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USD approaching end of a fairly steady month

By Nick Parsons

At the beginning of November, the Dollar’s index against a basket of major currencies stood around 94.3. Here we are at the beginning of the last trading session of the month with the index at 93.12. It has been as high as 94.8 on November 7th with a low of 92.2 on Monday 27th; a relatively narrow range of just over two points. Four weeks ago, the Dollar was being driven higher by hopes of tax cuts, a Budget boost to infrastructure investment and a stock market which stood at an all-time high. Here we are today, with the Budget still not passed but equity markets which are even higher still; the S+P 500 has added 50 points in the space of just over 20 trading days. Interest rate expectations have barely shifted over this period. A 25bp rate hike on December 14th still looks a done deal barring any external shock, whilst incoming Fed Chair Jerome Powell seems unlikely to deviate from the monetary policy path set out by his predecessor. What has changed a little is the economic and political outlook elsewhere in the world. The UK seems to have made some progress with Brexit negotiations whilst the European economy is growing at its fastest past in almost 20 years. As all currencies are relative prices, the adjustment to this income news flow has made the GBP and EUR a little more attractive than they previously were. There’ll be a good test of USD sentiment this afternoon when the latest PCE figures are released. This is the Fed’s preferred measure of inflation. Though it has consistently fallen short of Fed forecasts in every one of the past four years, and notwithstanding the note of caution in the November Minutes which pulled the rug from under the USD last week, any number no worse than the 1.6% y/y consensus should be OK as long as asset markets hold on to their recent gains.

We’ve said all week the Canadian Dollar will be driven by oil prices and that’s exactly how Wednesday shaped up. A full dollar off the price of crude to $57.10 had a very predictable impact on the currency which ended the day as the joint-weakest (with the AUD) of all the major currencies we follow here. USD/CAD hit a near 4-week high of 1.2865. Ahead of today’s 173rd OPEC meeting, it was reported that Saudi Arabia and Russia (which is not an OPEC member) were trying to reach agreement on extending production cuts into 2018. It is said the Saudis want to extend these until the end of next year whilst Moscow prefers a shorter timeline. The Saudi oil minister is quoted on newswires saying it was “too early to talk about a disagreement” and said “a solution” will be reached, without giving details. The world’s Press were invited to the opening session of the meeting at 10am today but then at midday CET there is a closed session before talks resume again at 3pm. With the week’s main economic data in Canada (GDP and the employment report) not out until Friday, the CAD will again be driven by oil prices and headlines from Vienna. It opens in North America this morning at a near 5-month high for USD/CAD of 1.2902 with NYMEX crude at $57.83.

Sometimes foreign exchange can be a very frustrating asset class – how many times recently have we seen a move become established, gain traction and then reverse as quickly as it developed? The EUR is a very good example of this. It rose in North American hours yesterday, helped by a speech from Bundesbank President Jens Wiedmann saying the German economy is roaring ahead and there are no signs that difficulty in forming a government is noticeably affecting business sentiment. Calling German economic growth “exceptionally good”, he said that the expansion would continue for some time, thanks to solid business sentiment and the highest rate of employment since German unification in 1990. “Updated (euro zone) forecasts come out in two weeks, in December as usual, on the basis of detailed country projections… Indications are that the economic outlook will be at least as good (as previously), if not better. Many short-term indicators have surprised positively”. By this morning’s European opening, EUR/USD stood at 1.1875 with EUR/CAD at 1.5280. Fast forward less than 6 hours and it has given up all of Wednesday’s gains. The blame lies with latest Eurozone CPI figures which came in softer than consensus expectations. Headline inflation was just 15% y/y whilst the core measure which strips out energy prices was just 0.9%. After Wednesday’s stronger German numbers, it seems that softness in Italy reported earlier this morning dragged down the Eurozone aggregate. EUR/USD has been down to a low of 1.1816 and opens in North America this morning at 1.1830 with EUR/CAD at 1.5255.

The pound continues its amazing run higher against every major currency, though it is off its best levels seen earlier in the London session. GBP/USD is at 1.3445, GBP/EUR at 1.1360 with GBP/CAD at 1.7345. The trigger for these latest gains is a story that Britain is close to an Irish border deal, after which EU leaders are preparing to offer a two-year Brexit transition deal as early as January. According to The Times newspaper, “The British proposal is understood to commit the government to work towards “avoiding regulatory divergence” in Ireland after Brexit even if the rest of the UK moves away from European rules. This would involve the government devolving a package of powers to Northern Ireland to enable customs convergence with the Irish Republic on areas such as agriculture and energy”. An unnamed senior EU official is quoted saying, “After sufficient progress on withdrawal we will open the next two phases of negotiations, first of all on a transition period and then on the future partnership”. In The Guardian, however, it is claimed, “Theresa May has been put on notice by hardline Conservative Eurosceptics that they could be prepared to vote against her final Brexit deal if the UK continues to pay the £50bn divorce bill for years to come or does not get good trade terms.” Several MP’s are quoted saying that saving £50bn and trading under WTO rules would be a far better outcome for the UK. For the moment, the GBP seems only to want to hear good news, but with September’s highs for USD/GBP within touching distance, it may soon be time to question whether the recent strong rally has gone far enough.

Writing here yesterday morning, we said, “Q3 capex numbers are going to have to be pretty robust if the prevailing negative sentiment around the AUD is to be reversed”. That negative sentiment saw AUD/USD trade down to 0.7556 early in the North American session. Overnight, the data on capital expenditures came in pretty much in line with expectations at 1.0% q/q with the annual rate up 2.3%. Looking ahead, the fourth estimate for total capex spend in the 2017/18 financial year rose to $108.bn, higher than the forecast revision of $105.4bn. Among the five sectors the ABS tracks in the capex report, mining had the smallest increase in expected investment from June, reporting a 0.5% increase. The outlook for spending on buildings and structures rose by 3.7% from the June estimate, while forecast spending on equipment, plants and machinery had a strong 8.7% increase. Elsewhere, the outlook for 2017/18 manufacturing spending rose by 6.7% while forecast capex across other selected industries climbed by 8.3%. Overall, these numbers were pretty solid and confirm the RBA’s view in the November Minutes that it saw a pick-up in non-mining investment. Good as they were, however, the capex figures haven’t given the Aussie Dollar much of a boost. AUD/USD jumped 20 pips on the news but at no stage overnight has it been able to regain a US 76 cents handle. It opens this morning at USD0.7565 with AUD/CAD at 0.9750.

The Kiwi Dollar has gone from hero to zero. Monday’s technically-driven squeeze higher against all the major currencies has been fully reversed by incoming fundamental news. Overnight the NZD has been the worst performer of all the major currencies we follow here. The culprit was a very weak ANZ business outlook report which showed New Zealand business confidence has tumbled to its weakest since the global financial crisis amid uncertainty over the policies of a new center-left government. A net 39.3 percent of firms expect the economy to deteriorate in the next 12 months; down from 10.1 percent in October and the lowest reading since March 2009. A separate gauge of expectations for their own activity also fell to an eight-year low and it appears that political uncertainty and a slowing housing market are hurting investment and consumption and threatening to curb economic growth. This incoming data is at odds with the OECD’s very upbeat assessment of the NZ economy in Wednesday’s semi-annual report but it has certainly taken the wind out of the Kiwi Dollar’s sails. NZD/USD is back down at 0.6845 with NZD/CAD down at 0.8820.