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USD nervously eyeing stock markets, AUD weaker after Q3 GDP, GBP still volatile on Brexit worries

By Nick Parsons

The US Dollar had a good time for much of Tuesday before slipping into the close and then overnight in Asia. It’s index against a basket of major currencies rose from 92.75 to 93.13 - its best level in almost two weeks – but slid to 93.0 at the New York close. In Asia overnight, it traded down to 92.86 but has subsequently recovered to open this morning in North America at 93.00. As we flagged here yesterday, The Atlanta Fed’s “GDPNow model” was updated Tuesday evening. This takes incoming high-frequency US economic data and updates in real-time its forecast of the current quarter’s GDP number.

As yesterday brought not just the ISM survey, but also the merchandise trade deficit for October, the econometricians nudged down their Q4 estimate from 3.5% to 3.2%. This is still higher than anywhere else in G7 but may not be enough on its own to support the Dollar if bond yields and stock markets now turn lower. The average daily move on the S+P 500 for the last three months has been barely 0.2% either way but yesterday saw a 0.4% drop and futures markets indicate another 5 points lower at today’s opening. It’s not just US equity markets which are under the spotlight today: Asia’s equivalent of America’s FANG stocks, the so-called TATS (Taiwan Semi, Alibaba, Tencent and Samsung) are down for 7 consecutive days with a cumulative drop over 10%.

Keep a close eye on equities as the outlook for stocks (and bonds) is an important element of the investment case for the US Dollar. Technical support on the USD index around 92.5 then last Monday’s low of 92.2 is now very important.

After a 2-day surge, the Canadian Dollar had a more mixed performance on Tuesday; rising against the GBP and CAD but falling against the US, Kiwi and Aussie Dollars. Overnight it has been largely out of the spotlight, though USD/CAD is down around 20 pips at 1.2670.

The CAD was helped by figures showing the trade deficit narrowed to $1.47bn in October from a revised $3.36bn in September as exports increased after four consecutive monthly declines. Economists had forecast a deficit of $2.70bn. The Bank of Canada – like all its global peers – stresses how its monetary policy actions are dependent on incoming economic data. Today we’ll get to see how these export numbers and last Friday’s labour market report are influencing their current thinking. It would be a big surprise if rates are moved from their current 1.0% today, though Governor Poloz has previously spoken about his preference for surprises rather than forward guidance if policy is to be most effective.

Before last week’s stunning employment numbers, markets were pricing around a 47% probability of a rate hike in January. This has now risen to a little over 50%. The policy rate decision is scheduled for 10.00am Eastern Time though this is one of the four meetings a year at which no Monetary Policy Report is simultaneously published.

The euro had a poor day Tuesday, losing almost half a cent to the USD to finish around 1.1813 and EUR/CAD down a similar amount to exactly 1.5000. Overnight this Wednesday, EUR/USD is down 10 pips but EUR/CAD is 30 pips lower and threatening to break down to what would be its lowest level since November 14th. The Euro’s drop today comes despite figures showing German factory orders climbed in October for the third month in a row, confounding expectations of a decline. Factory orders increased 0.5% in October from the previous month, according to the Federal Statistics Office.

September’s gain was also revised higher to 1.2% m/m from a previous reading of 1.0%. Details of the report showed orders from companies within Germany increased 0.4%, while international orders were up 0.5%. The international component was led by firms outside of the eurozone, where orders increased 1.6%. Clearly, there’s still plenty of demand for the very high-quality consumer goods, autos and machinery for which Germany is so deservedly famous. Elsewhere in this morning’s batch of data releases, Eurozone Retail PMI improved to 52.4 points in November, its highest level since June. The problem for the EUR continues to be that whilst the economic news is almost without exception positive, it is well known and already ‘in the price’.

Traders are reluctant either to sell dips or to buy into the rallies so we’re left in a familiar USD1.1750-1.1930 range unless and until some genuine ‘news’ hits the screens.

The British Pound’s volatility continues so for our North American clients, let’s try to summarize the situation as it currently stands. UK Prime Minister Theresa May leads a minority government which has entered into a formal Coalition with Northern Ireland’s Democratic Unionist Party in order to get the 326 seats it needs for a majority in the House of Commons.

Before Brexit negotiations can move to a second phase after an EU Leaders’ Summit on December 14, the UK and EU must agree on a customs arrangement, the size of the divorce bill and the rights of EU nationals living in Britain. The last two of these appear settled. However, the question of the Irish border is fiendishly complicated, due to the historical troubles between Northern Ireland and the Republic. The Dublin Government insists on an open border with complete freedom of movement and no physical controls. The UK agrees with this in principle but there will still have to be a border somewhere in the UK. The DUP is implacably opposed to anything which it sees a dilution of the territorial integrity and rights of the United Kingdom. It will not accept a border with mainland Britain. That is its’ whole reason for existence as a political party in Northern Ireland. With the clock ticking down, either something has to give or the Brexit talks could collapse, bringing the UK Government down with it.

We said in our London comment this morning that from its opening level of USD1.3425 today, the GBP could move as much as 3-4% in either direction depending on whether there’s movement to a transition Brexit deal or the collapse of the Coalition Government and a fresh General Election. So far, GBP has moved 0.5% lower to open in North America at USD1.3368 and CAD1.6950.

The Aussie Dollar did well through Tuesday’s Sydney session but the day’s high of USD0.7650 came just before London traders arrived at work and it was downhill all the way from there against a generally better-bid US Dollar.

By the New York close, the pair was struggling to hold on to a 76 cents handle though the AUD had made net gains against the CAD, GBP and EUR. Overnight, the big news has been the Q3 GDP figures which came in softer than consensus expectations. Most analysts’ forecasts had pinned growth around 0.7-0.8% q/q so the headline gain of just 0.6% was a clear miss. The annual rate of growth had been expected at 3.0% but printed only at 2.8%. The main culprit was the household expenditure category which struggle to grow at all and rose just 0.1% q/q. This weakness is due to a combination of very soft earnings growth and some nervousness over personal finances and the residential property market. A deeper dive into the GDP figures shows that the savings rate increased from 3.0% to 3.2%; the first increase since Q2 2016.

The AUD/USD rate fell from 0.7612 to 0.7576 then stabilized at this lower level. It opens in North America this morning at 0.7587 with AUD/CAD at 0.9612.

Foreign exchange can be a very frustrating asset class at times. Having ended Monday as the worst performer of the major currencies we track here, it was very much a case of ‘Turnaround Tuesday’. The New Zealand Dollar finished top of yesterday’s FX pile even though arguably very little had changed other than RBNZ Acting Governor Grant Spencer’s speech on “Low inflation and its implications for monetary policy” which we reported on here. Overnight we’ve seen the ANZ job vacancy numbers which inched down 0.1% in November from the previous month.

Despite this slip – which was the first drop in four months - job ads remain near historic highs as the country experiences a skilled labour shortage. Annual job ads growth in Canterbury and Wellington eased to 6% and 8% respectively while Auckland is slowly heading towards a broadly flat out-turn. The Kiwi Dollar has extended yesterday’s gains overnight and is again up against every one of our featured currencies apart from the USD.

Having briefly clawed its way back on to a US 69 cents handle, it opens in North America today at USD0.6895 and NZD/CAD0.8730.