USD dumps after Fed Minutes; can GBP hold its gains?

Key Movers

The pound had a pretty mixed day on Wednesday – up against the USD and AUD but down slightly against the EUR, CAD and NZD – after UK Chancellor Philip Hammond delivered his annual Budget speech to the House of Commons.


He had the seemingly impossible task of spending more whilst borrowing less against the backdrop of a slowing UK economy and though he generated some initially popular headlines with the scrapping of taxes on house purchases by first-time buyers, the economic numbers he presented from the independent Office for Budget Responsibility (OBR) made for pretty grim reading. After growing just 1.5% in 2017, UK GDP is then expected to grow over the next five years by 1.4, 1.3, 1.3, 1.5 and 1.6 percentage points.


Never in modern history has a UK Chancellor stood up to forecast growth below 2% in every one of the next five years. Even the initially positive news headlines might not stand up to much scrutiny when it’s realised that cutting transaction taxes merely pushes up prices with the benefits accruing to existing owners, not new homebuyers.


It is often said that a Budget should be judged after 5 weeks, not 5 minutes and if the smiles on the Government benches begin to evaporate, then so too will the recent enthusiasm shown for the GBP. It opens this Thanksgiving Day at USD1.3320; close to its best level against the US Dollar since early October.


The USD tumbled on Wednesday and has stayed down overnight.

Its’ fall began well before the FOMC Minutes as investors reflected on Janet Yellen’s comments at NYU the previous evening. She said inflation should rebound over the next year or two, although “I will say I am very uncertain about this. My colleagues and I are not certain that it is transitory, and we are monitoring inflation very closely… It may be that there is something more endemic going on or long-lasting here that we need to pay attention to.”

These doubts (well-founded in our view) helped push the US Dollar lower throughout the day and the US Dollar Index broke down through key technical support at 93.30. The Minutes confirmed what Dr. Yellen had said. “A number of participants were worried that a decline in longer-term inflation expectations would make it more challenging for the Committee to promote a return of inflation to 2 percent over the medium term. These participants’ concerns were sharpened by the apparently weak responsiveness of inflation to resource utilization and the low level of the neutral interest rate, and such considerations suggested that the removal of policy accommodation should be quite gradual.”

The USD index is now below 93.00, having traded in Asia down to a low of 92.87. With the Thanksgiving holiday Thursday removing a lot of liquidity from the foreign exchange market, the very near-term outlook is choppy in a firmly downward trend.


 


The USD tumbled on Wednesday and has stayed down overnight.


Its’ fall began well before the FOMC Minutes as investors reflected on Janet Yellen’s comments at NYU the previous evening. She said inflation should rebound over the next year or two, although “I will say I am very uncertain about this. My colleagues and I are not certain that it is transitory, and we are monitoring inflation very closely… It may be that there is something more endemic going on or long-lasting here that we need to pay attention to.”


These doubts (well-founded in our view) helped push the US Dollar lower throughout the day and the US Dollar Index broke down through key technical support at 93.30. The Minutes confirmed what Dr. Yellen had said. “A number of participants were worried that a decline in longer-term inflation expectations would make it more challenging for the Committee to promote a return of inflation to 2 percent over the medium term. These participants’ concerns were sharpened by the apparently weak responsiveness of inflation to resource utilization and the low level of the neutral interest rate, and such considerations suggested that the removal of policy accommodation should be quite gradual.”


The USD index is now below 93.00, having traded in Asia down to a low of 92.87. With the Thanksgiving holiday Thursday removing a lot of liquidity from the foreign exchange market, the very near-term outlook is choppy in a firmly downward trend.


The euro is back in the mid 1.18’s having reached a high overnight of USD1.1837. The GBP is at 7-week highs against the US Dollar but it can’t keep pace with the EUR and over the last 24 hours the GBP/EUR pair is down around 25 pips to 1.1265.


