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New Fed Chair announced

By Nick Parsons

There are multiple media reports that President Trump will today announce Jerome Powell as the new Fed Chairman to replace Janet Yellen and he has said himself that a formal announcement will be made before he sets off on a foreign policy trip to Asia tomorrow. To the extent Mr. Powell is seen as less likely to tighten policy aggressively that the other frontrunner John Taylor, this has seen the USD unwind most of yesterday’s gains.

For the moment, Dr Janet Yellen remains firmly in charge at the Fed and yesterday she released a new FOMC Statement for investors to pore over. They key phrase is that, “Hurricane-related disruptions and rebuilding will continue to affect economic activity, employment, and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further”.

The US Dollar index initially liked what it saw in the Statement and pushed up towards the top of its daily trading range (94.30-94.56) which was the best level since Friday evening. Overnight, however, it has slipped back a touch and now stands firmly mid-range at 94.40 ahead of Friday’s non-farm payrolls report.

The Canadian Dollar has recovered around half its losses suffered in the post-GDP sell-off but it still faces plenty of domestic economic headwinds. The latest of these came with the manufacturing PMI Survey which dipped to 54.3 in October from 55.0 in September. Although continuing to signal stronger business conditions at the start of the fourth quarter, the latest improvement in the health of the sector was the weakest since January. Markit noted, “Both output and new orders rose at slower rates during October.

Production increased for the twelfth successive month, but at the weakest pace since January. Where output rose, this was mainly linked to higher new orders. Export sales were particularly subdued, meaning that manufacturers were reliant on domestic demand to drive growth during October.” USD/CAD is at 1.2840 after printing 1.2905 just after GDP whilst GBP/CAD is at 1.6990 having been as high as 1.7160.

There’s no more economic news scheduled for release in Canada today and we’d expect the currency to be driven more by news elsewhere – especially in the UK and US – than by events at home.

Europe is back at work today and after Wednesday’s holiday, Spain, Italy, France and Germany all released their manufacturing PMI numbers this morning. We know that growth ended Q3 on a high note and these are the first numbers to show how the momentum carried over into Q4. For the Eurozone as a whole, the final IHS Markit Eurozone Manufacturing PMI rose to an 80-month high of 58.5 in October, up from 58.1 in September.

Growth of both output and new orders remained elevated, while the pace of job creation accelerated to a survey-record high. Markit noted that, “the upturn was again led by a strong-performing core of Germany, the Netherlands and Austria. PMI readings were unchanged in Germany and Austria, while the Netherlands PMI rose to its highest level since February 2011. The expansions in Italy (80-month record) and Spain (29-month high) both accelerated, while the France PMI held steady at September’s 77-month high. Growth was also recorded in Ireland and Greece, meaning all of the nations covered registered expansions for the fifth straight month”. EUR/USD picked up from the low 1.16’s overnight to open in London around 1.1650. '

It has been on a 1.16 big figure ever since 7pm London time on Friday and for the whole of this week’s trading it has been trapped in an extremely tight range from 1.1603-1.1660. EUR/CAD, meantime is at 1.4958; almost exactly unchanged on the day so far but still comfortably above its 20, 50, 100 and 200 day moving averages.

Given the mere 4 hour time difference between London and the eastern coast of the United States, the Bank of England’s interest rate decision is announced just as we go to print with this North American commentary. A 25bp rate hike looks a done deal. The main interest will be the split, if any, on the MPC and then how its Canadian Governor Mark Carney handles the Press Conference which will be given to present the Bank’s latest Quarterly Inflation Report. If he errs on the side of “one and done” and emphasizes a slow and gradual pace of future tightening, the pound could slip back further. If, instead, he adopts a more hawkish tone, the threat of more hikes in 2018 (which are not yet priced in to the market) could set the GBP on another tear higher.

Perhaps the least likely outturn is that the pound ends the day unchanged: it could be quite a volatile 24 hours ahead. GBP price action this morning has been pretty poor and the pound appears to have fallen victim both to some last-minute profit-taking and fresh political uncertainties after PM Theresa May was handed the resignation of her Defence Secretary Michael Fallon.

Technical support is now seen at USD1.3195 with resistance at 1.3295 and 1.3310. The GBP has also slipped against the Canadian Dollar and this morning sits just below 1.70. The first area of technical support is seen around 1.6935.

In our overnight commentary for the Australian time-zone, (OFX never sleeps!) we said that, “AUD/USD remains below all four of its main moving averages (20, 50, 100 and 200 day) but at some point this sideways range will be broken, perhaps dramatically”. We previewed the upcoming trade figures, noting that, “consensus expectations are for a seasonally adjusted monthly trade surplus around $1,200m after +$989m in August and +$808m in July”.

The actual number was much better than expected with a $1,745 surplus being the largest since May; benefitting from essentially flat imports but a pretty decent 3% rise in exports. This now completes the three monthly snapshots which will go into the Q3 GDP numbers and it seems that net trade will make a pretty decent contribution to growth in the quarter. Before getting too carried away, note the trade balance is often a misleading indicator of domestic demand (as its obviously mainly an export story) and the mining and LNG sector is not a huge employer so there’s no strong and immediate link back to spending at home.

Nonetheless, good news is good news and after more than a week of poor price action amidst liquidation of long positions, the AUD finally caught a bid overnight and moved at last back on to a 77 US cent handle for the first time in a week. AUD/CAD has been up to a high of 0.9908 before once again settling on a 98 cent big figure.

If you thought house prices were crazily high in Vancouver, Toronto, or indeed anywhere in Canada, then take a look at what’s been happening in New Zealand. Prices there are amongst the most expensive in the world, with eye-watering prices being paid for very modest properties in the main cities. The average house price in Auckland has risen 90% in the last 10 years to m ore than one million NZ dollars whilst the average price nationally has risen 56% to $647,000.

Latest figures out this morning from property research agency Quotable Value suggest that the boom might finally be over, at least in the country’s largest city. Prices in the Auckland region fell 0.6% from a year ago; the first annual decline in 6 years whilst the nationwide growth rate has slowed to a 5-year low of 3.9% y/y. The incoming Labour government has already pledged to ban foreign purchases of property and to build 100,000 new homes, whilst changing the tax code which makes residential property such an attractive investment. Who knows, perhaps there’ll be some different property conversations in future?

The NZD largely shrugged off the housing news, with a weaker US Dollar helping lift it back onto US 69 cents. NZD/CAD, meantime, has pulled back from overnight highs at 0.8923 and sits around 0.8872 at the North American open.