GBP gains extended on reports of Irish agreement, NZD tumbles

Key Movers

After Turnaround Tuesday and Wonderful Wednesday for the British Pound, Thursday is shaping up for more positive alliteration as the GBP again opens higher against every major currency.


GBP/USD is at 1.3460, GBP/EUR at 1.1340 whilst GBP/AUD is at an 18-month high of 1.7750, as too is GBP/NZD at 1.9665.


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. A transition deal will be ready in principle for January.”


Over at The Guardian, 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.


Amidst some sharp moves elsewhere, the most striking feature of the USD over the last 36 hours has been its overall stability. Its index against a basket of major currencies began Wednesday in Asia at 92.96 and stands this morning at 92.88, having moved only between 92.74 and 93.06.

In prepared remarks to the Joint Economic Committee of Congress, outgoing Fed Chair Janet Yellen said, “The economic expansion is increasingly broad based across sectors as well as across much of the global economy.” With weak inflation likely to prove “transitory,” she said, “we continue to expect that gradual increases in the federal funds rate will be appropriate.”

After US stock markets reached record highs, Dr. Yellen remarked that while asset values were “high by historical standards, overall vulnerabilities in the financial sector appear moderate.” On the future course of the US economy, she said there are structural factors that need to be addressed. Among them are an ageing population that has translated to slower labor force growth as well as the “unusually sluggish” productivity growth. To generate a sustained boost in economic growth without causing inflation that is too high, we will need to address these underlying causes”.

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. 


Amidst some sharp moves elsewhere, the most striking feature of the USD over the last 36 hours has been its overall stability. Its index against a basket of major currencies began Wednesday in Asia at 92.96 and stands this morning at 92.88, having moved only between 92.74 and 93.06.


In prepared remarks to the Joint Economic Committee of Congress, outgoing Fed Chair Janet Yellen said, “The economic expansion is increasingly broad based across sectors as well as across much of the global economy.” With weak inflation likely to prove “transitory,” she said, “we continue to expect that gradual increases in the federal funds rate will be appropriate.”


After US stock markets reached record highs, Dr. Yellen remarked that while asset values were “high by historical standards, overall vulnerabilities in the financial sector appear moderate.” On the future course of the US economy, she said there are structural factors that need to be addressed. Among them are an ageing population that has translated to slower labor force growth as well as the “unusually sluggish” productivity growth. To generate a sustained boost in economic growth without causing inflation that is too high, we will need to address these underlying causes”.


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.


The EUR had a better day Wednesday after Tuesday’s rather disappointing price action and this morning in London is up against the AUD, NZD, CAD, and USD though unable to keep pace with the still-soaring pound.


In a speech yesterday evening, Bundesbank President Jens Wiedmann said 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”.


The Bundesbank head, who also sits on the ECB Governing Council, repeated his long-standing criticism of the ECB’s loose monetary policy, saying that a less expansive stance would be justified. “One thing is clear: even after the end of net asset purchases, euro zone monetary policy will continue to be very expansionary”.


The EUR opens this morning around USD1.1865, whilst GBP/EUR at 1.1355 is the highest since November 7th.


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 New York 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 USD0.7587 with GBP/AUD at an 18-month high of 1.7750.


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 on Wednesday 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 whilst GBP/CAD hit a best level of 1.7282.


Ahead of today’s 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. An agreement first struck a year ago and set to expire in March was aimed at reducing a global oversupply of oil caused in part by US producers and it is said the Saudis want to extend this until the end of next year.


Moscow, however, prefers a shorter agreement which would allow it to increase output if prices rise, rather than see all the benefits go to North American shale producers. 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.


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 London this morning at USD1.2866 and GBP/CAD1.7314.


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 GBP/NZD opening in London at an 18-month high of 1.9665.