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Foreign Exchange Report 14 November 2018

The German ZEW investor confidence index improved slightly to -24.1 for November from -24.7 previously and was in line with consensus forecasts. ECB member Praet stated that a substantial amount of monetary stimulus is still required and that it was premature to signal a rate tightening-path. The Euro dipped lower on the remarks, although he also stated that the bank should look through recent evidence of weaker growth and the currency found support near 1.1320. The US NFIB small-business confidence index declined slightly to 107.4 from 107.9 previously, although the index remained close to record highs with further evidence of a tight labour market and upward pressure on prices.   The Euro regained some ground during the day with increased optimism that a Brexit deal was close a significant factor underpinning the currency. The Euro advanced to highs near 1.1300, but was unable to regain the former broken support line and retreated back to near 1.1250 as initial market enthusiasm faded quickly and German yields declined. The Italian government indicated that it would not change its budget policies and the IMF also warned that the fiscal proposals would increase Italian vulnerability. The Euro did move above 1.1300 on further optimism surrounding Brexit negotiations, but was unable to hold above this level as Germany reported a 0.2% third-quarter GDP decline.
Growth in Chinese new loans slowed to CNY697bn for October from CNY1380bn the previous month and was significantly below consensus forecasts while growth in M2 money supply slowed to 8.0% from 8.3%, maintaining concerns over an underlying slowdown in the economy. After opening higher, US equities briefly dipped into negative territory which pulled the dollar lower and a fresh challenge on the 114.00 area also faltered again as US yields edged lower. Chinese investment and production data was slightly above consensus forecasts, but retail sales were below consensus forecasts which maintained reservations surrounding the growth outlook. Japanese GDP declined 0.3% for the third quarter which was in line with consensus forecasts. Asian equity markets were mixed despite some optimism the US and China would be able to make some headway on trade talks and the dollar settled just below 114.00 as oil held substantial losses.
Headline UK average earnings increased 3.2% in the year to September from 3.1% previously and slightly above consensus forecasts while the figure excluding bonuses increased to 3.0% from a revised 2.8% and the strongest figure since late 2015. Although unemployment increased to 4.1% from 4.0% the data maintained expectations of further UK interest rate increases if there is an orderly Brexit outcome. The barrage of Brexit rhetoric continued with conciliatory rhetoric from EU Commission President Juncker and hopes of a breakthrough increased following media reports that the final text had been reached. Sterling extended gains following reports that the Irish backstop issue had been resolved and that the technical withdrawal agreement had been agreed. The Euro declined to fresh 6-month lows near 0.8660 and the UK currency also strengthened back above 1.3000 against the dollar on confirmation that the technical agreement had been reached. Gains faded quickly as strong opposition to the agreement emerged very quickly within parliament. Sterling edged stronger on Wednesday in very tense market conditions as Brexit rhetoric remained under close scrutiny with indications that major Cabinet members would support the deal. Inflation data is also due on Wednesday with further volatile trading inevitable amid major uncertainty.
Increased optimism that a Brexit deal could be agreed helped underpin confidence in European assets in US trading on Tuesday and curbed immediate defensive demand for the Swiss currency.  The Euro advanced to the 1.1370 area while the dollar briefly pushed to 20-month highs around 1.0130 before retreating back below 1.0100 amid the wider US retreat as politics dominated. Markets were still uneasy surrounding overall European political risks, especially with major uncertainty over the Italian budget situation and the Euro failed to make headway on Wednesday.