We’ve noted Press reports showing German Chancellor Angela Merkel might be keen to restart negotiations around a Coalition government. Opinion polls published Wednesday afternoon show why Ms. Merkel might wish to avoid a return to the ballot box: one survey showed her Conservatives on 29.2 per cent - sinking below 30 per cent for the first time since she took over in 2000 – whilst another put her Christian Democrat party and her current Bavarian coalition allies (CDU/CSU) on exactly 30 per cent, their lowest level ever. With the opposition SPD also losing support, the big gainer continues to be the right-wing AfD party. It is this fact alone which might persuade the traditional parties to re-visit Coalition negotiations; something which would surely be seen as EUR positive.


Away from German politics, this morning brings the flash estimates of manufacturing and services PMI’s in Germany, France and the Eurozone. The read-across to the EUR is pretty straightforward: strong numbers mean a strong currency.


By teatime in the first Ashes Test in Brisbane, Australia had taken only two England wickets; a performance they’ll find as disappointing as that of their currency.


Yes, the Aussie Dollar managed to gain some ground against a very weak US Dollar on Wednesday, but it was lower against most of the other FX majors: EUR, GBP and CAD and even slipped a bit against the Kiwi Dollar. By the end of the day’s play in the FX market, the scoreboard showed a net gain for AUD/USD of just 40 pips to end in New York around 0.7613. It opens less than 10 pips above this level at the start of the London session which means the GBP/AUD cross is nudging 1.75.


For the travelling England fans at the Gabba, the beers at least will seem quite cheap. There have been no economic data to distract the cricket watchers in Australia today and none are scheduled on Friday either. If the AUD/USD pair can’t hold on to a 76 cents handle in this environment of a weak USD and no news, then it may be a sign of more trouble to come.


The Canadian Dollar had another good day on Wednesday, boosted by a further sharp rise in oil prices to their highest level of the year. USD/CAD is down at exactly 1.2700 whist GBP/CAD opens in London this morning at 1.6920.


As recently as last Tuesday, NYMEX crude was at $55.19 per barrel. On Tuesday this week it finished in New York around $57.05 and yesterday it traded as high as $58.02 before opening in London today at $57.92. The rise in oil prices was very timely for the Canadian Dollar as some of the earlier optimism around the ‘NAFTA 2.0’ began to be reassessed locally.


Indeed, one of the major banks locally in Canada put out a report saying the CAD could fall as much as 20% if the talks failed in the New Year. They stressed this was not their central scenario (otherwise they might now be looking for a new Head of Research!) but noted, “Despite ongoing threats from President Trump and a more contentious renegotiation process of late, we continue to view NAFTA termination as a tail risk… the risk of significant negative impacts to economic activity and financial volatility, through the channel of policy uncertainty, is non-trivial.”


For the first two days of this week, you’d have been forgiven for thinking that New Zealand had a fixed exchange rate against the Australian Dollar; it barely budged from 1.1080.


By the end of the New York session Wednesday the pair was showing some modest sign of life, having traded down to a low of 1.1061 and it opens around that level in London this morning. Against the very weak USD, the Kiwi Dollar has rallied into the high 68’s with GBP/NZD close to its lows of the week in the 1.9350’s.


Earlier this week, Statistics New Zealand published detailed data on overseas visitor numbers. Today we got to see how deeply those tourists and NZ residents dug into their pockets to spend some money. Overall sales volumes rose 0.2% in the three months ended September 30, following a 2% increase in the June quarter. Eight of the 15 industries surveyed posted higher sales volumes in the quarter, though comparisons with Q2 can be a little misleading. For example, the food and beverage sector - which includes cafes, restaurants, bars, takeaways, and catering services - saw a record fall in both value and volumes in the quarter (down -2.2% and -3.1%). This came after a record gains in Q2.


The explanation, of course is those hungry and thirsty supporters of the World Masters Games and the British Lions rugby tour in that earlier period. Lots of foreign visitors and lots of spending: hopefully they’ve learned not to hand over wads of cash at the foreign exchange bureau in the arrivals lounge. There’s an app for that!!