USD tumbles as stocks fail to regain losses, AUD falls with it

Key Movers

The Kiwi Dollar has had a pretty difficult 24 hours, albeit not really of its own making. After Tuesday’s very strong NAB Survey and with investors generally positioned long NZD, short AUD, there was a rush to close out these positions. This pushed the AUD/NZD cross up to a high of 1.1138 by the time of the London opening. The NZD then did a pretty good recovery job through the Northern hemisphere trading day. By the close of business in New York, the cross has fallen to 1.1094 having at one point traded as low as 1.1080. The NZD/USD pair touched 0.6847 just after the London open but has since recovered around 35 pips to open in Sydney today around 0.6882.

There is literally nothing on the New Zealand economic slate today though students of price action will take some comfort from the NZD’s recovery off its’ lows against both the AUD and USD. Indeed, the NZD/USD pair has actually just managed to break above its 20-day moving average, even if it remains well below its 50, 100 and 200-day measures. A gap of just 180 pips from its 50-day average of 0.7065 doesn’t scream that the NZD is in oversold territory though it would offer some psychological encouragement if it could trade back on to a US 69 cents handle. It could be a long day ahead…


The British Pound still moves up and down like the proverbial fiddler’s elbow. Having touched a low of USD1.3087 during the London morning, the so-called ‘cable’ rate managed to rally almost a full cent to a high of 1.3178 before closing in New York around 1.3170. Official statistics Tuesday showed that CPI inflation in the UK was steady at 3.0% y/y in October rather than the 3.1-3.2% consensus of analysts’ expectations. This was important for several reasons: it continues the squeeze on real earnings (wages are growing only around 2% y/y) but it calls into question both the BoE’s recent decision to raise interest rates and undermines the arguments for any further tightening of monetary policy.

Despite these headwinds, the GBP improved steadily throughout the Northern Hemisphere day, little troubled by the latest political squabbles in the UK. Giving evidence to the House of Commons Business Committee, the Head of Honda UK said said it relied on 350 trucks a day arriving from Europe to keep its UK factory operating, with just an hour’s worth of parts being held on the production line. In an elegant piece of understatement, he said, “I wouldn’t say that the just-in-time manufacturing model wouldn’t work, but it would certainly be very challenging.” Wednesday in the UK brings the latest official data on unemployment and average earnings, with the wages rather than the jobless number likely setting the tone for the GBP.


The “buy the dip” crowd clearly didn’t get the memo on Tuesday. Prior to the NY open, futures markets had signaled an opening loss of just 3 points for the S+P 500 index but at no point during the New York day did the market manage to claw its way back into positive territory. Indeed, at one point it was more than 16 points lower at 2566; its lowest point in almost a week. At the start of the trading session the latest NFIB survey of small businesses was actually pretty upbeat. It noted, “The Index of Small Business Optimism gained 0.8 points to 103.8 in October, maintaining a streak of robust readings. Labor market indicators point to continued good jobs reports and job openings surged to record territory”.

Unfortunately, producer prices came in at a much stronger than expected 2.8% y/y; the fastest rate in more than 5 years with core PPI of 2.4% the highest since February 2002. The USD hasn’t really been trading off rate hike expectations recently – a December hike was already priced at 97.1% probability. Instead, the stock market wobble and continued uncertainty over tax reform have continued to weigh on investor sentiment. The USD Index tumbled more than half a point on Tuesday to 93.52; the lowest since October 26th. The next test for stocks and the Dollar comes with Wednesday’s CPI data where consensus looks for the y/y rate to be unchanged at 1.7%.


The euro has enjoyed a very strong 24 hours. It ended last week at 1.6662, reached a high Monday of 1.1672 and having opened in London Tuesday around USD1.1680 it took less than 12 hours to trade as high as 1.1800; its best level since the ECB meeting on October 26th. The main reason for the EUR’s strength was yet another set of better than expected economic numbers. They’ll be of little comfort to Italian soccer fans who on Monday saw their team fail to qualify for the World Cup finals for the first time since 1958, but GDP of 0.5% q/q pushed the annual rate of growth in Italy up to a 6-year high of 1.8%. Germany grew +0.8% in Q3 - driven by public consumption, investment and net exports - and some of its back data were also revised higher.

The comparison with the US tells a clear story: the GDP of the 19 countries using the euro grew by 0.6% from July-September and was 2.5% higher than the same period in 2016. In the United States, the economy grew just 2.3% y/y in Q3 after also growing slower than the Eurozone in Q2. We could argue that the pace of EUR appreciation over the last 24 hours leaves it technically overbought but there’ll be few sellers as log as nervousness persists in US asset markets.


The Canadian Dollar’s recent strong run may be coming to an end. Having finished last week at USD1.2690 the pair moved steadily higher throughout the London and New York time trading sessions on Monday to finish around the highs of the day at 1.2733. On Tuesday it extended this move (USD higher, CAD weaker) to a spike high of 1.2765 before the latest bout of USD weakness pushed it down to 1.2736 by the North American close.

In an otherwise quiet market, there’s a bit of chat around upcoming talks around the North American Free Trade Area (NAFTA). The fifth round of renegotiations is due to be held between November 17 and 21 in Mexico City and with 75% of all Canada’s exports headed to the United States, there’s a concern these talks might be the catalyst for a bit of profit-taking on long CAD positions. Before then we get some CPI inflation numbers which probably won’t help the CAD but keep an eye, too, on oil and natural gas which have recently been one of the big props for the currency. NYMEX crude futures fell 1.9% to $55.68 on Tuesday with natural gas down a chunky 2.4% to $3.09.