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Markets in Detail
New Zealand’s new coalition government is hands down the biggest story of the day. The decision by New Zealand First leader Winston Peters to shun the popular vote and form a coalition government with the Labour party’s Jacinda Arden caught the market mispositioned. While this may be another example of politicians disregarding the majority popular vote, more importantly, the fact that Arden gained enough votes to stay in the race and move on to become New Zealand’s youngest ever female Prime Minister is a testament to the world’s desire for change. Peters chose to form a coalition with Labour because of their ability to advance their economic priorities such as immigration, foreign land buyers and reducing poverty. His decision is summed up best with the comment- “We’ve had to make a choice, whether it was with either National or Labour, for a modified status quo, or for change.” With major policy differences between Labour and National, change is definitely in store. There will be major investments in the housing market with 100k affordable houses built and sold over the next 10 years, the RBNZ will add an employment mandate similar to the Fed, immigration will be cut back and the government will renegotiate elements of the Trans Pacific Partnership to increase restrictions on foreign home purchases. All of these steps are aimed at bolstering an economy that the new government sees as underperforming. For the RBNZ, an employment target could mean a longer period of easier policy. So while NZD/USD just experienced its largest one -day slide since August 24 2015, the day of the flash crash in U.S. equities, it’s a sell on rallies for an eventual move down to 68 cents.
The U.S. dollar shrugged off stronger than expected U.S. data and instead took its cue from yields. Although U.S. rates were down for most of the North American session, led by reports that Apple has cut its iPhone 8 orders, they bounced off their lows by the end of the day and the same intraday reversal can be seen in stocks. Ahead of the 30-year anniversary of the Black Monday stock market crash, investors were nervous with their anxiety heightened by some of the political developments abroad. However at the end of the day, U.S. data is improving. Jobless claims dropped to its lowest level in more than 4 decades, hinting of a strong non-farm payrolls report next month. The Philadelphia Fed manufacturing index also rebounded to 27.9 from 23.8. Economists had been looking for slower growth but the sharp rise in the Empire State survey suggests otherwise. Fed Chair Yellen speaks tomorrow but not until markets close so most of the day will be spent guessing whether she will be more hawkish or dovish. Chances are there will be limited new position taking ahead of her lecture on monetary policy since the financial crisis.
The Australian dollar on the other hand was the main beneficiary of NZD outflows. Not only was AUD one of the few currencies to outperform the greenback but it also hit a 17 month high versus the New Zealand dollar. The labor market continues to be one of the country’s primary areas of strength – Australia added another 19.8K jobs in September with steady growth in full and part time work. This helped to push the unemployment rate back down to 5.5%, the lowest level in more than 3 years. Although the PBoC warned of excesses, Chinese industrial production and retail sales growth grew slightly mores than expected in September. We wouldn’t be surprised to see AUD/NZD trade up to 1.14 in the coming weeks. The Canadian dollar on the other hand had a relatively uneventful day. The pair traded in a narrow range ahead of Friday’s inflation and retail sales reports. Lower oil prices and Canadian bond yields prevented CAD from enjoying the same gains as AUD or EUR. Tomorrow’s economic reports will be crucial going into next week’s Bank of Canada’s monetary policy announcement. If retail sales and inflation growth miss expectations, it would reinforce the BoC’s less hawkish views but with USD/CAD hovering near its 1.2450 support, unexpected strength in spending or inflation could take the pair sharply lower.
Sterling traded lower against the greenback but for the third day in a row, it settled above the 50-day SMA near 1.3150. This is notable because this morning’s retail sales numbers were significantly weaker than expected and yet GBP still managed to hold support. Economists expected consumer spending to fall by only -0.1% but instead it dropped -0.8%. Excluding auto and gas purchases demand was just as worse with spending falling -0.7%, marking the weakest pace of growth in 4 years. This week’s economic reports don’t help the case for a rate hike and with the ECB expected to make a move next week, we could see further gains in EUR/GBP. Meanwhile EUR/USD rose to a high of 1.1860 despite the Spanish government’s decision to invoke Article 155 of the constitution, allowing the central government to suspend the autonomy of Catalonia. This is a dangerous step that could lead to more violence if the Catalan people decide to block the measures on the streets but investors have cheered the government’s firm stance in doing everything that it takes to keep Spain in one piece.
