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Trump trip and tax reform

By Nick Parsons

The overnight sessions in both Asia and Europe have been amongst the quietest in recent memory, with the US Dollar’s index against a basket of major currencies moving only between 94.64 and 94.75. This still leaves it firmly within last week’s range of 94.20 to 94.90. President Trump is three days into his ten day, five country, economic and foreign policy trip to Asia and thus far it passed been without controversy. His first meetings were with fellow golfer Japanese Prime Minister Shinzo Abe and public comments after their 9-holes have thus far focused on issues of trade between the two nations. The US has urged Japan to buy more American military equipment and build more cars in the United States whilst the Japanese side countered that 75% of its cars sold in the US are already manufactured there. As President Trump continues his Asia trip with visits to China and South Korea later in the week, it will be important to keep an eye on what the Republican Party are doing back home. Any signs of squabbling and delay on tax cuts will keep a lid on further USD strength, whilst agreement should see it build on last week’s modest gains.

The Canadian Dollar has so far this Monday very modestly extended the gains it made at the back end of last week. Having closed on Friday at USD/CAD1.2762, it has printed down at a low of 1.2750 during the London session. The weekly data published by the CFTC show that investors have been running net long Canadian dollar positions since the beginning of May. So-called ‘speculative longs’ peaked at 98,079 contracts in the week of October 10th and the latest numbers published over the weekend show they have only been very gradually scaled back to 72,097 contracts. Investors are clearly rattled by the sharp slowdown in the Canadian economy since the BoC’s two surprise interest rate hikes, but these concerns have been offset somewhat by firmer oil prices which are a benefit to its shale oil producers. BoC Governor Stephen Poloz is scheduled to give a speech Tuesday on “Central Banks’ ability to understand inflation”, though we’d humbly suggest the easiest way right now is to drive past a gas station and look at the price.

Last week, the EUR/USD exchange rate managed the remarkable 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. This run was very briefly interrupted in London trading this morning, with a low of 1.1594 seen before the EUR bounced back on PMI services data which showed the pace of job creation at its fastest pace in a decade. For the week ahead, there’s not much more economic data to be released. ECB speakers include Draghi, Lautenschlaeger, Nuoy, and Angeloni tomorrow whilst it’s the turn of Bank of France Governor de Galhau and Bundesbank President Weidmann on Thursday. Often these speeches are used to ‘reset’ perceptions of policy and to help correct any unwelcome post-ECB movements in foreign exchange and interest rate markets. With price action as it was last week, however, there’s nothing to correct. Expect, instead, to hear the sound of happy central bankers across the Eurozone and be prepared for another quiet few days for the Single European Currency.

Prime Minister Theresa May’s Conservative Government – which now relies on Ulster’s Democratic Unionist Party to keep it in office – is currently engulfed (along with its Labour Party Opposition) by scandals involving allegations of improper sexual conduct dating back over many years. Last Thursday saw the resignation of Defence Secretary Michael Fallon and there is simply no way of knowing how many more revelations are going to appear over the coming days and weeks. The best thing that can be said about this morning is that there was no fresh bad political news and having held in a very tight range between 1.3063 and 1.3078 during the Asian session, GBP/USD has been able to press ahead to a best level in Europe of 1.3120. GBP/CAD, meantime, has improved slightly from 1.6690 to a high of 1.6736 before settling to open in North America around 1.6725. The bigger picture for GBP still seems to be one of weakness. Latest figures released this morning show total car sales in the UK are down 12.9% y/y; the seventh consecutive month in which fewer cars were sold relative to the same month a year ago. For the first 10 months of 2017, a total of 2,224,603 vehicles were sold compared with 2,330,663 in the same period in 2016. Along with house prices, nothing quite shows consumer confidence as clearly as shiny new cars on the driveway. A double-digit y/y decline is a vivid illustration of the current state of the UK economy.

The Aussie Dollar spent most of last week on a US 76 cents handle, and though Thursday’s international trade figures gave it a modest boost to a high of 0.7724; it couldn’t even manage 24 hours on 77 cents as weak retail sales figures on Friday once again undermined the currency. Local analysts who wrongly forecast an increase in retail sales have been swift to blame their error on the late release of the iPhone X but it is hard to believe the central bank will spend sleepless nights worrying whether the latest smartphone warrants a change in monetary policy. It’s only a short stroll from the RBA head office in Martin Place to the Apple store on George Street if they really want to check out how busy it is! Interest rate futures for 2018 are implying an RBA Cash Rate of 1.63% compared to 1.57% a year ago and we’ll get an update of official thinking after tomorrow’s Board meeting before televisions across the country are tuned in to the Melbourne Cup; “the race that stops a nation.” Looking at the runners and riders, We wonder if “Rekindling” will be used to describe rate hike hopes, though “Boom Time” seems an unlikely way to describe the Australian economy. For this morning, AUD/USD is steady at 0.7662 whilst AUD/CAD is virtually unchanged from Friday’s close at 0.9765.

It’s been nearly 6 weeks since the New Zealand elections and amidst the uncertainty surrounding the eventual formation of a Labour-led government, the Kiwi Dollar was hit hard, losing more than 5 cents against the USD and 6 cents against the CAD. Though last week saw the first tentative signs of a short-covering rally – helped by a very solid set of Q3 employment numbers – this morning it has been knocked back by the RBNZ’s latest survey of inflation expectations. Whilst year-ahead inflation expectations rose from 1.77% to 1.87%, the more closely-watched 2-year expectations (which aligns more closely with the RBNZ’s mandate) fell from 2.09% to 2.02%. These figures are quite important given that on Thursday is the RBNZ meeting when we’ll get updated forecasts on interest rates and CPI. In an otherwise quiet overnight market, the New Zealand Dollar is at the bottom of the pile with NZD/USD slipping from an opening level around 0.6910 to a low of 0.6876 before recovering to 0.6895. NZD/CAD is at 0.8890 having touched a low in the Asian session of 0.8781.