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Wild ride for GBP crosses; RBA due this week

By Nick Parsons

The US Dollar opened last Monday morning with its index against a basket of currencies around 94.65. It spent the first four days of the week trapped in a very narrow range from 94.20 to 94.90 as investors digested a solid set of ISM manufacturing numbers and the latest FOMC Statement. 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”. President Trump announced John Taylor as the new Fed Chair to replace Janet Yellen in Q1 2018 and though the employment report was a touch softer than forecast, ISM services on Friday pushed the USD index up to close around 94.70. With President Trump now in Asia for 10 days, his Twitter feed and US tax reform proposals will most likely determine its fate over the week ahead.

The Canadian Dollar has had a quite lively, and ultimately pretty good week as the incoming economic data swung around from disappointing to quite good. It opened Monday morning at USD/CAD1.2817 but by Wednesday the pair was up at 1.2905 (USD stronger, CAD weaker) after a pretty poor set of GDP numbers. Analysts had looked for just a +0.1% m/m increase in August GDP after no change in July. Instead, the outturn was a -0.1% m/m drop as declines in oil and gas and manufacturing more than offset small gains in a majority of other industries. Manufacturing was a particular soft spot and though the service sector eked out a small gain of 0.1%, this was the first monthly contraction for the economy overall since October 2016. In the second half of the week, the CAD caught a bid despite soft manufacturing PMI data and stood at 1.2828 just before labour market data in both the US and Canada were released simultaneously on Friday. US payrolls and earnings both missed consensus forecasts whilst Canadian employment grew a faster than expected 35,300. USD/CAD hit a low of 1.2734 before ending the week at 1.2763. The week ahead looks a bit quieter with no major economic data releases and no BoC meeting until December 6th but we’re tempted to wonder if last week’s price action might be a sign of some larger and as yet unreported capital inflows?

The key focus for the Single European Currency nearly always lies around ECB Council Meetings and the subsequent Press Conferences held by its President Mr Draghi; or “Super Mario” as he has come to be known in currency and interest rate markets. The most recent of these was 10 days ago when he managed to announce a so-called “dovish taper” of QE which would see asset purchases continue at a slower pace through 2018 but with a promise not to raise interest rates until QE was finally finished. EUR/USD had fallen sharply that day from 1.1820 to a low of 1.1580 before ending Friday October 27th at 1.1605. Over the past week it has managed the remarkable and almost unprecedented feat of staying on the same big figure for every single minute of the 120 hours in which the foreign exchange market was open for business. Thursday’s high was 1.1672 and Friday’s low 1.1602. Mr Draghi and his ECB colleagues have previously complained about unwelcome and unwarranted volatility of the exchange rate and will surely have been delighted by the price action of the past week. For the week ahead, there’s not much economic data to be released. ECB speakers include Draghi, Lautenschlaeger, Nuoy, and Angeloni on Tuesday whilst it’s the turn of Bank of France Governor de Galhau and Bundesbank President Weidmann on Thursday.

It was very much a week of two halves for the GBP which was bought very heavily on Monday and Tuesday in anticipation of the Bank of England’s first hike in interest rates for 10 years and was then sold just as hard after the announcement was made. GBP/USD opened around 1.3125 and by Wednesday morning had gained almost 2 cents to a high of 1.3310. After the BoE announcement and Press Conference the pair dumped almost 3 full cents to a low of 1.3030. So what went wrong? BoE Governor Carney had warned so often of a rate hike - but not actually delivered one - that his own credibility was on the line. Thus, even though real wages in the UK are falling and there has been a very poor run of retail sales figures, the rate hike came with a 7-2 split vote on the MPC. But, in the accompanying Quarterly Inflation Report, the BoE dropped its references to rates having to rise in future more than the market currently expects. It was, to coin a phrase often used to describe the Fed, “a dovish hike”. In a Friday interview with the BBC, his Deputy Ben Broadbent said, “there will be some pain and it’s one part of how monetary policy works”. This was not what homeowners or retailers wanted to hear and as a series of political scandals began to threaten Prime Minister Theresa May’s Government, so the GBP hit a fresh low of USD1.3040 before closing at 1.3076. Politics looks set to dominate the week ahead and the GBP will struggle to rally much even if the upcoming economic data manage to beat consensus forecasts.

The Aussie Dollar began what always threatened to be a very long week at USD0.7660. There were plenty of Central Bank meetings and key economic releases elsewhere in the world and no real domestic news until Thursday and Friday. The early part of the week was characterized by liquidation of stale long AUD positions and the currency was stuck on a US 76 cent big figure even as the USD itself gave back some ground. Thursday’s better than expected Australian international trade figures saw AUD/USD squeeze up to a best level of 0.7724 but it was then hit hard on Friday after a very poor set of retail sales data to end the week back down at 0.7650. Adding to the Aussie’s problems were some very strong Kiwi employment numbers. From a best level on Monday of 1.1220, the AUD/NZD cross rate stood at 1.1160 just before retail sales and was slammed to a low in New York of 1.1067. For the week ahead, the “Race that stops a Nation” is run on Tuesday; just after the latest RBA Board meeting. We wonder if “Rekindling” will be used to describe rate hike hopes, though “Boom Time” seems an unlikely way to describe the Australian economy…

In the 5 weeks since the New Zealand elections and amidst the uncertainty surrounding the eventual formation of a Labour-led government, the Kiwi Dollar had been hit hard, losing more than 5 cents against the USD and 4 cents against its trans-Tasman cousin. It began the week around 0.6860; around 30 pips off its post-election low the previous Thursday but edged gradually higher as labour market data showed the strength of the economy which Jacinda Ardern inherits. Unemployment for the three months ending September was 4.6 per cent, 0.2 percentage points lower than the prior quarter and the lowest level since the December 2008 quarter, whilst wages grew 0.7% in the quarter to take the annual rate of growth up to a five year high of 1.9%. A short-covering rally pushed NZD/USD to a best level of 0.6935 on Friday before ending in New York at 0.6907. For the week ahead, the key even is Thursday’s RBNZ meeting when we’ll get updated forecasts on interest rates and CPI. For the NZD, at least, there’s a possibility that the worst might now be behind it.