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USD falls below technical support

By Nick Parsons

After yesterday’s rest and recreation in Beijing on the one-year anniversary of Donald Trump’s election victory, today brings the more serious business of public and private discussions on trade and foreign policy. In a joint Press Conference with Premier Xi, President Trump said, “the trade relationship between China and the US has not been a very fair one. As we all know, America has a huge annual trade deficit with China, a number beyond anything that anyone would understand. Both the United States and China will have a more prosperous future if we can achieve a more level playing field”. After a rather clever rhetorical move to shift the blame for this on to his predecessors rather than the Chinese, the two leaders were then able to reconcile differences and present a closer image than many commentators had feared was possible. All the smiles and handshakes haven’t done the US Dollar a great deal of good, however. Its index against a basket of currencies at 94.30 has broken down below the 94.40-94.85 range. The end-October low of 94.22 and the 20-day average of 94.10 now become the immediate downside targets.

The Canadian Dollar has performed very well over the last week. It hasn’t been a one-way trade because of the volatility of incoming economic data but from an opening level of USD1.2904 on October 1st, the pair has moved down to open in North America this morning at 1.2715. The CAD is also stronger against the Aussie Dollar (down from a high of 0.9908 to 0.9957) and a little less so against the Kiwi Dollar (from a high of 0.8924 to 0.8850 this morning). The move lower (stronger CAD) was helped by Wednesday’s better than expected numbers on housing starts which rose at an annualized pace of 222.8k against the consensus expectation of 211k and by building permits which rose 3.8% m/m versus forecasts of a more modest 1.0% m/m gain. Oil prices are a touch firmer so far today with Brent crude at $63.68 per barrel and NYMEX futures at $56.92. The day ahead is quiet in terms of scheduled economic data in Canada though it will be seen as a good performance by the CAD if it can hold on to its gains of the first week of this month.

The Single European Currency may at least now be trading on two different big figures each day against the US Dollar but since last Friday it’s been stuck in a very narrow range from 1.1563 to 1.1615. The range against the Canadian Dollar has been quite a bit wider with the pair falling from EUR/CAD 1.4830 late Friday to open in North America this morning at 1.4760. Earlier this morning, the European Commission released updated economic forecasts for the Eurozone economy. Back in Spring, it forecast euro area GDP growth of 1.7% in 2017 and 1.8% in 2018. These numbers have now been revised up to 2.2% and 2.1% with next year now seeing the economy growing at its fastest pace in a decade. European Commissioner Pierre Moscovici said, “We have entered a new phase of the economic recovery, with stronger growth driven by resilient consumption, the global upswing, loose financing conditions and falling unemployment”. Though still very high, unemployment in the euro area is expected to average 9.1% this year, its lowest level since 2009, dropping to 8.5% in 2018 and 7.9% in 2019. The combination of a somewhat weaker US Dollar, German ECB speakers and these better economic forecasts ought to provide a favorable backdrop for the euro today though last week’s high of USD1.1671 is still likely to keep a lid on any gains. EUR/CAD, meantime, faces technical resistance around 1.4810 then 1.4832.

It is reported on the front page of The Times newspaper this morning that, “European Union leaders are preparing for the fall of Theresa May before the new year… Fears are growing in Brussels that the instability of Mrs May’s government raises the real prospect of a change of leadership or elections leading to a Labour victory.” One European leader told the newspaper that officials were planning for both scenarios. “There is the great difficulty of the leadership in Great Britain, which is more and more fragile,” the leader said. “Britain is very weak and the weakness of Theresa May makes [Brexit] negotiations very difficult.” The GBP was by some distance the weakest of all the major currencies on Wednesday, falling to a low of USD 1.3091 and after a brief rally early this morning to 1.3143, it has again fallen back to test this level. Against the Canadian Dollar, it is down almost 2 cents from yesterday’s high of 1.6815 to open in North America at 1.6650. We said here yesterday morning that for the GBP, “the path of least resistance still appears to be to the downside”. That is once again the case today. The mood in the market is very much one of selling GBP rallies rather than buying the dips.

With little fresh news domestically, the Australian Dollar has found some support from higher than expected inflation figures in China which have helped alleviate fears about a further slowdown in the economy which is still the major destination for Australia’s exports of coal, gas and minerals. After a deflation scare around the beginning of the year, China’s CPI had risen to 1.6% y/y in September. October was expected at 1.8% but the actual number printed this morning was 1.9%. For producer prices, the picture was even stronger. Consensus forecasts looked for 6.6% y/y but the outturn was 6.9% and China’s stock market responded by extending the gains which have seen it recoup nearly all of the losses suffered since the end of the Party Congress last month. Helped by a somewhat weaker US Dollar, AUD/USD is up at 0.7691 at the North American open today, though AUD/CAD still remains pressured by the good performance of the Canadian Dollar and opens around 0.9764. In terms of local drivers of the Aussie Dollar, the big focus will be the release of the Quarterly Statement of Monetary Policy which is released at 11.30am Sydney time Friday morning.

The Reserve Bank of New Zealand meeting earlier this morning left the Official Cash Rate (OCR) unchanged at 1.75 percent. Its Statement noted, “The exchange rate has eased since the August Statement and, if sustained, will increase tradables inflation and promote more balanced growth… GDP in the June quarter grew broadly in line with expectations, following relative weakness in the previous two quarters. Employment growth has been strong and GDP growth is projected to strengthen, with a weaker outlook for housing and construction offset by accommodative monetary policy, the continued high terms of trade, and increased fiscal stimulus”. Though this is all pretty standard stuff – and indeed could have been written by virtually any Central Bank in the world right now – the RBNZ also releases a quarterly forecast track for its official interest rate. A quick look at this showed the Bank now sees rates rising in Q2 2019 rather than in Q3 2019 as it had previously forecast. In reality this is a tiny shift and we’re still talking 18 months away, but it was enough for the Kiwi Dollar to catch a bid immediately after the numbers were released. NZD/USD jumped from 0.6924 to an overnight high of 0.6970 and with a weaker USD this morning has marginally extended these gains to open around 0.6975. NZD/CAD, meantime is steady at 0.8858.