GBP lower on more UK government woes. NZD jumps as Q3 GDP beats expectations. EUR awaits Catalonia elections.

Key Movers

This is the shortest day of the year in the Northern Hemisphere; a turning point in the calendar from where we can enjoy an extra two minutes of daylight every evening for the next 182 days. It all adds up: two minutes per day, a quarter of an hour per week and an hour per month.


Short as the daylight is today, it may still feel like a long day in foreign exchange markets as currencies struggle to gain much traction in either direction. In an otherwise quiet Asian session, the pound as been weakest of all the majors as the Deputy Prime Minister Damien Green became the latest Ministerial resignation from Government. After Theresa May finished her last Question Time of the year in the House of Commons yesterday, the GBP was up at USD1.3410; this morning it is almost half a cent lower at 1.3360.


The IMF yesterday released its annual report on the UK economy, with its Managing Director Christine Lagarde in London for a Press Conference. The IMF had been criticised 18 months ago for taking sides with former Chancellor George Osborne in the run-up to the EU referendum. Defending its forecasts, Ms Lagarde said that, “the Brexit referendum result and the decision to invoke Article 50 are already having an impact on the economy even though the UK is not planning to leave the EU until 2019.


She added, “We feared that if Brexit was decided upon, it would most likely entail a depreciation of sterling, an increase in inflation, a squeezing in wages and a slowdown and a reduction of investment. What we are seeing is that that narrative we identified as a potential risk is being rolled out as we speak. It’s not experts talking, it’s the economy saying that. Our forecast is 1.6 per cent GDP growth this year and 1.5 next year, which relative to the upward revisions we are advocating for other advanced economies is a bit of a disappointment.”


The IMF’s statement concluded, “Despite a strong recovery in global growth and supportive macroeconomic policies, the impact of the decision to exit the European Union has weighed on private domestic demand. Business investment growth has been lower than would be expected in the context of strong global growth and high levels of capacity utilization, owing to heightened uncertainty about economic prospects.”


With only UK government borrowing figures due for release today, the pound opens in Europe at USD1.3360 with GBP/AUD at 1.7445 and GBP/NZD at 1.9085.


The Dollar fell steadily across time zones on Wednesday, unable to gather much support either from strong economic data (existing home sales), higher bond yields or a rallying stock market. By the end of the London afternoon its index against a basket of major currencies had fallen to 92.83; its weakest level for a fortnight. The fall came – and we are wary of inferring causality – as the 3-month cross-currency basis swap (the price of borrowing dollars) suddenly reversed the move of last week which had persistently weighed down on the EUR/USD exchange rate.
US 10-year bond yields hit 2.48%; their highest since March, whilst their German equivalent hit only a 2-month high of 0.41% yesterday. The spread between the two of 207bp is the widest since Q2 but it does not seem yet to be a driving factor in currency markets. Nor, for the moment do 2-year US rates of 1.82%, even though their German counterparts still yield minus 70bp; a huge 2.52% yield advantage which the ECB is in absolutely no rush to reverse.
For the day ahead in the US, there’s a bumper crop of economic data releases: The third estimate of Q3 GDP, weekly jobless claims, the Philly Fed index, the Chicago Fed index of national activity and then November’s leading economic indicator. The US Dollar index opens in Europe at 92.96. 


The Dollar fell steadily across time zones on Wednesday, unable to gather much support either from strong economic data (existing home sales), higher bond yields or a rallying stock market. By the end of the London afternoon its index against a basket of major currencies had fallen to 92.83; its weakest level for a fortnight. The fall came – and we are wary of inferring causality – as the 3-month cross-currency basis swap (the price of borrowing dollars) suddenly reversed the move of last week which had persistently weighed down on the EUR/USD exchange rate.


US 10-year bond yields hit 2.48%; their highest since March, whilst their German equivalent hit only a 2-month high of 0.41% yesterday. The spread between the two of 207bp is the widest since Q2 but it does not seem yet to be a driving factor in currency markets. Nor, for the moment do 2-year US rates of 1.82%, even though their German counterparts still yield minus 70bp; a huge 2.52% yield advantage which the ECB is in absolutely no rush to reverse.


For the day ahead in the US, there’s a bumper crop of economic data releases: The third estimate of Q3 GDP, weekly jobless claims, the Philly Fed index, the Chicago Fed index of national activity and then November’s leading economic indicator. The US Dollar index opens in Europe at 92.96.


The euro followed up on Tuesday’s rally with a second day at the top of the FX league table on Wednesday; all of its gain coming very late in the European day and in the New York morning. The absolute magnitude of the move was not great – a 40 pip rise from 1.1843 to 1.1885 but the market was so quiet generally that it was enough for the EUR to take top spot.


The big event in Europe today is political rather than economic as the Spanish region of Catalonia goes to the polls. The election was called by the Spanish prime minister, Mariano Rajoy, at the end of October when the central government took control of Catalonia and sacked the regional government after it staged an illegal independence referendum and made a unilateral declaration of independence. The latest opinion polls suggest Catalonia is set for a hung parliament, with the pro-independence Catalan Republican Left party (ERC) vying for first place with the unionist, centre-right Citizens party.


