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The longest day of the year Down Under: AUD and NZD steady as USD Dollar edges lower. NZD Q3 GDP is released today.

By Nick Parsons

Wednesday’s movements weren’t large anywhere in the FX universe, though after the US Dollar the New Zealand Dollar was - only very marginally - the weakest of the major currencies we track here. NZD/USD recovered well from its 0.6958 low but spent the whole of the Northern Hemisphere session on a US 69 cents big figure; unable to regain the 70c threshold which it occupied between Friday and Tuesday.

Though we love the detail and insights which Statistics New Zealand bring to their many different economic, social and demographic snapshots of the country, even their most ardent fans would have to concede that 11 weeks is a long time to wait for quarterly GDP numbers. Finally though, today we’ll get to see how the economy performed in the three months to September.

We know that the June quarter benefited from a pickup in milk production and a spike in tourist numbers during the Lions rugby tour. GDP grew +0.8% in Q2 to take the annual rate to 2.5%. For the last quarter, growth forecasts range from +0.4% at Westpac to +0.7% at BNZ with the consensus at +0.6% q/q for an annual 2.4%. The RBNZ’s last Monetary Policy Statement assumed a +0.7% quarterly increase so anything less than this will reinforce expectations that interest rates will be on hold until at least 2019.

NZD/USD opens in Asia this morning at 0.6980 with AUD/NZD at 1.0980. The GDP figures are released at 10.45am local time.

As we head into the longest day of the year in the Southern Hemisphere, the trading ranges for the Aussie Dollar have narrowed quite noticeably. Over the past 48 hours, AUD/USD has been stuck in a 32 pip range from 0.7647 to 0.7679 with little in the way of catalysts or investor enthusiasm to move it one way or the other.

Having amused everyone yesterday with a Press Release entitled “Seasonally adjusted greetings from the ABS”, which looked at some of the quirkier numbers around Christmas, the official statisticians separately drew some insights into Australia’s ageing population. They noted that in 2016, nearly one in every six people (16 per cent) was aged 65 years and over, an increase of 664,500 since 2011. Additionally in 2016, there were almost half a million people (486,800) aged 85 years and over, an increase of around 85,000 people over the past five years.

In 2016, over a third of people aged 65 years and older (37 per cent) were born overseas. About two thirds of these (67 per cent) were born in Europe, while almost a quarter of older overseas born people (24 per cent) reported that they were born in England. While the majority of older people (82 per cent) only spoke English at home in 2016, Italian (3.2 per cent) and Greek (2.2 per cent) were among the most commonly reported languages other than English.

We’ll leave the last words on both population and Christmas to the ABS without further comment: “if you are celebrating your birthday on Christmas Day you are in rare company as the last 10 years of data shows it is the second least common birthday, after February 29. However, the Christmas and New Year holidays are the most likely time for babies to be conceived.”

The AUD opens in Asia this morning at USD0.7660 with AUD/NZD at 1.0980 and GBP/AUD1.7475.

The pound had a very mixed day on Wednesday, rising through to mid-afternoon London time but then slipping back in the New York session. It ended little changed against a weaker USD which meant it fell against all the major currencies we track here.

The IMF released its annual report on the UK economy, with its Managing Director Christine Lagarde in London for a Press Conference. The IMF had been criticised 18 months ago for taking sides with former Chancellor George Osborne in the run-up to the EU referendum. Defending its forecasts, Ms Lagarde said that, “the Brexit referendum result and the decision to invoke Article 50 are already having an impact on the economy even though the UK is not planning to leave the EU until 2019.

She added, “We feared that if Brexit was decided upon, it would most likely entail a depreciation of sterling, an increase in inflation, a squeezing in wages and a slowdown and a reduction of investment. What we are seeing is that that narrative we identified as a potential risk is being rolled out as we speak. It’s not experts talking, it’s the economy saying that. Our forecast is 1.6 per cent GDP growth this year and 1.5 next year, which relative to the upward revisions we are advocating for other advanced economies is a bit of a disappointment.”

