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USD reverses early losses, NZD surges as recent range breaks

By Nick Parsons

It’s been a rare sight recently to see the New Zealand Dollar at the top of the one-day performance charts but this is exactly what happened Monday. Initially, the Kiwi tracked the Aussie almost tick-for-tick and from the Sydney open to lunchtime in London, the AUD/NZD cross didn’t move outside a very tight 1.1064-1.1085 range. When it did break, it did so to the downside and quite dramatically. By the time London traders handed the books over to New York, the pair had fallen all the way down to 1.1005; its lowest level in almost 6 weeks. The big surprise is that this move took place in a total news vacuum. There was simply nothing. No economic data, no political announcement and no big-hitting analyst research report. We haven’t yet had the weekly CFTC Commitment of Traders report on speculative positioning in currency markets as it has been delayed due to the Thanksgiving holiday last Thursday. We do know from the last one released November 17th that the market’s net short of NZD was the largest since the week of May 19th; having turned around 180 degrees from the big net long state of late July. As AUD/NZD fell out of the last week’s trading range, a likely big volume of stop-loss/stop-entry orders were triggered which then fed through into NZD strength against all the other currencies as any available Kiwi liquidity was sucked up. NZD/USD is on a 69 cent handle whilst GBP/NZD is down over 2 cents from last week’s 1.9500 high. A very busy and totally unexpected day – the joys of foreign exchange!

Australia last held a referendum on whether it should become a Republic back in 1999, when it was rejected by a margin of 55:45. Opposition Labour Leader Bill Shorten has vowed that if his party wins the next election, "We will put a simple Yes or No question to the Australian people - do you support an Australian republic with an Australian head of state?" This isn’t the place to discuss the relative merits of the arguments for and against, but with another UK Royal Wedding announced yesterday and the birth next year of a baby who will be fifth in line to the throne, it may once again become a talking point. Certainly, there’s not much else that’s fresh on the domestic news agenda: it has been a pretty quiet 24 hours, albeit the Aussie Dollar has managed to hold on to a US 76 cents big figure for almost the entire period. The low of 0.7599 came just as England were finally thrashed in the first Ashes test and the AUD subsequently managed to climb around half a cent to the day’s best level of 0.7643 late in the London morning. It slipped 35 pips in the New York session but overall it wasn’t a bad start to the week for the AUD: up against the GBP and CAD, down against the NZD but steady against the EUR and USD. There are no domestic economic data until Thursday when we get a look at Private Capital Expenditure which will then be plugged into analysts’ GDP spreadsheets. The same day we’ll also see Building Approvals and RBA Credit numbers. Meantime, it’s radio silence as far as RBA speakers are concerned: the next Board meeting is December 5th so there’ll be no clues about monetary policy from Central Bank officials.

Like all the major currencies, the pound had a quiet day in the Asian time zone Monday but from 6.30am to lunchtime in London time it jumped 60 pips from USD1.3315 to a best level just over 1.3375 before then giving back most of these gains in the afternoon. GBP/AUD hit a high of 1.7545 before giving back 20 pips whilst GBP/NZD finished the day a full cent lower at 1.9292. After a weekend taken up by yet more twists and turns in the interminable Brexit negotiations and then a thrashing in the first Ashes test, it was a relief for the Brits to find something different to talk about: another Royal Wedding. It is only a couple of months since Prince Harry made his first public appearance with his girlfriend, Meghan Markle, at the Invictus Games in Toronto. A statement issued by Clarence House Monday morning said, “His Royal Highness the Prince of Wales is delighted to announce the engagement of Prince Harry to Ms. Megan Markle.” The wedding is to be held next year, with the ceremony conducted by the Archbishop of Canterbury. With Prince William’s wife Kate due to give birth late Spring, the UK’s royal fans will have both a new baby and a marriage to celebrate. Whether the country’s banks will be celebrating or commiserating will probably depend on the results of the Stress Tests published at 7am local time on Tuesday morning as part of the Bank of England’s Financial Stability Report. There has been some chatter than one of the banks may fail the tests and we’ll soon find out if this was a genuine leak or a carefully crafted piece of expectations management…

