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USD hits a 2-month low, EUR soars on strong data, AUD and NZD mixed

By Nick Parsons

The US Dollar had a very poor week, sliding lower before the Thanksgiving holiday then tumbling further on Friday to its lowest level since September 25th. The first hint of trouble came in New York on Tuesday evening when outgoing Fed Chair Janet Yellen spoke at an event with former BoE Governor Mervyn King. 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.” This proved to be a very useful heads-up ahead of Thursday’s FOMC Minutes. These revealed, “A number of participants were worried that a decline in longer-term inflation expectations would make it more challenging for the Committee to promote a return of inflation to 2 percent over the medium term. These participants’ concerns were sharpened by the apparently weak responsiveness of inflation to resource utilization and the low level of the neutral interest rate, and such considerations suggested that the removal of policy accommodation should be quite gradual.” The USD Index against a basket of major currencies began the week at 93.6. By Wednesday evening it was 92.9 and after plunging through the September 25th low of 92.58 on Friday, it ended the week down at just 92.45; its lowest level since September 25th.

The Aussie Dollar was pretty much out of the international spotlight last week, with no major economic data releases and little in the way of fresh insight on monetary policy. AUD/USD opened last Monday in Sydney at 0.7553 and traded down to the low 0.7530’s on Tuesday morning after the release of the Minutes of the RBA’s November 7th Board meeting. For interest rate and FX markets, the key phrase in the Minutes was, “there was considerable uncertainty around when and how quickly wage pressures might emerge and about how much these would add to inflationary pressure. In particular, Members noted that, among other factors, pressure on margins from strong competition and a faster-than-expected pick-up in productivity growth could delay the pass-through of tighter labour market conditions to inflationary pressure.” By Tuesday evening the AUD had recovered all its losses as Governor Phil Lowe spoke at the Business Economists’ dinner. 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’. AUD/USD regained a US 76 cent handle on Wednesday and finished the week around 0.7615.

The New Zealand Dollar tracked its Aussie cousin very closely last week and we remarked one morning that it seemed as though they’d fixed the exchange rate without telling anyone. The AUD/NZD cross didn’t move more than 30 pips either side of 1.1080 all week. After a high on Tuesday of 1.1113 and a low of 1.1055 on Thursday, it ended the week pretty much at the mid-point of the range. Picking out news highlights would present quite a challenge though the net visitor inflow data 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. NZD/USD began the week at 0.6805, hit a low on Tuesday of 0.6794 and a high on Thursday of 0.6897 before closing at 0.6880.

The British Pound had to deal with the dramas of the Chancellor of the Exchequer’s annual Budget and the tortuous process of Brexit negotiations. The new forecasts unveiled for the UK economy were grim indeed. Annual growth for the next five years of is now seen at 1.4, 1.3, 1.3, 1.5 and 1.6%; a cumulative increase in real national income of just 7.0% in half a decade. With a few judicious bribes for first-time homebuyers and an under-30’s discount railcard, the Chancellor might just keep his job. As for his boss, Prime Minister Theresa May was in Brussels on Friday trying to find an agreement about an agreement. Stripping down a very complex issue here, the PM offered after a speech in Florence in May to pay a so-called “divorce bill” upon Brexit. A UK cabinet meeting on Monday agreed to increase the final settlement but only on condition that the EU guaranteed progress on to a second phase of talks at a European council meeting on December 14 and 15. The EU is in no mood to be rushed; feeling that it can extract a greater sum of money and a better deal for EU citizens’ rights. The EU insists on no border between the Republic of Ireland and Northern Ireland. But if it wins this, there will have to be a border between Northern Ireland and the UK, something which the Prime Minister’s DUP Coalition partners refuse to accept. It is a tricky problem indeed. GBP/USD began the week at USD1.3150. Its’ low was Monday morning at 1.3193 but then strengthened to end the week up almost cents at 1.3340 against a very weak US Dollar. The GBP fell against the EUR and gained less than half a cent against both the Aussie and New Zealand Dollars.

The Euro began the week overshadowed by the breakdown of talks led by Chancellor Angela Merkel to form a new Coalition Government. 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. There were the four options facing Chancellor Merkel: try to struggle along with a minority government which then risks being defeated in Parliament on any single issue. Call fresh Federal elections and hope to increase her party’s 33% share of the vote it won in September. Try to form a Coalition with the SPD who have already rejected this option. Or 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. By the end of the week, it was the SPD who folded and a fresh Coalition now seems likely. With incoming data showing a very buoyant Eurozone economy – the PMI’s were at 17-year highs – the EUR was the strongest currency of all last week. It opened at USD1.1760, hit a low of 1.17715 on Tuesday morning but then soared on Friday to hit 1.1930; its best level since September 25th.

The Canadian Dollar began the week against the US Dollar at 1.2780. It traded to a high on Monday around 1.2820 but then got a boost from stronger oil prices and talk of a successful round of ‘NAFTA 2.0’ negotiations. The 173rd meeting of OPEC nations takes place in Vienna this coming week and we began to hear the usual chatter, rumours and leaks about production cutbacks to support higher prices. This is such a regular feature of the pre-meeting process that it’s a wonder the market still falls for the trick every time. On Monday, NYMEX crude was $55.90 per barrel. By Wednesday evening it was $58.03 and on Friday it set a fresh high for 2017 of $58.82. The Canadian Dollar only benefitted from strong oil prices until the release on Thursday of September retail sales figures. These rose just 0.1% m/m, versus forecasts for a 1 percent gain, after dropping -0.1% in August. This was the last major piece of output data ahead of third quarter GDP numbers this coming week, and is the second release this week that showed unexpected weakness in activity. Statistics Canada reported Tuesday that wholesale sales fell 1.2 percent in September. Economists are estimating annualized GDP growth of 1.8% in Q3, down from 4.5% in the Q2. Having reached a low (strong CAD) of 1.2680 on Thursday, SD/CAD ended the week around 1.2705.