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USD steady but vulnerable

By Nick Parsons

After two very poor sessions on Thursday and Friday, the USD Dollar index against a basket of major currencies ended the week at 94.10; its’ lowest close since October 26th. Overnight in Asian and London trading it has stabilized somewhat and opens in New York today very marginally higher at 94.25. The chief reason for the US Dollar’s drop was nervousness about the likely success – or otherwise – of President Trump’s tax reform bill. This was delayed so much since last year’s Election that in the first 10 months of his term of office, the USD Dollar index had tumbled from a high of 103.3 at the beginning of January to just 90.9 by late-September. A near-5% rally was then seen on more talk of tax cuts and further interest rate hikes from the Fed and the US index reached a recent best of 94.70 just 10 days ago. If tax reform runs into the ground once more, September’s low will again become the downside target. Some support ahead of that comes from the 200-day moving average at 93.25, and while interest rate hike expectations are still very much alive, Wednesday’s US CPI figures will be key for the near-term fortunes of the USD. It’s overnight rally could be very fragile.

The Canadian Dollar is very marginally weaker against the US Dollar at the North American open though it requires a magnifying glass to read too much into its price action. Recall the pair began last Monday at USD1.2763 and after a bit of a wobble Tuesday which saw it back up from 1.2702 to 1.2797, it was then a steady grind lower to end the week at 1.2689. Thus, a very slight pullback to a high in London of 1.2709 before settling back at 1.2700 should not be over-exaggerated. As with the Eurozone and the United States, perhaps the most important economic data in Canada this week is CPI, though the annual rate is expected to ease back a touch from 1.6% to just 1.4%. Before then, there’s a few statistics on house prices to digest. September’s -0.8% m/m decline was the biggest monthly drop nationwide since 2010 whilst prices in Toronto tumbled -2.7% m/m (who said monetary policy doesn’t work very quickly?). The Bank of Canada, like its US counterpart, only has 8 monetary policy meetings per year and the next one isn’t scheduled until December 6th. USD/CAD is unlikely to drift too far either way from 1.27 during the coming session and if it does, the catalyst is more likely to come from south of its border with the US.

From a low point last Tuesday of 1.1561, the EUR climbed slowly but steadily to a high of USD1.1666 before ending week at 1.1662. Against the relatively buoyant Canadian Dollar, the EUR did quite well to hold pretty steady in a range from 1.4744 to 1.4812 before ending the week at 1.4792. Overnight trading in both Asia and Europe has been pretty uneventful and the EUR/USD pair has been trapped between 1.1639 and 1.1658 with EUR/CAD exactly unchanged from where it finished on Friday evening. For the week ahead, Eurozone CPI on Thursday will likely be the most important of the economic numbers to be released. With Continental Europe now enjoying its 17th consecutive quarter of GDP growth, subdued price prices are the only reason the ECB continues its policy of Quantitative Easing; albeit now at a somewhat slower monthly pace. Provisional estimates for October showed prices rose just 0.1% on the month for a 1.4% annual inflation rate though with oil prices rising and already feeding into higher pump prices for petrol and diesel, it may not be long before CPI resumes its upward path. As we keep saying, these are the key driver (pun very much intended!) of inflation right across the G20 and the Emerging Markets universe. For the session ahead, it would be no surprise to see EUR/USD firmly anchored on a 1.16 handle with EUR/CAD not moving far from the high 1.47’s.

If the pound was on a roller-coaster ride for much of last week, today’s fairground metaphor has most definitely been the slide. GBP/USD had been as high as 1.3220 after Friday’s economic data before ending the week at 1.3190. GBP/CAD, meantime, had been in a range from 1.6644 to 1.6831 before closing at 1.6717. Overnight this Monday morning, GBP/USD slid 70 points in the Asia session to a low of 1.3120 then extended these losses to a low in London of 1.3078. GBP/CAD has traded down to 1.6617; the lowest since October 20th. The weekend Press in the UK was again dominated by politics; a constant stream of bad news for Prime Minister Theresa May’s minority government which remains in office (though arguably not in power) only because of a coalition agreement with the Ulster Unionists. The arcane rules of a leadership challenge in the Conservative Party require 48 of their MP’s to sign a letter of no-confidence. Reports on Sunday suggested there were now 40 such signatories and the number could rise as the EU withdrawal bill returns to the House of Commons on Tuesday. This week also brings UK inflation and unemployment data. CPI on Tuesday is likely to rise above the Bank of England’s 1-3% target range and BoE Governor Carney will have to write a letter to the Chancellor explaining what he will do to bring it down. With real earnings still falling, the British Pound is unlikely to rally much until wages show signs of picking up or the political situation improves.

The Aussie Dollar ended last week pretty much where it began against a USD; not a particularly great achievement given the USD’s weakness. In one of the quietest weeks in recent memory, AUD/USD remained stuck in a range of less than 60 pips from 0.7636 to 0.7694 before ending at USD0.7659. The AUD/CAD cross rate, meantime fell from 0.9760 at the beginning of last week to end on Friday in New York around 0.9715; its lowest close since October 11th. For the AUD, a new monthly round of incoming economic data now begins for the RBA to then consider at their last meeting of the year on Tuesday December 5th. This kicks off with the NAB Business Survey tomorrow, then Wednesday it’s the quarterly wage price index and Thursday it’s the employment and unemployment numbers. Like most Central Banks around the world, the RBA has been a bit puzzled as to why falling joblessness hasn’t so far boosted earnings growth. And, like all the others, it just says “give it time, it will happen”. Interest rates in Australia aren’t going to move much, if at all, until wages actually do pick up. Indeed, RBA Assistant Governor Guy Debelle made exactly this point in a speech on business investment today: ““Are we just going to jack up rates to see how the household sector lives with that? I don’t think so,” he said. Expect to see the AUD remain under pressure unless significantly better than expected economic numbers come to its rescue.

The Kiwi Dollar had a slightly better week than its Aussie counterpart but still only managed to gain around 50 pips against a generally weak US Dollar. The pair opened in Wellington last Monday morning at 0.6907 and closed in New York on Friday evening at 0.6931. The NZD/CAD cross rate reached a high of 0.8867 on Thursday before sliding in New York to end the week at 0.8791. After a minor earthquake measuring 4.8 on the Richter scale was felt in Wellington overnight – almost exactly a year to the day since your author was in the country when the destructive 7.8 Kaikoura quake struck – the New Zealand Dollar opened little changed against the USD this Monday morning at 0.6931 but has slid throughout the European session to stand at the day’s low of USD0.6908. Against the Canadian dollar, the NZD has tumbled to 0.8787; its lowest since October 25th. Economic data in New Zealand this week is very much second or even third-tier but it does include possibly one of the best indicators of construction activity: ready mixed concrete production. It’s always nice to find that a nation whose official statisticians can’t measure CPI each month can still produce this gem of a number!