The US Dollar had a day of two unequal halves on Monday, falling for the first 15 hours since the Sydney open then rallying through the New York day to regain all and more of its earlier losses. The USD Index against a basket of major currencies opened at 92.50, tumbled to a 2-month low of 92.21 then rallied all the way back up to 92.61. The chief trigger for the rally was the publication of US October new home sales data. Against expectations of a 6.1% fall in sales, the outturn was a stunning 6.2% m/m increase. The numbers aren’t quite as straightforward as they look: September’s outsized 18.9% spike was revised down to 14.2% which meant October started from a lower base. Nevertheless, the annualized pace of 687k was the highest since November 2007 and accompanying data on prices showed the average price of a new house rose above $400,000 for the first time ever to $400,200. Read that and weep if you’re a homebuyer in Sydney or Auckland. Ahead of the Senate Banking Committee confirmation process for incoming Fed Chair Jerome Powell, Tuesday brings more data on house prices, consumer confidence and the goods trade balance. For the US Dollar, the key will be how “Jay” – as he is known – sees strong activity numbers feeding into inflation and affecting future monetary policy decisions.

Price action for the EUR on Monday was the simple mirror image of the USD: quiet through Asia, up through the European lunchtime then reversing lower during the New York Day. EUR/USD began around 1.1930, reached a high of 1.1958 immediately before the US new home sales numbers then promptly lost 60 pips to dip back onto a 1.18 handle. It was not a dissimilar pattern against both the Aussie and Kiwi Dollars though NZD/EUR did outperform AUD/EUR amidst the bout of short-covering we described above. There were no fresh Eurozone data or Central Bank speakers on Monday, so it was back to watching the unfolding Coalition talks in Germany. By common consensus, the immediate loser in these talks is SPD leader Martin Shulz, though his party may still be able to extract significant concessions as the price for its ongoing support of the CDU/CSU. It may gain control of the Finance Ministry or it may force Merkel’s CSU partner to abandon the proposed 200,000 annual cap on asylum seekers. For her part, Angela Merkel said only that global challenges such as relations with Russia and the US needed a Germany “able to act… President Macron’s plans for EU reform had led to an “expectation that we draw conclusions and position ourselves”. In words which were widely interpreted as a call for a Grand Coalition, she said, “given the conflicts we have in the Middle East, given the situation in Russia, the situation in the United States of America, I think it is good if Germany is able to act. That is why we believe that such a stable government should be formed, in terms of Europe, in terms of our economic strength, in view of the new challenges we face”. We’ll now have to see if this helps put a floor under the EUR after Monday’s reversal.

Monday’s trading pattern for the Canadian Dollar was the same as most other FX majors: it strengthened through Asia and Europe then reversed these gains during New York hours. USD/CAD fell from 1.2710 to a low of 1.2682 before jumping almost a full cent to a high of 1.2766. As well as the obvious influence of USD trading more generally, the CAD was also hit by a quite sizeable drop in oil prices. Though a concerted effort to talk crude prices higher ahead of Wednesday’s OPEC meeting in Vienna, little of note was heard from the major players. NYMEX Crude reached a fresh 2017 high of $58.82 on Friday but fell steadily on Monday to be around 65 cents overnight to $58.15. All this volatility comes ahead of a very busy Canadian economic calendar: the Bank of Canada’s Financial System Review is on Tuesday and the labour market report and Q3 GDP figures are released on Friday. Economists are estimating annualized GDP growth of 1.8% in Q3, down from 4.5% in the second quarter. Canada is unusual – indeed it is a world leader – in producing monthly GDP numbers. July was flat m/m whilst in August GDP edged down by 0.1% the first m/m drop since October 2016. The September numbers will be published alongside the full quarterly estimate.