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Trump enjoys the sights in Beijing

By Nick Parsons

Air Force One touched down in Beijing overnight to begin the third leg of President Trump’s five-nation Asia trip. In a reciprocal gesture for hosting Premier Xi at his Mar a Lago estate in Florida earlier this year, the two leaders and their wives enjoyed an opera performance and a tour of the Forbidden City. Your author first experienced this almost 20 years ago; a wonderful memory from back in the days when a Global FX Strategist actually got to see the world he wrote about. With the serious business part of Mr. Trump’s trip not until Thursday, the US Dollar index remains stuck in its now-familiar 94.40-94.85 range. It opened in London this morning almost exactly in the middle of this band at 94.62 and has slipped around one-tenth during the session to open in North America around 94.50. A December Fed rate hike still appears very much a done deal (the CME online calculator pins the probability of a 25bp rise at 93%) and it would take either a huge external shock or a sudden sharp decline in the stock market to make investors rethink their views. Keep an eye on tax reform progress, as well as the President’s Asia trip for near-term clues on the USD.

Bank of Canada Governor Stephen Poloz is one of the more interesting and insightful Central Bank Governors around. Though we [only half] jokingly suggested that the best way to forecast inflation in the short-term is to drive past a gasoline station and look at the price on the pump, his speech yesterday afternoon to the Montreal Council on Foreign Relations was a more scholarly affair. Mr Poloz concluded a fascinating speech by noting, “The popular perception that inflation has become inexplicable has been greatly exaggerated. In part, this perception reflects a misunderstanding of the accuracy with which economists can predict inflation, and a misunderstanding of the precision with which central banks can control it. Fundamentally, we know how inflation works - the laws of supply and demand have not been repealed… The bottom line is that inflation targeting has worked, through good times and bad, for more than 25 years. It continues to work today”. Although there were no clear signals for the CAD in the speech, USD/CAD has fallen steadily over the past 24 hours from yesterday’s 1.2802 high. It opened in London around 1.2760 and has been down to a low in the European morning of 1.2737. Data on Canadian housing starts and building permits are published locally this morning with consensus expectations of +211k and +1.0% m/m.

Having spent almost the whole of Tuesday on a 1.15 handle, EUR opened in London this morning around 1.1588; almost 5 cents down from its early September high. In a session largely bereft of economic news (apart from Latvian CPI and Portugese unemployment!), it has just managed to claw its way back on to 1.16 though might struggle to advance much further. The technical picture continues to exert downward pressure on the currency pair. It is now below its 20 day moving average of 1.1688, the 50 day average of 1.1782 and the 100 day measure at 1.1787. In another bearish chart development, the 50 day average has also crossed down through the 100 day one. In the very big picture, we should look to the much slower 200 day average for support but unfortunately this does not come into play until we get all the way down to 1.1410. The ECB’s Sabine Lautenschlaeger yesterday said, “I would have liked to see a clear exit [from QE]”. Tomorrow it is the turn of Bundesbank President Jens Weidmann to speak and analysts will again be looking for any differences of opinion between him and ECB Chief Mario Draghi. For today, however, the euro’s fortunes are more probably driven by external events than any fresh domestic news.

The British Pound continues to react nervously to the very fragile political situation in the UK. Fortunately for Prime Minister Theresa May, the UK Parliament has just risen for a week’s holiday and she thus avoids the danger of once again coming off second-best to Opposition Leader Jeremy Corbyn in the weekly pantomime that is Prime Ministers’ Questions. Unfortunately, having suffered the resignation of her Defence Secretary last week, Press reports say the International Development Secretary might now be forced out after revelations about unauthorized meetings whilst on holiday in Israel. It is reported in the UK media this morning that Mrs. May has cleared her diary of meetings for the rest of the day. As Oscar Wilde might have put it, to lose one Minister looks unfortunate, but to lose two begins to look like carelessness... Having rallied up to USD1.3174 overnight, the GBP opened around 25 pips lower in London at 1.3148 and has traded down to a low of 1.3120. Against the Canadian Dollar, it is down from yesterday’s high of 1.6815 to open almost a cent lower in North America at 1.6727. The path of least resistance still appears to be to the downside.

There are 11 RBA Board meetings each year. Very sensibly, it takes January off, considering that people would rather be at the beach or away on vacation than be disturbed by such matters as the cost of borrowing and mortgage rates. As well as the 11 monthly Statements which essentially summarise the Board’s thinking on one sheet of paper, there are four Quarterly Statements of Monetary Policy (the clue is in the name!) which explain in detail the numbers and assumptions which underpin its immediate interest rate decision as well as offering a medium-term view on the economic conjecture. By tradition, the Board meeting is on the first Tuesday of the month with the SoMP on the Friday of the same week. After its’ warning that, “The higher exchange rate is expected to contribute to continued subdued price pressures in the economy… and is also weighing on the outlook for output and employment”, the market spent most of Tuesday selling the Australian Dollar which fell from USD0.7691 to 0.7628. Despite a lack of domestic news, it has recovered most of these losses overnight to open in North America around USD0.6970 and CAD0.9777. With no data slated for release Thursday, for Aussie currency markets it could be a long wait until 11.30am Sydney time Friday morning.

The 52nd Parliament in New Zealand was formally opened on Tuesday in Wellington and overnight we had the State Opening ceremony. As promised during the election campaign, Finance Minister Grant Robertson has launched a review of the Reserve Bank of New Zealand’s mandate to include maximizing employment as a monetary policy goal. However, he said there was no plan to include the New Zealand dollar, the world’s 11th most traded currency, in the bank’s revised mandate. Mr Robertson also said he did not expect the proposed alterations to have any immediate impact on monetary policy, but acknowledged that in a situation of high unemployment and slightly higher inflation, rates could be lowered though, “My view is that this shouldn’t have a dramatic impact, certainly in the near-term”. The Kiwi Dollar was pretty resilient on Tuesday, slipping against the USD and CAD but not as much as the AUD did. At one point yesterday, the AUD/NZD cross was down to 1.1057; its lowest point in almost three weeks and it opens today in North America at 1.1079. Against the USD it sits at 0.6925 whilst the NZD/CAD cross is at 0.8827 as the market now looks forward to Thursday’s RBNZ meeting.