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EUR jumps on stunning PMI surveys, AUD & NZD gain against GBP and USD

By Nick Parsons

For most of this week, you’d have been forgiven for thinking that New Zealand had a fixed exchange rate against the Australian Dollar; it hasn’t moved more than 30 pips either side of 1.1080 and after printing a low of 1.1055 on Thursday, it’s now pretty much back to the mid-point of the range. Earlier this week, Statistics New Zealand published detailed data on overseas visitor numbers. Yesterday we got to see how deeply those tourists and NZ residents dug into their pockets to spend some money. Overall sales volumes rose 0.2% in the three months ended September 30, following a 2% increase in the June quarter. Eight of the 15 industries surveyed posted higher sales volumes in the quarter, though comparisons with Q2 can be a little misleading. For example, the food and beverage sector - which includes cafes, restaurants, bars, takeaways, and catering services - saw a record fall in both value and volumes in the quarter (down -2.2% and -3.1%). This came after a record gains in Q2 thanks to the hungry and thirsty supporters of the World Masters Games and the British Lions rugby tour in that earlier period. With NZD/USD now down around the lows of the last 12 months, the big question is whether the cheaper currency will be able to attract a fresh wave of overseas visitors.

With the US out for Thanksgiving Day, the Aussie Dollar was able to capitalize on the calm by very modestly extending its gains of the previous two sessions against the US Dollar. By the end of the North American session (Canada was still open for business), AUD/USD stood at 0.7628; its best level in almost 10 days. The AUD also advanced against a somewhat weaker CAD but did best against a British Pound which is beginning to suffer – as we thought it might – from a closer look at the details of Wednesday’s UK Budget. GBP/AUD closed down at 1.7430; almost a cent and a half down from its best levels earlier this week. The one currency it couldn’t outperform was the EUR which, as we explain below, benefitted from some extremely strong Eurozone PMI data. As the week draws to a close, we expect events at the Gabba this Friday to be far more interesting than the foreign exchange market. It was very considerate of the Queenslanders to serve up some Spring rain to make the travelling ‘Barmy Army’ feel at home, though a betting person would probably have a few dollars on the double of England all out by tea-time and a lower GBP/AUD exchange rate by the end of the day. We’ll review both predictions in the London opening commentary!

We expressed here yesterday our doubts as to whether the initially positive reaction to the UK Budget would stand closer scrutiny. As we pointed out then, “never in modern history has a UK Chancellor stood up to forecast growth below 2% in every one of the next five years”. A sequence of 1.4, 1.3, 1.3, 1.5 and 1.6 would be a pretty dire set of marks in ice-skating or gymnastics. As a set of GDP forecasts, it is equally grim; a cumulative increase in real national income of just 7.0% in half a decade. Once the various UK economic think tanks had time to crunch the numbers on Wednesday night and into Thursday, there are some pretty alarming stories. The Times newspaper reports the widely-respected Institute for Fiscal Studies saying, “Britain will not return to debt levels as low as before the financial crisis until the 2060s, with workers facing two “lost decades” without earnings growth… Real earnings are falling this year as inflation has risen to 3%. The nascent recovery in earnings, which were growing through 2014 to the first half of 2016, has been choked off. That they might still be below their 2008 level in 2022 as the OBR forecast is truly astonishing”. Ouch!! GBP/USD is down 30 pips from its pre-Budget high to 1.3300, GBP/AUD is down 75 pips at 1.7450 whilst GBP/NZD is just over a full cent lower at 1.9315. We don’t imagine the Budget forecasts will look any better on Monday morning after a whole weekend’s reflection…

Even before the Minutes of the last FOMC Minutes were released, the US Dollar had been under pressure; its index against a basket of currencies falling below the key technical support level at 93.30 that we have been highlighting here for the past 10 days. In our London opening commentary on Wednesday, we drew attention to Janet Yellen’s speech at NYU. She said inflation should rebound over the next year or two, although “I will say I am very uncertain about this. My colleagues and I are not certain that it is transitory, and we are monitoring inflation very closely… It may be that there is something more endemic going on or long-lasting here that we need to pay attention to.” These doubts (well-founded in our view) helped push the US Dollar lower throughout the day and were later confirmed in the FOMC Minutes. “A number of participants were worried that a decline in longer-term inflation expectations would make it more challenging for the Committee to promote a return of inflation to 2 percent over the medium term. These participants’ concerns were sharpened by the apparently weak responsiveness of inflation to resource utilization and the low level of the neutral interest rate, and such considerations suggested that the removal of policy accommodation should be quite gradual.” The USD index has now tumbled below 93.00 to a low of 92.91 and with the Thanksgiving holiday Thursday, there’s nothing now to prevent further USD losses.

The euro had a pretty good day on Wednesday, regaining a 1.18 handle against the US Dollar and up against all the currencies we follow apart from the CAD. In our New York morning comment (OFX never sleeps!) on German politics, we noted Press reports suggesting Ms. Merkel’s team expected increasing public and political pressure on the SPD to abandon its aversion to a rerun of a "grand coalition" with the Chancellor’s Christian Democratic Union. On Monday, SPD leader Martin Schulz had said: "I will never join a government with Angela Merkel." In response, the Chancellor told ZDF television, "I do hope that they will reflect very intensely about whether they should step up and take responsibility." Opinion polls published Wednesday afternoon show why Ms. Merkel might wish to avoid a return to the ballot box: one survey showing her Conservatives on 29.2 per cent - sinking below 30 per cent for the first time since she took over in 2000 – whilst another put her Christian Democrat party and her current Bavarian coalition allies (CDU/CSU) on exactly 30 per cent, their lowest level ever. With the opposition SPD also losing support, the big gainer continues to be the right-wing AfD party. It is this fact alone which might persuade the traditional parties to re-visit Coalition negotiations; something which would surely be seen as EUR positive.

The Canadian Dollar had another good day on Wednesday, boosted by a further sharp rise in oil prices to their highest level of the year. As recently as last Tuesday, NYMEX crude was at $55.19 per barrel. On Tuesday this week it finished in New York around $57.05 and yesterday it traded – and then closed - as high as $58.02. The rise in oil prices was very timely for the Canadian Dollar as some of the earlier optimism around the ‘NAFTA 2.0’ began to be reassessed locally. Indeed, one of the major banks locally in Canada put out a report saying the CAD could fall as much as 20% if the talks failed in the New Year. They stressed this was not their central scenario (otherwise they might now be looking for a new Head of Research!) but noted, “Despite ongoing threats from President Trump and a more contentious renegotiation process of late, we continue to view NAFTA termination as a tail risk… the risk of significant negative impacts to economic activity and financial volatility, through the channel of policy uncertainty, is non-trivial.” USD/CAD is down 75 pips from 1.2780 to 1.2705 over the past 24 hours whist the AUD/CAD cross is down from almost 0.9690 to 0.9665.