Most of the major currencies traded higher yesterday including the U.S. dollar. Ten-year bond yields are up more than 3bp across the globe with U.S. stocks hitting fresh record highs. While housing starts and building permits fell more than expected today, risk appetite is strong. We haven’t heard any new confrontational comments on North Korea and Fed President Powell who is the leading candidate for Fed Chair according to the betting markets follows the same mantra of slow rate hikes as Yellen which is positive for the equity market. Investors are also encouraged by stronger corporate earnings and have hope that President Trump won’t nominate someone completely unexpected. The Federal Reserve’s Beige Book report added fuel to the rally as the Fed districts reported widespread labor tightness. We could see the dollar extend its gains with USD/JPY breaking 113.50 if yields continue to rise and there are no negative headlines to offset the flow. The Philadelphia Fed survey is scheduled for release on Thursday and the sharp jump in manufacturing activity in the NY region signals similar strength in Philly region.
Sterling dropped to a low of 1.3140 before reversing to the settle the day much closer to its highs than lows. While wage growth was stronger than expected, investors did not feel that the overall report was positive enough to offset the doubt caused by yesterday’s comments from MPC officials. Jobless claims ticked up slightly but the unemployment rate remained unchanged and most importantly wage growth was revised up to 2.2% in July and remained at that pace in August. Retail sales are due for release tomorrow and this increase along with the uptick in spending reported by the British Retail Consortium suggests that spending may not have fallen in September like economists expect. Unfortunately, even if the report beats expectations, as we have seen today, Brexit and BoE concerns could prevent sterling from enjoying a meaningful rally. However on technical basis it appears to be due for one with today’s slide finding support right at the 50-day SMA.
The Australian dollar will also be in play tonight with the country’s labor market report and Chinese GDP, retail sales and industrial production numbers on tap. AUD/USD has found support above 78 cents but if significantly weaker job growth is reported tonight, we could see this key level broken. Australia added 54K jobs in August but job growth is expected to have slowed to 15K in September. According to the PMIs, employment growth in the manufacturing and service sectors slowed last month. As usual full time job growth will be more important than the headline number. Meanwhile China is expected to report slower Q3 GDP growth but stronger retail sales and industrial production. These reports should not only affect AUD but also NZD as well. After rising strongly last week, NZD/USD found solid resistance at the 20-day SMA. Investors completely shrugged off the stronger but backwards looking Q3 CPI numbers in favor of weaker manufacturing activity and lower dairy prices. Despite the fact that it bounced off the lows today, NZD still appears poised for a move back to 71 cents. The Canadian dollar on the other hand was one of the strongest performing currencies, soaring on the back of higher Canadian yields, a sharp unexpected jump in manufacturing sales and a mild increase oil prices. If USD/CAD breaks the October low of 1.2433, the next stop should be 1.2375.
Thanks to the sharp rise in German yields, euro also snapped a 4 day downtrend and found its way back up to 1.18. There were no major economic reports released today but if it manages to rise above 1.1820, we could finally see the currency gain upside traction ahead of next week’s European Central Bank monetary policy meeting.
It should be no surprise to our readers that sterling is on the move. Between potential Brexit headlines, speeches from Bank of England officials and a number of key economic reports, we knew this would be an active week for sterling. Unfortunately neither BoE speak or UK data provided much support for the pound today. Although BoE Governor Carney said a hike may be appropriate in the coming months, he also suggested that inflation may peak around 3% in October and indicated that firms have become less confident about a smooth Brexit. BoE members Tenreyro and Ramsden also sounded less enthusiastic with both members talking about slack, spare capacity and inflation peaking. However Tenreyro, who is a brand new member of the policy committee added that a hike would be appropriate if the economy performs as expected. As for data, consumer price growth was right in line with expectations. CPI grew by 0.3% in the month of September, which was slower than the previous month but year over year growth accelerated to 3% from 2.9% while core price growth held steady at 2.7%. Labor market numbers are due for release on Wednesday followed by retail sales on Thursday. According to the PMIs job growth weakened slightly last month and if that deterioration is reflected in the jobless claims AND average weekly earnings growth slows, GBP/USD could break 1.31.