Posted in Fx Market

Foreign Exchange Report 13 November 2018

The Euro remained under pressure in early European trading on Monday as the break below 1.1300 against the dollar continued to erode sentiment. EU Commission President Juncker repeated his criticism on the Italian government position and there was further uncertainty ahead of Tuesday’s deadline for the Rome government to re-submit its draft budget. If the government fails to respond, the Commission could open an excessive deficit procedure which would intensify domestic political tensions. There were also fresh concerns surrounding the Italian banking sector which undermined the Euro. Underlying Brexit concerns also hampered the Euro ahead of the New York open and the dollar index posted 17-month highs amid weak sentiment towards European currencies with the Euro trading below 1.1250. San Francisco Fed President Daly stated that she would not be surprised by a further rate hike in December and also saw at least two further rate hikes in 2019 in order to reach a neutral level. The Euro was trapped at 17-month lows late in the day before recovering slightly on Tuesday as immediate defensive dollar demand faded slightly on hopes for progress in USChina talks while reports that the Italian government could offer some concessions to the EU curbed immediate Euro selling.
The dollar was unable to make further headway ahead of the New York open with fragile risk conditions amid concerns surrounding the global growth outlook. US equities declined significantly in early trading which reinforced market unease and triggered fresh defensive yen demand even though gold lost support. Weakness in the US technology sector also triggered doubts over capital flows into the US, especially if budget deficit fears intensify. Treasuries also secured some support with the 10-year yield dipping below 3.20% and the dollar declined to the 113.70 area at the European close. Concerns surrounding the Chinese yuan persisted with reports that state banks were intervening to support the yuan. There was, however, an element of optimism surrounding US-China trade talks after reports that China’s top negotiator was heading to the US in preparation for the Trump-President Xi meeting late this month. Risk conditions stabilised with US futures ticking higher and the dollar moved back to near 114.00 as US yields moved higher and Chinese equities recovered.
Bank of England Deputy Governor Broadbent stated that there are signs of weaker fourth-quarter GDP growth, although he also commented that wage growth is materially higher and that the bank was seeing signs of domestic inflation pressure now. Gradual rate increases did not necessarily mean one hike per year while the Brexit outcome was crucial for the central bank. Sterling remained under pressure in Europe amid evidence of further opposition to Prime Minister May’s Brexit plans. UK gilts also declined sharply which undermined currency support. EU Council President Tusk was reported to have stated that a deal needed to be in place by Wednesday night in order for there to be a special summit in November. Early in US trading there were reported comments from EU Chief Negotiator Barnier that the Brexit Treaty was almost ready and that the main elements were ready to be presented to the UK Cabinet on Tuesday. Although the UK currency spiked higher, selling quickly resumed after reports that the Cabinet would be likely to reject the EU offer. Sterling dipped to 1.2850 against the dollar before correcting slightly as Prime Minister May stated that negotiations were in the end game. The Euro settled near 0.8735 with both currencies remaining out of favour on Brexit concerns ahead of UK earnings data.
A fragile tone surrounding risk appetite underpinned the Swiss franc on Monday and the currency also gained support from increased concerns surrounding the UK and Euro-zone political environment. Overall, the Euro declined to lows just below 1.1350 late in the European session while the dollar again challenged resistance above the 1.0100 level, but failed to break higher. The franc retreated slightly on Tuesday as risk conditions stabilised, although the dollar held close to 1.0100 as underlying concerns surrounding European politics continued to dominate sentiment.


