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USD softer but still above key support

By Nick Parsons

The US Dollar index against a basket of currencies opened the week around 93.50, and 48 hours later it stands at 93.49, having been as low as 93.30 on Monday and to a high of 93.83 yesterday. The big talking point on Tuesday was the performance of the stock market where the S+P 500 index traded at 2600 for the first time ever. This index added 17 points during the day (0.64%) with the Dow Jones Industrial Average up a whopping 160 points to 23,600. The positive mood in equities helped support the USD but overnight it has slipped back after digesting remarks from outgoing Fed Chair Janet Yellen. Speaking at an event in New York Tuesday evening, she said inflation should rebound over the next year or two, although “I will say I am very uncertain about this. My colleagues and I are not certain that it is transitory, and we are monitoring inflation very closely… It may be that there is something more endemic going on or long-lasting here that we need to pay attention to.” Interest rate futures markets haven’t changed their implied probability of a 25bp hike at the December FOMC meeting but stock index futures are flat and the USD is by a very small margin just in the lower half of its trading range thus far this week. Key technical support is still at 93.30 as the market awaits the Minutes of the last FOMC meeting released at 2pm this afternoon.

The Canadian Dollar got a double dose of good news on Tuesday and ended the North American session the equal strongest (with the AUD) of the currencies we follow here. Crude oil was up around 23 cents per barrel with NYMEX spot at $56.66 per barrel; more than a dollar and a half above last week’s low. The other bit of fundamental good news came from the NAFTA negotiations which are being held to thrash out a new version of the 23-year old Free Trade Agreement between the US, Canada and Mexico. These so-called NAFTA 2.0 talks are taking place as closed-door meetings and no documents from the meetings have been made public. Stakeholders involved in the negotiations are also forbidden from disclosing details. Nevertheless, it was reported on Bloomberg that, “Mexico sees the nations close to finishing work on telecom, energy and digital commerce chapters in the fifth round of negotiations”. Overnight, NYMEX crude has surged more than a dollar per barrel to a fresh 2017 high of $57.97 (we have been warning here about the upcoming OPEC meeting and the usual jaw-boning about production cuts) and the CAD has had another leg higher to again be the strongest of the major currencies. It opens in North America this morning at USD1.2740 with AUD/CAD down at 0.9640.

The euro had a much calmer day on Tuesday and overnight in Asia it edged modestly higher from a New York close of 1.1735 to a best level of USD1.1770 during the London morning. It has subsequently given back 20 pips of these gains to open in North America today at 1.1750. Against the Canadian Dollar, the EUR is back below 1.50 and looking to test this week’s CAD1.4965 low. The focus of attention in currency markets remains very firmly on German politics and the four options facing Chancellor Merkel: She can try to struggle along with a minority government which then risks being defeated in Parliament on any single issue. She can call fresh Federal elections and hope to increase her party’s 33% share of the vote it won in September. She can try to form a Coalition with the SPD who have already rejected this option. Or she can try to restart Sunday’s failed talks in the hope that the FDP’s leader might cop the blame for the instability and be prepared to renegotiate. Overnight Press reports suggest Ms. Merkel’s team expect increasing public and political pressure on the SPD to abandon its aversion to a rerun of a "grand coalition" with the Chancellor’s Christian Democratic Union. On Monday, SPD leader Martin Schulz said: "I will never join a government with Angela Merkel." In response, the Chancellor told ZDF television overnight: "I do hope that they will reflect very intensely about whether they should step up and take responsibility." These two politicians can’t both be right and the outlook for the EUR hinges crucially on which one of their views now prevails.

As we publish this commentary today, the UK Chancellor Philip Hammond is delivering his annual Budget speech to the House of Commons and we might expect some greater than usual volatility in the British Pound. Ahead of the Budget, the pound clawed its way up to a best level of USD1.3260 before opening in North America around 1.3240. Against the Canadian Dollar, the Pound stands at 1.6895; almost exactly a full cent below Tuesday’s high. The Chancellor faces plenty of critics from his own side of the House, let alone on the Opposition benches and he has the seemingly impossible task of spending more whilst borrowing less against the backdrop of a slowing UK economy. The independent Office for Budget Responsibility (OBR) has already significantly cut its estimates for UK productivity growth and with business investment crimped by uncertainties around Brexit, its usual rosy optimism about the medium-term economic prospects is far from guaranteed. Mr. Hammond’s morning was taken up with a Cabinet meeting and the usual photo opportunities with the red Budget briefcase; a beautiful sunny Autumn day with the case held high. The speech itself should last around an hour, though the reactions to it will feel like they last forever.

After falling to 5-month lows last week, many investors were looking to the RBA Governor’s speech Tuesday evening for clues about the future course of monetary policy in Australia and what it would mean for the AUD. Mr Lowe’s speeches are always packed with information and insight. They are worth reading many times over. But, in today’s world of instant, reductive analysis, there’s always the search for one key soundbite which is then repeated many times over in Press and TV reports around the world. The sentence which drew most attention in the speech was that ‘If the economy continues to improve as expected, it is more likely that the next move in interest rates will be up, rather than down’. To our mind, this was in no way particularly newsworthy. It was a statement of the blindingly obvious. But, in a market which was clearly short of AUD, it was enough to prompt a flurry of buy orders which took AUD/USD up to a high of 0.7586 before closing in New York yesterday around 0.7580. A more considered reassessment of Mr. Lowe’s remarks overnight has seen the AUD give back some of Tuesday’s gains and it opens in North America today around USD0.7560. Against the stronger Canadian Dollar, the AUD is down around 60 pips from yesterday’s 0.9702 high and opens around 0.9640.

The Kiwi Dollar has had little or no independent direction of its own this week. Instead, with an AUD/NZD rate firmly stuck around 1.1080, it is being dragged up and down entirely by external shifts in the Australian Dollar. Thus it is that NZD/USD opens in North America this morning at 0.6832; little changed on net over the past 24 hours. NZD/CAD is lower, though, with the rate down in the very low 87 Canadian cent area and threatening to break down on to an 86 cent handle for the first time this week. Overnight we have seen the latest official data on overseas visitor numbers. These always make fascinating reading. Short-term visitor arrivals, which include tourists, people visiting family and friends and people travelling for work, reached 3.7 million in the October year, up 8 per cent from a year earlier and a new annual record. Statistics New Zealand says the number of people going to New Zealand on holiday rose 8.6 per cent on an annual basis to 1.9 million people. During the past five years, annual visitor arrivals have regularly hit record highs, and have risen by more than one million, or 40 per cent, since the upward trend began in 2013. Meantime, people living in New Zealand took a record 2.83 million overseas trips in the October 2017 year, up 11 percent on the October 2016 year. If the NZD stays down at current levels, then a trip from North America to Middle Earth will now be quite a bit cheaper than it was a year ago.