (after inflation) rose a punchy +2.0% q/q. There’s no chance of a repeat in Q3 and consensus looks for just +0.1%. Bear in mind that even though local media are reporting buoyant sales to China on Singles Day 11/11, this comes way after the end of Q3. There could be further disappointment for the NZD in the week ahead which kicks off today with the Performance of Services Index.

After the Q3 wage data showed there was little, if any, pass through from higher employment to higher earnings, the Aussie Dollar had a pretty rough week, though ultimately not as bad as its Kiwi cousin. The RBA couldn’t have made it plainer a fortnight ago when it said it wanted to see, “how much wage growth will pick up in response to improved labour market conditions and the associated reduction in spare capacity”. Markets were quick to hit the AUD which fell from USD0.7630 to 0.7580 and on to a low of 0.7540 on Friday before ending the week at 0.7565; its weakest close in more than five months.

With 11 RBA meetings each year and 4 Quarterly Statements of Monetary Policy (the clue is in the name!) the Minutes of four of the Board meetings are largely redundant. This Tuesday will be one of those occasions. Before then, Jonathan Kearns, RBA’s head of financial stability, and Marion Kohler, head of domestic markets, are scheduled to speak at separate events in Sydney on Monday morning while Governor Philip Lowe will give a speech at the Australian Business Economists (ABE) annual dinner on Tuesday.

Economic data is a little thin on the ground this week, though England’s cricketers arrived in Brisbane ahead of next Sunday’s opening Ashes test to find the British Pound bought 1.74 Australian Dollars; its best level in more than 6 months. For currency traders, that May 9th high of GBP/AUD1.7620 will now be the technical level to watch.

The British Pound spent last week pulled by incoming economic data and the latest twists and turns in the Brexit negotiations. CPI inflation didn’t rise beyond the upper end of the Bank of England’s 1-3% target range but although the UK labour market numbers on Wednesday showed the jobless rate was steady at 4.3%, the number of people in employment across the UK fell for the first time in nearly a year. GBP/USD began the week at 1.3130 and having been as high as 1.3250 on Friday, ended at 1.3220. Against the Aussie Dollar, GBP rose from 1.7150 to 1.7475 whilst against the Kiwi Dollar it gained more than four cents from 1.8950 to 1.9390.

The news on Brexit talks doesn’t appear good, but it will be completely overshadowed this week by the annual Budget delivered by Chancellor Philip Hammond on Wednesday. Just as superpowers fight out ‘proxy wars’ in third countries, so the Budget will be the scene of much political infighting in the UK Conservative Party. The Chancellor has the seemingly impossible task of spending considerably more money by borrowing less against a background of a slowing economy. It might really be a question of how exactly he will fail, rather than whether he can actually succeed. Of course, some of these concerns are already ‘priced in’ to the currency but clients with GBP transactions to execute should be aware of the potential for increased volatility in the second half of this week.

The US Dollar had a pretty disappointing week. Its index against a basket of currencies stood at 94.20 on Monday morning, around half a percent down from its recent closing high of 94.70 on November 6th. By Friday evening it had slipped to a close of 93.39; only just off the lows of Wednesday morning before the latest round of US economic data were published. The S+P 500 index regained all of Wednesday’s losses on Thursday and it’s interesting to note that that the Dollar could glean no support from the stock market. With equities driven by corporate earnings and the prospects for tax reform, it has often been the case that the USD also correlates positively with stocks. This is something which should be watched carefully from here as a close below 93.30 opens up the technical path to a retest of early September’s 91.00 low.

Of course, the big event of the week ahead will close the market on Thursday’s Thanksgiving holiday, with retailers then praying for a shopping frenzy to rescue their year on Friday. Before then, the Minutes of the last FOMC meeting will be released on Wednesday afternoon Washington time. The CME probability calculator shows a 96.7% chance of a 25bp rate hike on December 13th so there’s not much support the USD can get from interest rates near-term. It could be a lively few days in the foreign exchange market…

Currencies are relative prices: they can’t all go up or down simultaneously! With a weaker AUD, NZD and USD and a broadly steady CAD, the two winners over the past week were GBP and the EUR. There were plenty of ECB speakers to add their own perspective on the incoming economic data and ECB President Draghi has found a form of words which we can expect to hear repeated very often by his fellow Council members. “The euro area is in the midst of a solid economic expansion. GDP has risen for 18 straight quarters, with the latest data and surveys pointing to unabated growth momentum in the period ahead. From the ECB’s perspective, we have increasing confidence that the recovery is robust and that this momentum will continue going forward… from a monetary policy perspective our task is not complete, as we have not yet seen a sustained adjustment in the path of inflation… we are not yet at a point where the recovery of inflation can be self-sustained without our accommodative policy”.

Away from economics, the big question for financial markets is the success – or otherwise – of German Chancellor Angela Merkel’s attempts to form a four-way Coalition (a so-called Jamaica coalition because of the colours of its flag). As we go to print at the Sydney open, there has still been no announcement of a government and if the talks fail it could trigger fresh elections. EUR/USD briefly clawed on a 1.18 ‘big figure’ on Friday but political problems in Germany are a big potential negative as the new week begins.

The Canadian Dollar had a very good first couple of weeks in November but has since given back some of its gains as oil prices fell and CPI inflation slipped back from 1.6% to 1.4%. Against the US Dollar it began last week around 1.2690 and the pair edged gradually firmer to an intra-day high immediately after Friday’s CPI numbers of 1.2811. By the end of the week, USD/CAD was around half a cent off its best level and ended in New York at 1.2770. With an absence of major economic news other than CPI, traders focused on lower oil prices which had recently been a factor helping support the CAD. NYMEX crude opened the week at $57.05 but slipped to $55.15 at Tuesday’s close. Oil steadied Wednesday and Thursday then jumped sharply on Friday to end the week just a net 25 cents lower at $56.85.

The Bank of Canada released its Autumn Review last week and it’s interesting to note the very first article was a very thorough examination of the factors behind the oil price decline since 2014. They conclude, “the most important drivers were the surprising growth of US shale oil production, the output decisions of the Organization of the Petroleum Exporting Countries and the weaker-than-expected global growth that followed the 2009 global financial crisis”. For the week ahead, Canadian wholesale sales numbers are out on Tuesday with retail sales published on Thursday when the rest of North America celebrates Thanksgiving. As temperatures in the Northern Hemisphere begin to tumble, keep a close eye on oil prices.