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Another choppy day for GBP on Brexit talks; NZD is the bottom of the pile as AUD awaits RBA Meeting

By Nick Parsons

The New Zealand Dollar had a quieter day Monday, although quiet doesn’t mean good. Having opened around USD0.6870, it traded in a 30 pip range from 0.6841 to 0.6871 before finishing close to the day’s low to be the worst performer of all the major currencies we track here. The AUD/NZD cross rose half a cent, while NZD/USD and NZD/CAD both fell half a cent. This poor day for the Kiwi Dollar came despite analysts at Swiss bank UBS putting out a bullish recommendation on the currency which they described as the cheapest in G10. “As the Chinese economy continues its rebalancing away from investment-led growth and toward increased consumption, the country’s import patterns will change with obvious knock on effects for its key trading partners… New Zealand is a clear beneficiary, given the importance of agricultural products (milk and meat) to its economy and exports. New Zealand exports virtually no investment goods to China, so there no offsetting loss from a deterioration in these exports”. All the major global banks’ ‘2018 Outlooks’ are hitting the street around now, but this is one of the more bullish views from an offshore player. Back to the more mundane incoming economic data locally, this week brings some of the ‘partial’ data which then feed into GDP on December 21st. Today it’s Building Work, Thursday is Wholesale Trade and Friday is the Manufacturing Survey. RBNZ Acting Governor Grant Spencer is delivering what will be a very closely-watched speech tomorrow on “Low inflation and its implications for monetary policy”; the text of which will be released at 1.15pm local time today. NZD/USD opens at 0.6845 with the AUD/NZD cross at 1.1090.

Away from Adelaide, the big event of today is of course the last of the year’s eleven RBA Board meetings. Re-reading the November 7th Statement, it is not obvious which paragraphs need much of a tweak either way. On Melbourne Cup day a month ago, the RBA noted, “The Bank's forecasts for growth in the Australian economy are largely unchanged. The central forecast is for GDP growth to pick up and to average around 3 per cent over the next few years. Business conditions are positive and capacity utilisation has increased… The labour market has continued to strengthen. Employment has been rising in all states and has been accompanied by a rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead”. If that assessment left them to leave interest rates unchanged with no forward bias, it’s reasonable to assume exactly the same outcome today. There’s probably a bigger discussion about what biscuits to have with the morning coffee than what to say about monetary policy. For the first 24 hours of the week, AUD/USD has traded in a range between 0.7584 and 0.7613 and has spent roughly equal amounts of time on 75 and 76 cents ‘big figures’. It finished Monday down against the USD and CAD, little changed against the EUR and a very volatile GBP, but up against the NZD.

There seems no end to the volatility in the British Pound. It traded lower through Monday’s Asia session on fears that the Brexit talks might stall over the vexed question of the Irish border. The Republic of Ireland says it will veto a ‘hard border’ with Northern Ireland but the UK Conservatives’ coalition partner in Government, Ulster’s Democratic Unionists (DUP) object to any border being placed between them and the rest of the UK. At lunchtime in London, ahead of Prime Minister Theresa May’s meeting with European Commission President Jean-Claude Juncker, EU Chief negotiator Michel Barnier told MEP’s that “a breakthrough is likely. GBP/USD jumped from 1.3423 to 1.3535 with GBP/AUD up from 1.7650 to 1.7790 and a Press Conference was scheduled in Brussels for 4pm. This proved a very short and very tense affair in which Mrs May said a deal had not been agreed. Although no reason was given, it was clear that the DUP had vetoed it and the GBP gave back almost all its gains as quickly as it had earlier made them. Irish PM Leo Varadkar said, “The responsibility of any Prime Minister is to ensure that they can follow through on agreements that they make and we are surprised and disappointed that they haven’t been able to”. Unfortunately for the GBP, the more it looks as though a deal was made in Dublin, the more likely it is to be rejected by the Unionists north of the border. Talks are scheduled to continue later this week and the GBP is likely to be bounced around from one Twitter headline to the next. It opens in Sydney this morning at USD1.3455 and AUD1.7720 but be wary of a great deal on intra-day volatility throughout the next 24 hours and indeed right through to the end of the week.

The USD Dollar had a decent day on Monday as stock markets rallied and some of the more excitable Trump chatter from Friday subsided. Indeed, at one point, the Dow Jones Industrial Average was trading 500 points above Friday’s intra-day low whilst the S&P 500 Index was almost 60 points higher. Against this very positive asset market backdrop, the USD index rose back to 93.0, and gained against most of the major currencies we follow here. In the version of the tax reform bill which passed in the Senate by 51-49 votes on Friday, the proposed cut in the tax rate on repatriation of overseas deferred profits was pretty much reversed. The original proposal had provided for a 10 percent deemed repatriation tax rate for cash and 5 percent for other profits but in a late change, the Senate increased the tax rate on the deemed repatriation of currently deferred foreign profits to 14.5 percent for cash and cash-equivalent earnings and 7.5 percent for other profits, almost matching the House bill’s 14 and 7 percent rates. Going forward, this is a much less USD-positive story than had been previously expected. For the immediate future, the focus for FX markets is on the ISM non-manufacturing index. Any number close to October’s bumper 60.1 would surely be USD positive.

The euro has traded gradually lower today, though the ranges have been tight and it would be wise to look at the numbers on the ‘y axis’ of any chart before leaping to unwarranted conclusions about its weakness. The facts are that it began the week 24 hours ago at USD1.1865 and having touched a low of 1.1838 during the New York morning, it finished the day within 10 pips of where it started. The only economic indicator of note in the European session was the Sentix Eurozone economic confidence indicator. This slipped more than had been expected in December to 31.1 from 34.0, though it should be noted that November was the highest since July 2007. The assessment of the current situation strengthened to the highest level in more than 10 years, while expectations weakened notably to a 4-month low in December. Looking forward, Tuesday brings the various PMI service sector indices across the Eurozone whilst Wednesday it’s German factory orders and on Thursday we have German industrial production. The simple problem for the EUR at present is that whilst the economic news is almost without exception positive, it is well known and already ‘in the price’. It takes a stunning set of incoming data to produce a genuine shock. Once we get beyond today’s PMI’s the economic calendar is pretty much empty for the rest of the week whilst the ECB falls silent after Wednesday ahead of the December 14th Council Meeting. In the world of foreign exchange, something usually turns up to shatter the calm but for the EUR right now, it’s genuinely difficult to see what that might be.

Canadian Dollar traders were able to pause for breath Monday after the enormous swings of Friday afternoon. The good news has been the general resilience of the currency in the face of a 90 cents drop in crude oil prices. NYMEX crude began the week at $58.35 but fell steadily in each time zone to finish in New York around $57.46. Despite this drop, USD/CAD closed barely 20 pips above its opening level in North America of 1.2685, whilst AUD/CAD was almost exactly unchanged on the day at 0.9650. Looking forward, the Bank of Canada holds its 8th and final monetary policy meeting of the year on Thursday. Compared to the economic situation at its last meeting in October, retail sales, the labor market, housing market, manufacturing activity, trade and oil prices have all improved somewhat though inflation has eased a bit lower. Markets are pricing around a 50% probability of a rate hike in January. Though they could react quite sharply to any clear steer from Governor Poloz, it’s hard to imagine much more volatility for the CAD than we saw at the very end of last week…