The U.S. dollar ended the day higher against all of the major currencies but this weakness masks underlying pressures as the greenback eased off its highs by the end of the North American trading sessions. This intraday reversal tracked the move in 10 year Treasury yields which went from up 2bp to down -0.5bp. U.S. data was slightly better than the previous month with import and export prices rising, industrial production rebounding and the NAHB home builders index ticking upwards. In response, USD/JPY spiked to a high of 112.48. While these reports are encouraging, the next rate hike is still 2 months away. Between now and then, the uncertainty of North Korea and Fed chair selection should keep the greenback under pressure. President Trump is expected to announce his selection of Fed Chair after a meeting with Janet Yellen some time this week. The odds that she will keep her job are slim. Fed Presidents Powell and Warsh along with Stanford economist Taylor are the top contenders. Powell who favors gradual rate hikes will be more negative for the U.S. dollar than Taylor and Warsh who have criticized the central bank’s easy monetary policies. If Yellen somehow manages to stay in her post, the dollar will rally wildly. Housing starts and building permits are scheduled for release tomorrow along with the Fed’s Beige Book report.
Euro traded lower against the U.S. dollar for the fourth consecutive trading day extending its losses below 1.1750. However even with today’s decline, the total losses over this period was just over 100 pips which is not a big move. Although Eurozone consumer prices ticked up by 0.4% in the month of September, investor confidence plunged in October. This is expected considering Spain’s political troubles and the uptick in the expectations component of the German ZEW survey confirms that the concerns are regional. The main focus for euro tomorrow will be ECB President Draghi’s speech in Frankfurt. He’s not the only policymaker speaking – Praet and Coeure will also be taking part in the same conference. We are not sure how much monetary policy talk there will be as the topic will be “structural reforms in the euro area” but regardless the early European session speech could dictate how EUR/USD trades for the rest of the day.
All 3 of the commodity currencies ended the day lower against the greenback but these losses masks an impressive intraday recovery in USD/CAD. Having come within 10 pips of 1.26, USD/CAD u-turned during the North American session to end the day much closer to 1.25. No Canadian economic reports were released today and oil prices gave up earlier gains but investors saw the reports that NAFTA talks will extend past year end as positive for the currency. A delay isn’t great news but it means that talks haven’t been scrapped. However between OPEC reaching a “general agreement” on an extension of the output cuts and Canada implementing more stringent borrowing rules, the Canadian economy and the Canadian dollar still faces downside risks. The New Zealand dollar shrugged off stronger consumer price growth to trade lower on the back of a 1% drop in dairy prices. The RBA minutes did not have a significant impact on the Australian dollar although the central bank sounded upbeat, saying that growth will rise gradually thanks to current policy with a stronger labor market expected to support household spending in the period ahead.
There was very little movement in currencies on Monday and this lack of volatility could be indicative of trading for the rest of the week. With no major U.S. economic reports scheduled for release and Fed Chair Janet Yellen not speaking again until after the market closes on Friday, political headlines are the only hope for volatility in the greenback. Traders should be watching for any news on the selection of a Fed chair, North Korea and progress or setbacks on tax reform. Yellen, who has a 90% chance of losing her job in February spoke on Sunday and her comments were relatively hawkish. She said employment should bounce back after weak September and her best guess is that soft inflation readings won’t persist. Most importantly, she felt ongoing economic strength warranted gradual rate hikes, which suggests they are on track to raise interest rates one more time this year. These positive comments along with the stronger than expected Empire State manufacturing survey helped USD/JPY avoid further losses as manufacturing activity in the NY region grew at its strongest pace in more than 3 years. However looking ahead we believe USD/JPY is vulnerable to additional losses as U.S. and South Korea military exercises begin. CNN also reported that North Korea is rejecting diplomacy with the U.S. for now. The Fed chair announcement is also expected any day now and any surprises could send USD/JPY below 111.00.
