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AUD has a poor week, NZD even worse

By Nick Parsons

The US Dollar had quite a disappointing week. Its index against a basket of currencies stood at 94.20 on Monday morning, around half a percent down from its recent closing high of 94.70 on November 6th. The S+P 500 index traded slightly lower on Monday and Tuesday - dragging the Dollar with it - and on Wednesday suffered its biggest intra-day fall in almost 3 months ahead of an important batch of economic data. With the Fed apparently set on a determined course to raise rates at the December FOMC meeting, the concern in the stock market was either that faltering growth would make this a risky move or that faster inflation might bring even more hikes in 2018. In the event, the economic data as a whole – retail sales, CPI and real hourly earnings – were broadly in line with consensus expectations. Retail sales were up 0.2% m/m against forecasts of no change, headline CPI met expectations at 2.0% y/y whilst the core ex-food and energy number was a tenth higher at 1.8%. The CME’s online calculator at the beginning of the Northern Hemisphere day on Wednesday showed the probability of a December Fed hike at 96.7%. By the close of business, it stood at…. 96.7%. Though the stock market rallied off its worst levels, and on Thursday the S+P closed up 21 points, the USD just couldn’t catch a bid. Its index against a basket of major currencies rose barely two-tenths of a point on the day from 93.54 to 93.68 and on Friday it slipped further to a 3-week low of 93.4. As we head into Thanksgiving holidays, the main focus this week is Wednesday’s FOMC Minutes.

The Canadian Dollar had a very good first couple of weeks in November but then gave back some of its gains as oil prices fell and CPI inflation slipped back from 1.6% to 1.4%. Against the US Dollar it began the week around 1.2690 and the pair edged gradually firmer to an intra-day high immediately after Friday’s CPI numbers of 1.2811. By the end of the week, USD was around half a cent off its best level and ended in New York at 1.2770. With an absence of major economic news other than the inflation data, traders focused on lower oil prices which had recently been a factor helping support the CAD. NYMEX crude opened the week at $57.05 but slipped to $55.15 at Tuesday’s close. Oil steadied Wednesday and Thursday then jumped sharply on Friday to end the week just a net 25 cents lower at $56.85. For the week ahead, Canadian wholesale sales numbers are out on Tuesday with retail sales on Thursday as the rest of North America celebrates Thanksgiving.

With the US Dollar on the back foot all week, there was no shortage of key speakers talking up the Eurozone economy. Mario Draghi, President of the ECB, gave a speech to the Frankfurt European Banking Congress in which he noted, “The euro area is in the midst of a solid economic expansion. GDP has risen for 18 straight quarters, with the latest data and surveys pointing to unabated growth momentum in the period ahead. From the ECB’s perspective, we have increasing confidence that the recovery is robust and that this momentum will continue going forward”. Despite his bullishness on the Eurozone economy, Mr Draghi warned that, “from a monetary policy perspective our task is not complete, as we have not yet seen a sustained adjustment in the path of inflation… we are not yet at a point where the recovery of inflation can be self-sustained without our accommodative policy”. It seems the ECB is doing its best not to permit any market expectations of an early rise in interest rates, lest it push the external value of the currency still higher. The economic numbers speak for themselves, however, and after a 4 cent drop since just before the ECB Council meeting on October 26th, the EUR was back in demand this week. It rose from USD1.1660 at the beginning of the week to a high of 1.1845 before finishing at 1.1790, whilst it made fresh highs for the year against both the AUD and NZD.

The Aussie Dollar had a rough week, though ultimately not as bad as its Kiwi cousin. AUD/USD opened last Monday in Sydney at 0.7655 and its best level of the entire week came in the first few hours of trading: just 10 pips higher. RBA Deputy Governor Guy Debelle kicked off a busy week of Central Bank-speak around the world with a speech about business investment which made clear there was no rush to be raising interest rates. As he put it, “Are we just going to jack up rates to see how the household sector lives with that? I don’t think so.” Tuesday brought the NAB Survey whose widely-watched “business conditions” index reached an all-time high of +21 in October; a huge 7-point jump from September’s +14. Wednesday’s Q3 wage data had been expected to show an increase of 0.7% in the quarter to leave the annual rate around 2.2%. Instead, wages rose only 0.5% for y/y rate of 2.0%. The RBA last week previously said it wanted to see, “how much wage growth will pick up in response to improved labour market conditions and the associated reduction in spare capacity”. The simple answer is “not very much” and the currency quickly fell from USD0.7630 to 0.7580. AUD is now below its 20,50,100 and 200-day averages and hit a low of 0.7540 on Friday before ending the week bruised and battered at 0.7565; its weakest close in more than five months.

There was very little in terms of fresh economic news in New Zealand last week but the Kiwi Dollar slipped slowly and steadily, with the move accelerating to the downside on Thursday and Friday. In our daily commentaries we had noted that, “international investors selling the NZD feel they’re pushing on an open door”. Looking at the price action at the end of the week, it seemed that it opened on to a pretty steep staircase. NZD/USD began on Monday at 0.6920, slid to a low around 0.6850 on Tuesday and recovered briefly on to a 69 cents handle during Wednesday’s European morning as worries about tax reform began to weigh on the US Dollar. By Thursday morning the Kiwi was down to 0.6837 and as New Zealanders headed home to start their weekend on Friday evening, the very poor liquidity conditions in the Northern Hemisphere saw the NZD tumble to a low of just 0.6783 before rallying around 30 pips to end at 0.6815. There is no top-tier economic news scheduled in the week ahead but having closed at a fresh low for 2017 and its worst level in almost 18 months, it’s hard to see what might come to the NZD’s rescue any time soon.

The British Pound spent all week pulled by the opposing forces of incoming economic data and the latest twists and turns in the Brexit negotiations. CPI inflation didn’t rise beyond the upper end of the Bank of England’s 1-3% target range but although the UK labour market numbers on Wednesday showed the jobless rate was steady at 4.3%, the number of people in employment across the UK fell for the first time in nearly a year. There were 32.06 million people in work in July-September, which is a 14,000 drop on the previous quarter. On wages, meantime, both measures (including and excluding bonus payments) were pretty much in line with consensus expectations at 2.2% y/y. A year ago, the Bank of England forecast earnings would grow 3.0% in 2017 and continues to believe there’ll be a strong pick up over the next 18-24 months. Unless and until they do, then with CPI of 3.0%, the squeeze on real incomes and consumer spending in the UK looks set to continue for some time to come. On Brexit, Theresa May’s government survived a few votes in the House of Commons but by the weekend was facing the prospect of no agreement on progressing talks at an upcoming EU Summit in December. GBP/USD began the week at 1.3130 and having been as high as 1.3250 on Friday, ended at 1.3220. Against the Aussie Dollar, GBP rose from 1.7150 to 1.7475 whilst against the Kiwi Dollar it gained more than four cents from 1.8950 to 1.9390. The big focus of UK attention this coming week will be Thursday’s Budget; a potentially make-or-break event for Chancellor Philip Hammond.