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FOMC Meeting and payrolls loom

By Nick Parsons

The last Saturday in October is when Europe changes clocks so London is now back on Greenwich Mean Time (GMT). Until the US moves to Daylight Saving Time on the first Sunday in November, there’s only a four hour time difference between the UK and cities on the eastern seabord of the United States. A Monday morning which always threatened to be quiet in terms of price action in foreign exchange has now been effectively shortened by an hour so there’s even less to report, though where changed the US Dollar is generally a touch softer than Friday’s close, other than against the NZD which continues to slide lower. A very busy week of Tier 1 economic data in the US (ISM surveys and payrolls) kicks off today with personal income and expenditure. The main interest lies in the so-called PCE deflator; the Fed’s preferred measure of inflation. This is expected to edge up from 1.4% y/y in August to 1.6% in September – not enough to ring alarm bells for investors but moving in the right direction to suggest a Fed rate hike remains on the cards in December. Whilst Dr. Janet Yellen will still be in charge at the Fed for that meeting, the White House has said that President Trump will announce his pick for the next Fed Chair before he departs for a trip to Asia on Nov 3rd. The choice appears narrowed down to either Jerome Powell or John Taylor, with the latter arguably offering a bit more USD support through the prospect of a somewhat faster pace of rate hikes in 2018.

As in the United States, Canada doesn’t move to Daylight Saving Time until the first Sunday in November. With Europe having moved the clocks back an hour this last weekend there’s only a four hour time difference between London and Toronto this week and only a five hour gap between Continental Europe and those in Canada’s Eastern Time zone. It remains to be seen whether the seasonal shift will bring any respite for the Canadian Dollar which surged through the summer months but has recently come under sustained pressure. Having surprised financial markets not once but twice with interest rate hikes, the Bank of Canada has subsequently seen a sharp deterioration in most of its main economic indicators. Indeed, the so-called “Economic Surprise Index” has plunged over the past 6 weeks to levels not seen since the fourth quarter of 2016 and USD/CAD has snapped back almost 7 cents higher onto a 1.28 handle reaching a 3 ½ month high of 1.2850 on Friday. The week ahead brings data on consumer confidence today then it’s GDP and producer prices Tuesday, manufacturing PMI Wednesday and employment and international trade Friday. A decent run of economic news (or at least nothing worse than expectations) might finally offer the CAD some respite after its recent mauling.

Whilst there’s plenty of fresh news coming up to set the tone for currency markets in North America, last week was the big event for the single European currency. For much of the past few months, the debate has been how the ECB could communicate a scaling-back of QE without signaling a tightening of monetary policy. Last Thursday’s Press Conference saw Mr. Draghi signal a “dovish taper”; a reduction in the pace of bond buying but a commitment that interest rates would not be raised until well after QE finally comes to an end. Simply put, this means another 12 months without a rise in Eurozone interest rates, even as the economic recovery becomes more broadly based and the pace of activity continues to pick up. EUR/USD fell below 1.16 for the first time since early July post-ECB but another fresh high this morning for economic and consumer confidence in the Eurozone has seen the pair recover to a high thus far of USD1.1640. The political situation in Catalonia remains fluid but has thus far not escalated into dramatic or violent demonstrations which might cause further capital flight from Spain. Unless this were to happen, the EUR will be supported around USD1.1580 and may attempt a test of its 50 day moving average at 1.1642. Next stop beyond there would be the 100 dma at 1.710 but this looks beyond reach unless US economic data disappoints.

A big week lies ahead for the GBP, with the Bank of England confidently expected to raise interest rates for the first time in over 10 years. Thursday’s MPC meeting should finally see BoE Governor Mark Carney deliver on one of his many threats to tighten monetary policy even though the performance of the UK economy remains disappointing under the clouds from Brexit. The BoE has a 1-3% target for CPI inflation and should it go beyond these boundaries (currently it is 3.0%), the Governor has to write a letter to the Chancellor saying what steps he will take to bring it back to target. Carney’s predecessor Mervyn King allowed CPI to rise to 5.2% without raising rates. Instead, he judged that the costs of bringing inflation back to target were too great in terms of lost output and employment. The current Governor is to a large extent trapped by his own rhetoric and a failure to raise rates on Thursday would see his credibility tumble along with the pound. So, whether or not a hike is really necessary right now (and reasonable people can disagree on this) it has to be done simply to save face. The one uncertainty surrounds the Bank’s language; will it be “one and done” or will the MPC warn of more hikes to come in 2018? It is this which will set the tone for the GBP for the next few weeks and which could make for a volatile day when the Quarterly Inflation Report is released at the same time as the interest rate decision is announced.

The AUD traded very heavily last week, breaking its 200 day moving average at 0.7705 and falling on to a US 76 cent handle for the first time since July 13th. From Friday morning’s low around USD0.7630, though, it has crept tentatively higher and in doing so has managed to break above both its 20 day (0.7673) and 50 day (0.7664) moving averages to reach a best level in London today of 0.7682. With conflicting signals from recent economic statistics on CPI and employment, investors have adopted very much a wait-and-see attitude to the Australian Dollar and will be looking for more clues later this week when Thursday brings September’s Trade Balance (consensus +$1.2bn) and Friday sees Retail Sales (+0.4% m/m). Before then, private sector credit and weekly consumer confidence figures are due Tuesday but are unlikely to move the FX dials much as the RBA enters a period of radio silence before next week’s RBA Board meeting. From a technical perspective, the upside break of the 20 and 50 dma’s brings the 100 day moving average within reach at 0.7698 but in truth there is little investor participation in the Aussie Dollar right now other than playing it from the long side against its trans-Tasman neighbor.

Canadians looking for straws to clutch at as they watched the CAD come under pressure found plenty of comfort Down Under: the New Zealand Dollar has spent the last couple of weeks as the worst performer amongst all the major currencies. NZD/USD tumbled through its 20, 50 and 100 day moving averages and its 200dma at 0.7155 was decisively broken after the announcement of a new Labor government. There’s been nothing in the legislative program to lift currency investors’ spirits and the ‘big figure’ of US 70 cents was easily broken for the first time in almost 5 months on October 19th. Friday’s close of USD0.6878 was the lowest since mid-May and in an otherwise quiet overnight market, the NZD has again been the biggest loser, falling almost another 40 pips on the day thus far. Unless and until they receive more clarity about the government’s economic policy and its stance on the remit of the RBNZ, investors are unlikely to want to play the NZD from the long side anytime soon. Against this background, even a decent set of Q3 employment figures on Wednesday may provide only better levels at which to once more sell the currency.