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Eurozone economic treats

By Nick Parsons

The US stock market had a very minor wobble Monday. Most of the pressure was felt on small cap stocks, whilst the S+P 500 fell 8 points and the Dow Jones Industrials Average lost 85.

Lower stocks, lower bond yields and a somewhat weaker USD index (-0.3% yesterday) might not endure until the end of a week which sees major economic data releases but there’s the added complication of the Trump-Russia story which investors are now struggling to incorporate into their thinking. It is a fiendishly difficult narrative to follow and much of the reporting is as biased as the political actors themselves. It may or may not develop into a more important theme for financial markets but in the very short-term traders are faced with ‘Trump-Russia’ headlines and the fact of lower equity markets and it is very tempting and easy to link the two.

Overnight and through the London morning the USD has stabilized with the Dollar index against a basket of currencies up around 0.15% at 94.35. Last Friday’s high of 94.89 still looks out of reach until we see the ISM and payroll numbers later this week but if consumer confidence doesn’t spook the market, then some consolidation today looks likely.

Judging by the price action in foreign exchange markets, investors might be forgiven for thinking it’s a Public Holiday in Canada. Over the whole of the last 36 hours, USD/CAD has been trapped in a range from 1.2809 to 1.2849; the quietest period in many weeks.

Canada is one of the very few countries to release GDP figures on a monthly basis (the official statisticians in Australia and New Zealand can’t even calculate CPI monthly!) and though it’s expected that the latest figures will show only a slight moderation in the annual rate of growth to 3.6% from 3.8%, much of this growth came earlier in the period before the BoC moved to twice hike interest rates. Monthly GDP in July was unchanged and the August numbers out this morning are expected to be up just 0.1% m/m. After yesterday’s consumer confidence numbers showed the sub-index tied to perceptions about the economy and housing had the lowest month-end reading since January, investors shouldn’t be holding their breath for a pick-up in Canadian GDP any time soon.

For the day ahead, last Friday’s high of USD/CAD1.2906 will be the level to watch in case of any further disappointment in the economic data.

It has been a very busy morning for European economic data kicking off with a very solid 0.5% q/q increase in French GDP in Q3. The result was in line with consensus forecasts but upward revisions to the second quarter of this year and the fourth quarter of last year - both by 0.1 percentage point to 0.6% - helped lift the y/y growth rate to 2.2%; its fastest pace since 2011.

For the Eurozone as a whole, Q3 GDP was a tenth higher than expectations at 0.6% q/q (or 2.4% annualized as our American friends would describe it) whilst the second quarter was revised up by a tenth from 0.6% to 0.7%. Capping off a very encouraging day for economic news, unemployment in the Eurozone fell below 9 per cent for the first time since the beginning of 2009 and is now down more than 3 percentage points from its 12.1% peak in early 2013. The euro hasn’t received much of a lift yet from these numbers – perhaps because headline and core CPI were both a both touch weaker than forecast (a development we flagged up in one of our earlier commentaries).

Nevertheless, strong growth and low inflation is rarely a bad mix for the currency and after its post-ECB sell-off on Thursday, there should now be some near-term scope for the EUR to rally a little against both the USD and CAD.

After a very strong day which saw it leading the global FX pack by quite some way, the GBP has taken something of a breather through the APAC and London morning sessions. GBP/USD broke marginally through Monday’s high of 1.3213 but could advance only another 4 pips to a best level of 1.3217. GBP/CAD has performed somewhat better moving to a high of 1.6981 which is just a few pips shy of the multi-month high of 1.6984 reached last Thursday.

Two of the main private sector gauges of confidence were released overnight in the UK: GfK’s consumer confidence and the Lloyds Bank business barometer. The first of these showed a slight deterioration to -10 after a couple of months of very modest improvement whilst the latter improved from +23 to +26 and is now around its average level for much of 2017. There is some encouragement that falling real wages and seemingly interminable Brexit negotiations have not had a more negative effect on individuals or companies but it would be something of a stretch to describe these numbers as encouraging.

The trends in both series remain downwards and consumer confidence is actually lower than in the immediate aftermath of the referendum in Summer 2016. We’re left to wonder how much scope there is for GBP to advance further as a 25bp rate hike from the Bank of England on Thursday looks very much a done deal.

Monday’s Sydney trading range in AUD/USD was just 18 pips and though today’s price action there was somewhat better, all trading was still contained within just 25 pips from USD0.7672 to 0.7697 and the pair hasn’t been back on a US 77 cents handle since last Thursday.

For the country with the greatest amount of household mortgage debt per capita in the world and a Central Bank Governor who takes a close interest in debt metrics, it’s always worth having a look at credit numbers to see if there are any interesting stories developing. The latest data for September released overnight showed monthly growth in owner-occupied and investor housing credit grew around one-tenth of a percent less rapidly than it did in August though the annual rates of growth were unchanged at 6.3% and 7.2% respectively. These are still pretty decent numbers though there’ll be some concern that business credit grew just 0.1% m/m (the slowest since February) and the annual rate here fell to just 4.3%.

The only vantage point from which Australian house prices don’t look eye-wateringly expensive is if you’re standing in Toronto, Vancouver or San Francisco and the recent sharp decline in top-end prices in some of Canada’s main cities is something which should scare Australian mortgage holders more than any Halloween costume.

The New Zealand Dollar still just can’t rally and the scariest thing for FX investors this Halloween is still a Jacinda mask. For sure there are a few local analysts’ research notes out there saying the New Zealand currency is technically oversold, there’s too much bad news in the price and maybe the turning point is here but it still looks prudent to be patient. It’s easier and less painful to pick a fallen knife from the ground than it is to try to catch it mid-air.

Having closed in New York last night around 0.6870, it has been down to a low of 0.6837 and is barely above this level as we go to print. Every major currency world is up against the NZD and its measure of its weakness that even CAD/NZD is higher on the day. Any North Americans planning a holiday to Middle Earth this fall or Winter will be anxiously watching the NZD exchange rate. The good news is that the USD and CAD both buy more Kiwi Dollars than they’ve done at any point for the last 12 months.

It doesn’t yet make New Zealand a cheap place to visit, but it does make that holiday spending money go just a bit further. The incoming Labour government may not like overseas property investors any more but it has so far made the cost of vacationing a little bit cheaper.