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USD higher with stock markets, GBP reverses higher on talk of Brexit deal

By Nick Parsons

The USD Dollar actually managed to end last week firmer than it began and it’s higher again in the European morning session as stock markets rally strongly. It is an amazing fact but at one point overnight, the Dow Jones Industrial Average was trading 500 points above Friday’s intra-day low whilst the S&P 500 Index was almost 60 points higher. If cash equities open where futures markets are currently trading, it will be yet another record high. Against this very positive asset market backdrop, the USD index is up at 92.95, and has gained against most of the major currencies we follow here. In the version of the tax reform bill which passed in the Senate by 51-49 votes on Friday, the proposed cut in the tax rate on repatriation of overseas deferred profits was pretty much reversed. The original proposal had provided for a 10 percent deemed repatriation tax rate for cash and 5 percent for other profits but in a late change, the Senate increased the tax rate on the deemed repatriation of currently deferred foreign profits to 14.5 percent for cash and cash-equivalent earnings and 7.5 percent for other profits, almost matching the House bill’s 14 and 7 percent rates. Going forward, this is a much less USD-positive story than had been previously expected. For the immediate future, the Fed is about to enter radio silence ahead of the Dec 12-13 FOMC meeting so the focus for FX markets this Monday morning is tax reform and stock markets before attention shifts to the delayed payroll numbers at the end of the week.

The Canadian Dollar got the month off to an amazing start on Friday. By the end of the North American session, with the US Dollar in retreat on the Trump/Flynn story, USD/CAD had suffered its biggest daily drop in 21 months. The pair crashed from 1.2900 to close at 1.2684 with the CAD surging against every currency. AUD/CAD fell a full cent to 0.9650, NZD/CAD fell 80 pips to 0.8745 whilst GBP/CAD tumbled over 3 cents to 1.7100. It’s obviously a bit quieter this morning though the CAD has been pretty resilient in the face of a 50 cent drop in crude oil prices and opens in North America at USD/CAD1.2685. Looking forward, the Bank of Canada holds its 8th and final monetary policy meeting of the year on Thursday. Compared to the economic situation at its last meeting in October, retail sales, the labor market, housing market, manufacturing activity, trade and oil prices have all improved somewhat though inflation has eased a bit lower. Markets are pricing around a 50% probability of a rate hike in January. Though they could react quite sharply to any clear steer from Governor Poloz, it’s hard to imagine much more volatility for the CAD than we saw at the very end of last week.

The euro has traded lower this morning, though if last week’s price action is any guide, the next 50 pips could be in either direction without any catalyst from fundamental news. It opens in North America around 50-60 pips lower than Friday’s close at USD1.1847 and CAD1.5025. The only economic indicator of note in the European session was the Sentix institute’s Eurozone economic confidence indicator. This slipped more than had been expected in December to 31.1 from 34.0, though it should be noted that November was the highest since July 2007. The assessment of the current situation strengthened to the highest level in more than 10 years, while expectations weakened notably to a 4-month low in December. Looking forward, Tuesday brings the various PMI service sector indices across the Eurozone whilst Wednesday it’s German factory orders and on Thursday we have German industrial production. Ahead of the Council Meeting on December 14th, we may get a few ECB speakers early in the week but otherwise it all seems pretty quiet. There is no need for the Central Bank to give any signals one way or another and they’ll be pretty happy if traders endure another frustrating week of little net change for the EUR.

The pound traded lower overnight on fears that Brexit talks might stall but in the last two hours has recovered all its losses and is now higher on reports that EU Chief negotiator Michel Barnier told MEP’s that “a breakthrough is likely”. Prime Minister Theresa May is in Brussels today for a lunchtime meeting with European Commission President Jean-Claude Juncker to discuss the UK’s final offer on the three main issues in the first round of Brexit talks – the Irish border, citizens’ rights and the financial settlement. This is supposedly the deadline to table offers before a European council summit on 14 December, when EU leaders will decide if “sufficient progress” has been made to proceed to the next phase. The biggest difficulty remains Ireland. “Contacts continue at official level in order to reach agreement. There is still a way to go,” said an Irish official widely quoted in today’s newspapers. “There must be clarity on the need to avoid regulatory divergence which would lead to the re-emergence of a border.” Even if the Irish question is solved or fudged to mutual satisfaction, there are still problems back at Westminster where a group of Conservative MP’s and ex-Ministers calling themselves ‘Leave Means Leave’ have set out a list of conditions upon which they threaten to base their support. GBP/USD traded down to a low of 1.3428 in London time with GBP/CAD at a low of 1.7035. At the North American open this morning, the Pound has recovered its earlier losses to stand at 1.3520 and CAD1.7135.

The Aussie Dollar really came back from the dead in the final few hours of trading last week. Wednesday morning’s low was USD0.7557, with the AUD lower against most of the major currencies. By Friday, AUD/USD had steadied in the mid-upper 0.75’s but GBP/AUD had jumped almost 4 cents to a near 18-month high of 1.79. As the very last trading session of the week slammed the USD lower, AUD/USD finished the week where it began at 0.7610 whilst GBP/AUD lost almost two cents from its high to finish at 1.7705. Nothing could keep pace with the surging Canadian Dollar, though, and AUD/CAD fell just over 100 pips to 0.9650. Overnight, the AUD has struggled to hold on to US 76 cents despite a decent set of inventory and wage cost numbers. Separate data showed job vacancies in the country were at a six-year peak, a sign that Australia's run of strong employment gains could last a while yet. For the week ahead, the immediate focus is on Tuesday’s RBA meeting then the big data release of Q3 GDP (which the folks in Martin Place will already have had sight of). Three hours ahead of the RBA come October’s retail sales numbers which will give us an idea of how Q4 is beginning to shape up. For this morning, the AUD opens in North America at USD0.7600 and CAD0.9640.

The New Zealand Dollar had a week of two halves; surging on a position-driven squeeze on Monday and Tuesday then tumbling on a very weak business outlook report which showed confidence at its weakest level since the global financial crisis. It finished on Friday little changed against the USD at 0.6890 though NZD/CAD plunged over a full cent from 0.8824 to 0.8720. For New Zealand economic news, it’s still a very long wait to the Q3 GDP figures on December 21st (more than 2 weeks after Australia) but in the meantime, we’ll have some of the ‘partial’ data which then feed into the number. Tuesday is Building Work, Thursday is Wholesale Trade and Friday is the Manufacturing Survey. Before then, RBNZ Acting Governor Grant Spencer is delivering what will be a very closely-watched speech tomorrow on “Low inflation and its implications for monetary policy”; the text of which will be released at 1.15pm local time. It will be tough to repeat last week’s dramas for the NZD but in Foreign Exchange, we learn never to say never… NZD/USD opens in North America today at USD0.6865 with NZD/CAD at 0.8710.