Article 155 of the Spanish constitution – which allowed Prime Minister Rajoy to sack the Catalan government and call elections – will remain in force until a new government has been agreed and a new regional president elected by the Catalan parliament. For the moment, and indeed for the forseeable future, no government in Europe is willing to support a Catalonian push for independence and the exiled leader of the secessionists, Carles Puigdemont, could well face arrest should he return from Belgium.


With no economic data of any note today, the EUR opens in Europe this morning at USD1.1865 and GBP/EUR1.1265.


Over the past 48 hours, AUD/USD has been stuck in a 32 pip range from 0.7647 to 0.7679 with little in the way of catalysts or investor enthusiasm to move it one way or the other. The fact that it has held on to a US 76 cent handle is itself a positive development after a period from mid-September when the pair lost more than 5 cents from its 0.8050 peak. Whether it can be sustained if the interest rate differential with the United States across all parts of the maturity spectrum continues to narrow is still the big question for 2018.


Having amused everyone yesterday with their “Seasonally adjusted greetings”, which looked at some of the quirkier numbers around Christmas, the official statisticians at the ABS separately drew some insights into Australia’s ageing population. They noted that in 2016, nearly one in every six people (16 per cent) was aged 65 years and over, an increase of 664,500 since 2011. Additionally in 2016, there were almost half a million people (486,800) aged 85 years and over, an increase of around 85,000 people over the past five years.


In 2016, over a third of people aged 65 years and older (37 per cent) were born overseas. About two thirds of these (67 per cent) were born in Europe, while almost a quarter of older overseas born people (24 per cent) reported that they were born in England. While the majority of older people (82 per cent) only spoke English at home in 2016, Italian (3.2 per cent) and Greek (2.2 per cent) were among the most commonly reported languages other than English.


The AUD opens in Europe this morning at USD0.7660 with AUD/NZD at 1.0935 and GBP/AUD1.7445.


We warned here yesterday of the sometimes random nature of foreign exchange markets and highlighted the price action in the Canadian Dollar as an example of sudden directional shifts. On Tuesday afternoon USD/CAD broke through the November highs of 1.2900 and 1.2905; reaching a best level of 1.2912 before quickly reversing 40 pips lower. On Wednesday, the pair extended the move to the downside and overnight reached a low of 1.2823. Indeed, the CAD finished the second-best currency on the day after the EUR.


In economic news, Canadian wholesale sales increased a much stronger than expected +1.5% to $63.0 billion in October, more than offsetting the 1.1% decline in September. Gains were reported in six of seven subsectors, together representing 81% of total wholesale sales. The machinery, equipment and supplies and the personal and household goods subsectors contributed the most to the increase.


Wholesale inventories, meantime, increased 0.8% to $82.1 billion in October, the sixth gain in seven months. The machinery, equipment and supplies subsector (+3.5%) led the increases, with higher inventories in all four industries in the subsector. In October, the increase was led by the construction, forestry, mining, and industrial machinery, equipment and supplies industry (+3.5%). The machinery, equipment and supplies subsector has recorded increases in four of the past five months, increasing 7.0% over that period.


The Canadian Dollar opens in Europe this morning at USD1.2830 with GBP/CAD at 1.7145 and AUD/CAD at 0.9830. Both CPI and retail sales are released this afternoon so we could well see further swings in an increasingly illiquid pre-Christmas FX market.


The New Zealand dollar spent the whole of the Northern Hemisphere session on Wednesday trapped on a US 69 cents big figure and though it recovered from the low of 0.6958, it couldn’t gain much traction and remained tethered quite closely to a generally weak USD. This dragged down the Kiwi on all its main currency crosses. Overnight, however, it has jumped back on to 70 cents as the long-awaited Q3 GDP figures were finally published.


Ahead of their release, growth forecasts at the major banks locally ranged from +0.4% at Westpac to +0.7% at BNZ with the consensus at +0.6% q/q for an annual 2.4%. The official figures out last night showed a rebound in the construction sector drove gross domestic product up 0.6% in the three months ending September with an upwardly-revised +1.0% in Q2 helping lift the annual rate of growth to 2.7%. Statistics New Zealand also revised its GDP figures for previous years, raising 2015 growth to 3.6 percent from 2.4 percent and 2016 to 4 percent from 3 percent.


The main bright spot in the latest figures was the construction sector, which grew 3.6 percent, unwinding two quarters of falls as investment went into rail, road and other infrastructure. But growth was dented by dairy production, which has been hampered by wet weather and lower global prices. As we suggested in our preview last night, the RBNZ’s last Monetary Policy Statement assumed a +0.7% quarterly increase so anything less than this will reinforce expectations that interest rates will be on hold until at least 2019. Notwithstanding the upward revisions to prior periods, this has been very much the reaction from analysts locally.


NZD/USD jumped immediately after the GDP data from 0.6975 to a high of 0.7015. It opens in Europe this morning at 0.7005 with GBP/NZD at 1.9070.