Regards Anyone.
Posted in Fx Market

G10 FX Week Ahead > 11-16 Nov. 2018

°The dollar heads into next week’s data releases on a high.
°While US retail sales and inflation should back the narrative of further Fed hikes, German GDP could actually show a QoQ contraction.
°And if Italy refuses to moderate its budget in response to criticism from Brussels, EUR/USD could break to new lows for the year.
US data this week sees inflation and retail sales for October. Core inflation is expected to remain at 2.2% YoY and surveys suggest retail sales are set to stay strong. We’ll also hear from a variety of Fed speakers, including Chair Powell. So far the mid-term results have done little to dent US growth optimism and the market will be keen to hear whether there is scope for bipartisan fiscal stimulus after all. Firm US rates should keep the dollar bid versus the low yielders.
The Eurozone story remains challenged, however. The week ahead will see the second reading of Eurozone 3Q18 GDP, which disappointed at 0.2% QoQ. We’ll also see the first reading of German growth, which some are expecting to have contracted. This is a far cry from the temporary slow-down story muted in the first half of 2018. We’ll also get the next instalment of the Italian budgetary story.  Having been sent back to the drawing board by the European Commission, there are no signs that the Italian government is yet ready to compromise on its spending plans. While this discord may just about be priced into the BTP:Bund spread, it still leaves EUR/USD vulnerable.  A break down to new lows for the year to levels just below 1.12 look possible this week.
GBP has been performing better on the view that the British Prime Minister, Theresa May, has a new Brexit deal to put in front of cabinet colleagues – perhaps at a meeting this weekend. Any news that a Brexit summit is back on the table for late November could also give GBP a boost. Assuming Brussels does not pull the rug from under Downing Street once again, the focus will then shift onto whether Mrs May can get the deal through parliament – which has been promised a ‘meaningful’ vote. Its passage looks highly uncertain.
That said, the UK economy is performing reasonably well and this week should see UK wages, inflation and retail sales all coming in on the strong side. Thus were it not for Brexit, pressure would be building for another BoE rate hike. Currently, the market struggles to see the next BoE rate rise within a year. On balance we see GBP staying reasonably bid on temporary Brexit optimism, but larger gains look to be had against the EUR rather than the USD.
EUR/CHF is still trading very narrow ranges and doesn’t seem to be responding to Italian risk much these days. For what it’s worth, we note that the one year 25 delta Risk Reversal is narrowing sharply – meaning the cost of insuring against a downside break in EUR/CHF is declining. Thus looking at EUR/CHF alone, it seems that investors are not increasing their bets on another Eurozone crisis.
The Swiss data calendar is light, but in theory EUR/CHF should come under pressure from soft Eurozone 3Q18 activity data. Also, keep a watch on how USD/CHF trades near 1.0100. A break above here could encourage fresh follow-through buying from modelbased funds and actually help EUR/CHF a little higher.
The CAD has succumbed to stronger dollar rates and lower oil prices, with neither of those stories looking likely to change near term. On the oil side, six to seven weeks of US crude oil stocks rising at 5mn barrels per week have contributed to lower oil prices and it is probably too early to expect any significant changes in OPEC+ production policy – members meet on Sunday in Abu Dhabi.
There’s no major Canadian data this week, although we may hear some more news on
the USMCA, Donald Trump’s replacement for NAFTA. The ITC is due to provide feedback on it this week and leaders are expected to sign off on it at the end-month G20 meeting in Argentina. We’ll back a stronger US dollar this week and USD/CAD moving close to 1.33.
US equities continue to enjoy an impressive recovery and as above, investors are interested in whether any bi-partisan support for infrastructure projects can extend the US growth story through the entirety of 2019. The market is still contemplating where the top is for the Fed Funds’ cycle and the bearish flattening theme for the US Treasury curve looks set to continue. If, as we suspect, the risk environment can hold up through November in the (unlikely) expectation of a US-China trade deal, then the JPY could find itself as the preferred funding currency for EM growth plays. That said, look out for Chinese IP growth this week and also take care as to how USD/CNY fares around 7.00.
Locally, we’ll see 3Q Japanese GDP data early Wednesday. A large QoQ decline is expected, adding to the narrative that the BoJ will be on hold through-out 2019. There’s also the consumption tax hike to deal with as well. On balance, we see USD/JPY pushing up to the highs of the year at 114.50 – although presumably, we might be getting close to levels when the White House starts trying to talk the dollar lower.
AUD/USD has managed to hold onto its gains quite well this week, despite a resurgent US dollar. Challenges this week will come from China, where Tuesday’s October Industrial Production data and the ever-present risk of USD/CNY breaking above 7.00 pose downside risks to the AUD. Our bearish call on the month is largely on the back of a strong USD and a view that the prospects of a US: China trade deal will have evaporated by early December.  Also look out for Australia October jobs data on Wednesday.
That said, AUD/USD has recently broken out of a well-defined bear channel. This warns that any near-term losses may stall in the 0.7130/0.7160 area. If this is the case, then a subsequent break above the 0.7300 could deliver substantial follow-through. Just a word of caution here!
Some better employment 3Q18 employment data and a slightly more positive RBNZ has seen quite a substantial steepening of the NZD money market curve (some 10-30bp across 1-3 year maturities) has helped the NZD. This week the only big quarterly release is PPI, but we doubt this is a big market mover. Instead, we expect NZD to largely trade alongside, if not slightly out-perform its AUD peer, both being driven by Chinese data.
Similar to the AUD, a re-assessment of very flat money market curves are helping the currency, but the headwinds from high US rates look here to stay.  As such NZD could perform better on the crosses than against the USD.
Politics will dominate Swedish markets this week, where Wednesday will see the centreright Moderates try to secure their leader, Ulf Kristersson, as the next Prime Minister. The vote will be close and should help the SEK should it succeed, but failure should not necessarily be a knock-out blow for the SEK. We say this because there would still be a chance of 2019 budget proposals being approved a day later, which would end some welcome uncertainty.
This week will also see Swedish October CPI, which may come in on the high side and cement expectations of a December Riksbank rate hike. Those expectations may hold
until some softer 3Q18 Swedish GDP data is released at the end of the month
There’ll be a lot of focus on Norway’s release of 3Q18 GDP figures. Consensus expects mainland GDP to grow 0.5% QoQ; we see risks closer to 0.7-0.8% QoQ, which should help firm up 1Q19 as the timing for the next move in the Norges Bank tightening cycle.
NOK has been suffering slightly on the lower oil price, but with Eurozone growth slowing and the timing of ECB normalisation being called into question, we suspect that NOK will find buyers on dips.
Best week Anyone.
Posted in Fx Market