GBP ends the week on a high note; AUD and NZD slump

Key Movers

The British Pound couldn’t quite get to 1.32 in the Northern Hemisphere yesterday but when it did finally reach this level in Sydney overnight, it pretty quickly added another 40 pips or so to be the strongest currency in the Asia session.


GBP/AUD is up at nearly 1.75 whilst GBP/NZD at 1.93 made a fresh high for 2017. It would be a struggle to ascribe this price action to any news flow, though the Guardian newspaper this morning reports that, the 27 EU member states have sought a legal opinion from the European commission on a possible extension of the two years allowed for talks under article 50 of the Lisbon treaty. The member states do not envision a lengthy extension of the two years, however. One EU diplomat said: “We all have our own domestic political situations to deal with and so I can’t imagine us having unanimity on extending article 50. And this extension would only be if we are near striking a deal and need a few extra weeks or months.”


Speaking at a Bank of England roadshow in Liverpool yesterday, BoE Governor Carney said, “If the economy evolves broadly in line with our projections we would probably raise interest rates a couple of times over the next few years… But there’s some pretty big forces, some pretty big decisions still to be taken with respect to Brexit by the UK Government and the Europeans and all of those things can affect it”.


There’s no UK economic data scheduled Friday so it looks like a somewhat calmer day ahead unless UK politics suddenly turn nasty.


The memo about buying the dip may have arrived 24 hours late but it finally got there.
The S+P 500 index finished 21 points higher on the day and up more than 30 points from Wednesday’s intra-day low of 2,556. There was no particular catalyst for this move, though we’d note that ahead of the opening bell, WalMart exceeded analysts’ earnings expectations and Cisco gave a boost to the entire tech sector.
In economic news Thursday, weekly jobless claims were a higher than expected 249k but industrial production beat expectations with a +0.9% m/m gain and manufacturing output surged 1.3% against forecasts of a more modest, but still impressive +0.6% increase.
Putting it all together, the best day for the stock market in almost 3 months, renewed hopes around tax reform and slightly higher US bond yields all helped the US Dollar though its price action was still somewhat disappointing. Its index against a basket of major currencies rose barely two-tenths of a point on the day from 93.54 to 93.68 and it has once again turned lower overnight to open in London at 93.32.
With concerns that its rally since early September might be fading despite talk of tax reform and rate hikes, keep an eye on the 50 and 100 day moving averages at 93.50 and 93.09. The near-5 per cent rally never took the index up to its 200 day average (95.32) and a move below all three main measures will add technical pressure to the more fundamental concerns. 


The memo about buying the dip may have arrived 24 hours late but it finally got there.


The S+P 500 index finished 21 points higher on the day and up more than 30 points from Wednesday’s intra-day low of 2,556. There was no particular catalyst for this move, though we’d note that ahead of the opening bell, WalMart exceeded analysts’ earnings expectations and Cisco gave a boost to the entire tech sector.


In economic news Thursday, weekly jobless claims were a higher than expected 249k but industrial production beat expectations with a +0.9% m/m gain and manufacturing output surged 1.3% against forecasts of a more modest, but still impressive +0.6% increase.


Putting it all together, the best day for the stock market in almost 3 months, renewed hopes around tax reform and slightly higher US bond yields all helped the US Dollar though its price action was still somewhat disappointing. Its index against a basket of major currencies rose barely two-tenths of a point on the day from 93.54 to 93.68 and it has once again turned lower overnight to open in London at 93.32.


With concerns that its rally since early September might be fading despite talk of tax reform and rate hikes, keep an eye on the 50 and 100 day moving averages at 93.50 and 93.09. The near-5 per cent rally never took the index up to its 200 day average (95.32) and a move below all three main measures will add technical pressure to the more fundamental concerns.


The euro, like the pound, has been on a bit of a tear in Asia.


It had spent the whole of the European and North American sessions grinding gradually lower from nearly USD1.18 down to around 1.1760 but then took off to add nearly half a cent overnight. It opens in London this morning at 1.1806. The pound has tracked the euro pretty much tick-for-tick and for the last 12 hours the GBP/EUR rate has been locked in an unusually tight 20 pip range in the low 1.12’s.


