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Trump in South Korea; USD higher

By Nick Parsons

After some nervousness Monday over the passage of the tax reform Bill, the US Dollar index steadied somewhat to open in London around 94.50. As Mr Trump moved on from Japan to South Korea, he spoke at a joint press conference with President Moon Jae-in after private meetings in which the two leaders reaffirmed their nations’ “ironclad” alliance. Mr. Trump said he would not allow Pyongyang to threaten South Korea’s safety and that Mr Kim was “threatening millions and millions of lives so needlessly”. Though he stressed that the US had immense military capabilities, Mr Trump said, “we hope to God we don’t have to use military force”. With the euro sliding back (see below) the USD index has moved up to 94.85; its best level since last Friday. In US economic news, Janet Yellen’s supposedly favourite series – the Job Openings and Labour Turnover Survey (JOLTS) – is released at 9am New York time today but it still hasn’t gained a lot of traction within the foreign exchange market. A December rate hike appears very much a done deal and it would take either a huge external shock or a sudden sharp decline in the stock market to make investors rethink their views.

The Canadian Dollar had another good day on Monday with the USD/CAD exchange rate falling from a high of 1.2781 to a low of 1.2703. If the dominant theme last week was weakness in manufacturing production and GDP, this week it’s all about firmer oil prices which are a benefit to its shale oil producers. NYMEX crude yesterday rose 2.8% to $57.24 per barrel, whilst natural gas futures were over 4% higher. BoC Governor Stephen Poloz is scheduled to give a speech in Montreal this morning on “Central Banks’ ability to understand inflation”. We’d suggest the easiest way right now is to drive past a gas station and look at the price on the pumps. A large part of the fall in inflation around the world has been driven (pun intended) by lower oil prices. These have also had the same economic impact as a tax cut because money not spent on filling up the car is essentially the same as a tax cut. Thus, we have the phenomenon of a pick-up in economic activity accompanied by very low levels of inflation. Mr Poloz is always a very interesting and thought-provoking speaker. With USD/CAD opening around 1.2765 in North America today, let’s see if he can explain low inflation as easily as we can!

It’s recently been quite a rare sight for German economic data to fall short of consensus expectations but that’s exactly what happened this morning. After a 2.6% m/m jump in August, industrial production fell -1.6% in September compared to forecasts of a more modest -0.9% m/m decline. EUR/USD had briefly dipped on to a 1.15 big figure overnight in Asia but then after the economic numbers, it took out the overnight low of 1.1584 to move down to a low of 1.1564; its weakest in almost 10 days. The ECB’s Sabine Lautenschlaeger told Bloomberg TV “We have a strong growth momentum, we have growth for 17 quarters and now the labor market has a solid recovery, the sentiment factors are positive, the financial conditions for firms and households are very favorable so I’m very confident that the inflation rate will pick up. I think it was correct to reduce the amount [of QE assets] purchased from January onwards. I would have liked to see a clear exit”. Draghi’s speech in Frankfurt this morning was about banking supervision rather than monetary policy and he was unsurprisingly quite upbeat about progress made since the financial crisis. For trading in the North American time zone today, the EUR still looks pressured against the USD and now sits below its 20, 50 and 100 day moving averages. Major support from the 200dma is not seen until 1.1410

Despite the growing sense of alarm at the heart of the British political establishment – both over the allegations of improper conduct and now the so-called ‘Paradise Papers’ – the GBP didn’t move much at all through the overnight session and opened in London at USD1.3160; within a few pips of its New York close. It initially shrugged off a very disappointing report from the British Retail Consortium which reported sales down -1.0 y/y which it said, “was driven by the worst performance of non-food sales since our record began in January 2011." As the London morning passed with little else to comment on, so a whole series of bearish analysts’ comments received plenty of media coverage. It’s always a little odd to see when data isn’t acted upon for several hours, but it does at least give those with the courage of their convictions plenty of time to enter into fresh currency positions. The next set of UK economic data isn’t until industrial production on Thursday so the very near-term outlook for GBP is for it to be stuck between technical support at 1.3050 and resistance around 1.3180. We still think there is more scope for the downside to be tested in the coming days, not least if the Opposition Labour Party can land a few blows in the growing debate around tax havens and the UK Government’s relatively hands-off approach to them.

Over the last few days we amused ourselves – and hopefully our readers – by looking at a couple of horses in the Melbourne Cup; “The Race that Stops a Nation.” Looking at the runners and riders, we said that ‘Boom Time’ seemed an unlikely way to describe the Australian economy and wondered if “Rekindling” would be used to describe rate hike hopes. In the event, Rekindling, starting from stall four and ridden by Corey Brown, burst down the home straight at Flemington Racecourse to be only the second Irish horse in 24 years to win the Melbourne Cup. For the Reserve Bank of Australia, the winning horse appears to have had little influence on interest rate expectations which were most certainly not rekindled. Its Statement today noted, “forecasts for growth in the Australian economy are largely unchanged… The higher exchange rate is expected to contribute to continued subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.” Markets have taken the hint and marked down the AUD exchange rate. AUD/USD is 30 pips lower at 0.7650 with AUD/CAD 10 pips lower at 0.9762.

The New Zealand Dollar has had a pretty whippy 24 hours. Yesterday morning it was 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%. NZD/USD fell from an opening level of USD0.6911 down to a low of 0.6881. As the USD then came under pressure during the NY session, the Kiwi Dollar climbed all the way up to a high of 0.6951 but overnight gave back 30 pips of these gains to open in London at 0.6920 and is another 5-10 pips at today’s North American open. After the Crown Financial Accounts were published overnight, Finance Minister Grant Robertson said in a statement, “The government is committed to the fiscal parameters we outlined before the election, which include reducing government net debt to 20 per cent of GDP within five years of taking office, maintaining government expenditure to within the recent historical range of spending to GDP, and delivering a stable surplus throughout the Treasury's Budget forecast period." Currency markets took these words with a pinch of salt. For the NZD, the key event is still Thursday’s RBNZ meeting.