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EUR/USD choppy after German govt talks collapse

By Nick Parsons

Last week was pretty disappointing for the US Dollar and this morning in Asia and European trading it continues to edge a little lower. The recent high for the Dollar’s index against a basket of major currencies was way back on November 6th at 94.70. Over the last fortnight it lost almost 1½ points and ended Friday at 93.39; only just off the lows of Wednesday morning. With the EUR opening lower today (see below) the USD index rose around three-tenths to open in London around 93.66 though it has subsequently given back all its early gains to open unchanged from Friday. We have flagged up over the past few days that the USD wasn’t getting much support from the recovery in stocks but there’s an asymmetry developing where it does struggle when stocks fall. With S+P futures indicated around 3 points lower, this is something which should be watched carefully from here as a close below 93.30 for the USD Index opens up the technical path to a retest of early September’s 91.00 low. Of course, the big event of the week ahead will close the market on Thursday’s Thanksgiving holiday, with retailers then praying for a shopping frenzy to rescue their year on Friday. Before then, the Minutes of the last FOMC meeting will be released on Wednesday afternoon Washington time. The CME probability calculator shows a 96.7% chance of a 25bp rate hike on December 13th so there’s not much support the USD can get from interest rates near-term. It could be a choppy few days in the foreign exchange market…

The Canadian Dollar is still tracking oil prices quite closely. Last week it began against the US Dollar around 1.2690, moved to an intra-day high immediately after Friday’s CPI of 1.2811 and ended in New York at 1.2770. It opened in London this morning around 1.2783 and has traded in a 40 pip range from 1.2760 to 1.2800. NYMEX crude rallied sharply into the close on Friday, up over a dollar fifty from Tuesday’s low of $51.55 to end the week just 25 cents lower at $56.85. This morning in Europe it has slipped around 30 cents to $56.55 with Brent Crude 40 cents lower at $62.18. The Bank of Canada’s Autumn Review last week contained a very thorough examination of the factors behind the oil price decline since 2014. They conclude, “the most important drivers were the surprising growth of US shale oil production, the output decisions of the Organization of the Petroleum Exporting Countries and the weaker-than-expected global growth that followed the 2009 global financial crisis”. For the week ahead, Canadian wholesale sales numbers are out on Tuesday with retail sales published on Thursday when the rest of North America celebrates Thanksgiving. As Winter approaches in the Northern Hemisphere, keep a close eye on those oil prices.

The euro is little changed from Friday’s close against both the USD and CAD though it has been a very choppy morning as investors tried to assess the implications of a changing German political scene. After a week in which it was one of the winners in the foreign exchange market, EUR/USD tumbled from a high just under 1.18 in Sydney to a low of just 1.1726 in London with EUR/CAD at one point down to exactly 1.5000. It has since regained these early losses to open in North America at USD1.1785 and CAD1.5060. More than two months have passed since the German Federal Elections in September and Chancellor Angela Merkel’s attempts to create a four-party government failed last night when the pro-business Free Democrats walked out shortly before midnight after repeatedly clashing with the left-wing Greens. A so-called Jamaica coalition (named after the four colours of the Caribbean island’s flag) had never been put together before but the narrowness of the election result meant it was the only way forward without bringing the right-wing AfD party into Government. It appears the major stumbling block between the parties was on immigration, an issue that has overshadowed the past two years of Ms. Merkel’s CDU leadership following her decision to allow over a million asylum seekers into Germany. The way forward from here is far from clear. It is possible that fresh elections will be held in the New Year, but Ms. Merkel may no longer be the head of the CDU at that time. For the moment, German politics will totally overshadow Eurozone economics and it seems premature to expect that France’s President Macron will somehow fill the void which would be left if Angela Merkel departs. Some talk of a CDU minority government has helped the EUR recover early losses but a sustained return above USD1.18 doesn’t look likely unless the USD heads lower.

The British Pound had a good week and its’ positive momentum has continued in Monday’s London session with GBP reaching intra-day highs of USD1.3280 and CAD1.6948 before slipping back a little to open in North America this morning at USD1250. The European Union’s chief negotiator Michel Barnier has today given an important speech to the Centre for European Reform conference in Brussels. He said there are two contradictory soundbites from the strongest supporters of Brexit: that the UK will set itself free from EU bureaucracy; and that after Brexit the UK will still be able to participate in the single market, because the UK and the EU have shared common rules for 40 years. This is not a sound basis for going forward: “The UK has decided to give up the free movement of people. That means the UK will lose the benefits of the single market. That is a reality”. It is against this background that UK Chancellor Philip Hammond delivers the annual Budget on Wednesday. He has the seemingly impossible task of spending considerably more money by borrowing less against a background of a slowing economy. It might really be a question of how exactly he will fail, rather than whether he can actually succeed. Of course, some of these concerns are already ‘priced in’ to the currency but clients with GBP transactions to execute should be aware of the potential for increased volatility in the second half of this week.

The Aussie Dollar has steadied a little after last week’s losses. The slide began last Wednesday after the Q3 wage data showed there was little, if any, pass through from higher employment to higher earnings. The AUD fell from USD0.7630 to 0.7580 and on to a low of 0.7540 on Friday before ending the week at 0.7565; its weakest close in more than five months. The pair traded down to almost 0.7550 overnight in Sydney but then rallied 20 pips in London to open in North America this Monday morning around 0.7560. The AUD/CAD cross, meantime, is around 10 pips up from Friday at 0.9665. With 11 RBA meetings each year and 4 Quarterly Statements of Monetary Policy (the clue is in the name!) the Minutes of four of the Board meetings are largely redundant. This Tuesday will be one of those occasions. Instead, attention switches to RBA Governor Philip Lowe’s speech to the Australian Business Economists (ABE) annual dinner on Tuesday. He has chosen the title “Some evolving questions”. Expect them to be examined in more depth when the analysts get back to work next morning. Economic data is a little thin on the ground in Australia this week though the so-called “Construction Work Done” series will be released on Wednesday.

The Kiwi Dollar is above Friday’s worst levels of USD0.6783 and CAD0.8644 but NZD/USD remains stuck firmly below its 20, 50, 100 and 200 day moving averages. The pair dipped below 68 US cents once again in Sydney overnight but opens in North America around 0.6832 with NZD/CAD at 0.8732. We mentioned here on Friday the Quarterly International Visitor Survey and the highlight of the data calendar locally this coming week will be to see how that spending fits in to Thursday’s overall Q3 retail sales numbers. The second quarter got a big lift from the British Lions rugby tour (it’s a big deal in New Zealand) and sales rose a punchy +2.0% q/q. There’s no chance of a repeat in Q3 and consensus looks for just +0.1%. The only economic data today has been BNZ’s Performance of Services Index. This fell 0.3 points to 55.6 from the previous month though the accompanying Press Release sought to put a positive spin on the drop, noting “these are robust results given the prevailing uncertainty surrounding the election, coalition negotiations, and government formation over the period.” For the moment, the FX market has given the NZD the benefit of the doubt though it is too early to be confident about calling the bottom of the market.