ECB Chief Economist Peter Praet gave a pretty upbeat address to a working group of bank economists in Brussels on Thursday morning. He noted that, “domestic demand has become the mainstay of growth in the euro area, making the recovery more resilient to developments overseas. Real GDP growth is projected to remain above potential growth in the coming years. The strength and resilience of the recovery tends to foster our confidence that reflationary forces will gradually support a return of headline inflation towards a level that is below, but close to, 2% over the medium term”.


The ECB still projects that CPI inflation will edge lower into the end of the year though we’d note that retail petrol prices are now rising throughout Continental Europe and the UK. Over the last month, there’s been nearly a 5% jump in prices at the pump. And, when prices rise, so does inflation! If anything, the army of highly qualified economists and statisticians at the ECB might be understating near-term CPI.


For today, the week ends with not a lot on the Eurozone economic calendar on Friday though the EUR finishes far more strongly than it began.


The Aussie Dollar has had a very rough night, despite there being no fresh economic news flow.


Over the course of the week we’ve seen a solid business survey, soft wages and a pretty ordinary labour market report which was neither as good nor as bad as the early headlines might have suggested. AUD/USD had its usual 5 minutes of madness around the employment numbers but actually finished on Thursday exactly where it had begun at USD0.7593.


GBP/AUD, meantime had traded pretty much sideways in a 30 pip range all day to close in the high 1.73’s. Friday in Sydney actually began pretty well, with AUD popping its head above 76 cents to reach a high of 0.7607. From then on, however its been downhill all the way and the Aussie has lost almost half a cent against an already-weak US Dollar. Its opening level in London this morning of 0.7560 is the lowest since late-June whilst GBP/AUD hasn’t been on a 1.75 handle since mid-May.


We said here yesterday that, “with no growth in real earnings and a huge burden of mortgage debt to be serviced, worries about slower household consumption should continue to weigh on the AUD from here. The days of an 80 cent AUD/USD rate are not coming back.” If it falls just another 70 pips, it will actually be nearer to 70 cents than 80…


The Canadian Dollar is by far the best of the “Commonwealth Currencies” overnight and has made further progress against the US Dollar.


We shouldn’t exaggerate its gains; USD/CAD has been stuck on a 1.27 big figure ever since Monday afternoon but it did print as low as 1.2715 overnight before opening in London this morning around 1.2740. GBP/CAD, however, is in the high 1.68’s for the first time since November 2nd and opens today at 1.6870.


On an otherwise quiet day for news, ADP launched their first Canadian Employment Report in Toronto yesterday. Their US report used to be quite widely watched as a lead indicator of payrolls but in fact now it incorporates the last official numbers as in input, making it a much less reliable guide to upcoming data. We noted in our North American commentary that ADP might get a bit of coverage on an otherwise quiet day.


For what it’s worth, the new report put the monthly change in Canada’s September non-farm payrolls at -5,700 but an upbeat Press Release said, “The Canadian economy has added more than 250,000 jobs so far this year, which is 25 percent more than the total number of jobs created in all of 2016.”


Whether the very modest CAD rebound against the USD can be extended still remains to be seen though it’s looking good against the AUD and NZD.


We wrote in our North American opening comment on Thursday that, “international investors selling the NZD feel they’re pushing on an open door”. Looking at the price action overnight, it seems that it opened on to a pretty steep staircase.


From a best level of 0.6880 early in the session, NZD/USD has tumbled to 0.6830; a fresh low for 2017. GBP/NZD, meantime, has jumped more than a cent overnight to an 18-month high just short of 1.94. This move lower in the Kiwi hasn’t been driven by news flow, but an increasingly ugly technical picture.


NZD/USD is now stuck firmly below its 20, 50, 100 and 200 day moving averages, it has taken out (marginally) the May and October lows and approaches a point in the week when liquidity conditions are at their least favourable.


New Zealand released overnight its Quarterly International Visitor Survey. It noted visitor spending rose 4% y/y to a record NZ$10.4bn in the year to September. This was driven by an increase in visitor numbers, whereas the average spend per visitor fell 4%.


The Ministry for Business, Innovation and Employment (MBIE) which releases the report noted the strong NZD had contributed to a decline in spend per visitor. If the exchange rate moves of the last few weeks continue, there should be some much happier faces in the Ministry and tourist industry…