The IMF’s statement concluded, “Despite a strong recovery in global growth and supportive macroeconomic policies, the impact of the decision to exit the European Union has weighed on private domestic demand. Business investment growth has been lower than would be expected in the context of strong global growth and high levels of capacity utilization, owing to heightened uncertainty about economic prospects.”

The Pound opens in Asia this morning at USD1.3395 and GBP/AUD1.7450 with GBP/NZD at 1.9190.

The Dollar fell steadily across time zones on Wednesday, unable to gather much support either from strong economic data (existing home sales), higher bond yields or a rallying stock market. By the end of the London afternoon its index against a basket of major currencies had fallen to 92.85; its weakest level for a fortnight. The fall came – and we are wary of inferring causality – as the 3-month cross-currency basis swap (the price of borrowing dollars) suddenly reversed the move of last week which had persistently weighed down on the EUR/USD exchange rate.

The US Senate has at last approved the $1.5 trillion tax reform bill, which includes permanent tax breaks for corporations and temporary tax cuts for individuals, by a final vote of 51-48. Once enacted, the legislation will represent the most drastic change to the US tax code since 1986. The bill lowers the top individual tax rate from 39.6% to 37% and slashes the corporate tax rate to 21%, a dramatic fall from its current rate of 35%. Speaking at a Press Conference after the vote, Senate majority leader Mitch McConnell hit back against criticism that the tax overhaul was unpopular among the public. “If we can’t sell this to the American people, we ought to go into another line of work.” Let’s see if this line comes back to haunt him at some point in the future.

For the day ahead in the US, there’s a bumper crop of economic data releases: The third estimate of Q3 GDP, weekly jobless claims, the Philly Fed index, the Chicago Fed index of national activity and then November’s leading economic indicator. The US Dollar index opens in Asia at 92.86.

The euro followed up on Tuesday’s rally with a second day at the top of the FX league table on Wednesday; all of its gain coming very late in the European day and in the New York morning. The absolute magnitude of the move was not great – a 40 pip rise from 1.1843 to 1.1883 but the market was so quiet generally that it was enough for the EUR to take top spot.

A look at pricing in the FX options market shows just how quiet things are. As Bloomberg notes, in the run-up to the holiday season, and especially in the days around Christmas, liquidity in the market drops considerably, increasing the risk that a currency faces abrupt moves even on small volumes. “One-week implied volatility in the euro-dollar dropped for an eighth day on Tuesday and traded as low as 4.73 percent, a level unseen since August 2014. A close below 5 percent would mark a record low for this time of year since the euro came into circulation.

One-week options structures cover a series of major US economic data including gross domestic product, durable goods, income and spending numbers, and the Federal Reserve’s preferred gauge of inflation PCE. Clearly, the market is not pricing any directional risk from these indicators or, indeed, any unforseen exogenous shock.

The EUR opens in Asia this morning at USD1.1880, AUD/EUR0.6450 and NZD/EUR0.5872.

We warned here yesterday of the sometimes random nature of foreign exchange markets and highlighted the price action in the Canadian Dollar as an example of sudden directional shifts. On Tuesday afternoon USD/CAD broke through the November highs of 1.2900 and 1.2905; reaching a best level of 1.2912 before quickly reversing 40 pips lower. On Wednesday, the pair extended the move to the downside and the CAD finished the second-best currency on the day after the EUR.

In economic news locally, wholesale sales increased a much stronger than expected +1.5% to $63.0 billion in October, more than offsetting the 1.1% decline in September. Gains were reported in six of seven sub-sectors, together representing 81% of total wholesale sales. The machinery, equipment and supplies and the personal and household goods sub-sectors contributed the most to the increase.

Wholesale inventories, meantime, increased 0.8% to $82.1 billion in October, the sixth gain in seven months. The machinery, equipment and supplies sub-sector (+3.5%) led the increases, with higher inventories in all four industries in the sub-sector. In October, the increase was led by the construction, forestry, mining, and industrial machinery, equipment and supplies industry (+3.5%). The machinery, equipment and supplies sub-sector has recorded increases in four of the past five months, increasing 7.0% over that period.

The Canadian Dollar opens in Asia this morning at USD1.2830 with AUD/CAD at 0.9835 and NZD/CAD at 0.8950.