While this may be a quiet week for some currencies, it should be an active one for the British pound. Unlike the U.S. dollar, we got a taste of the big potential intraday swings today with GBP/USD crashing on the back of Brexit news. Early in the North American session, there were reports that unless the European Union concedes on some key issues, Brexit talks could collapse. According to officials close to the matter, Bloomberg reports that “without a clear sign that negotiations will progress to trade and transition arrangements by December at this week’s summit of EU leaders, the entire Brexit process will be in danger of collapse.” Last week investors were hopeful that the talks would make meaningful progress after the EU’s Chief Negotiator said that they could provide the 2-year Brexit transition period but the latest setback is a sign of how difficult the negotiations will be. As the talks progress however, the outlook for the economy and monetary policy could overshadow Brexit risks. Consumer prices are due for release tomorrow and according to the PMIs, price pressures accelerated in the month of September, convincing the Bank of England that a rate hike would be necessary. Labor and consumer spending numbers are also due for release this week along with a speech by BoE Governor Carney and we believe that most of these event risks will be positive for sterling.
Euro on the other hand traded in a narrow 25 pip range throughout the North America session. German wholesale prices and the trade balance were both better than expected. Geopolitical risks will also affect the euro this week as we watch the ongoing political crisis in Spain. The Spanish Prime Minister has given the Catalan government 8 days to drop their independence bid with a failure to do so resulting in a suspension of their autonomy. In his latest speech today Catalan leader Puigdemont failed to address the issue directly, choosing to appeal to the government by calling for a negotiation over the next 2 months. If Madrid refuses to talk, then Thursday is D-day and it’ll be interesting to see how both sides respond. Meanwhile the German ZEW survey is scheduled for release tomorrow and these political troubles could weigh on investor sentiment. ECB President Mario Draghi’s speech on Wednesday will be one of the most important event risks for the euro this week.
All 3 of the commodity currencies traded lower with the New Zealand dollar turning negative after earlier gains. Service sector activity in New Zealand slowed in the month of September and if tonight’s CPI report also surprises to the downside, reinforcing the Reserve Bank’s caution, NZD/USD could slip back down to 71 cents. The Canadian dollar shrugged off higher oil prices to move above 1.25 on the back of a stronger U.S. dollar and falling Canadian yields. The Australian dollar is trading lower ahead of tonight’s RBA minutes. We’re not expecting much from the RBA as AUD dropped when the RBA said a higher A$ is weighing on the outlook for output and employment and warned that growth and inflation may be slower than forecast if the currency keeps rising. However it recovered its losses quickly on their positive outlook for the labor market. The bottom line is that the RBA is comfortable with the current level of policy and has no immediate plans to raise interest rates.
The pound largely picked a direction against each of its peers and stuck to it last week, barring Friday’s excitement. A combination of data and fresh Brexit negotiations kept both the economic and political outlook in focus throughout the week.
The pound was largely on sluggish form last week. The data calendar was largely empty and markets were awaiting the outcome of another round of Brexit negotiations.
Tuesday’s strong industrial, manufacturing and construction output figures were largely ignored, as the latest trade data revealed that the visible trade balance deficit had widened to its highest level on record during August. Instead of narrowing to -£11.2 billion, the deficit expanded from an upwardly-revised -£12.83 billion to -£14.24 billion.
Thursday’s Bank of England (BoE) credit conditions and bank liabilities surveys disappointed markets after showing that banks were planning on tightening the availability of credit by the greatest extent since the financial crisis.
There have been signs that UK consumers are using borrowing to fuel continued high levels of spending in the face of surging inflation, so restricting the supply of credit could weaken spending and dissuade the BoE from hiking interest rates.
Sterling seesawed on Friday after a report the previous evening in a German newspaper suggested EU officials were preparing to offer the UK a transitional Brexit deal – once the divorce bill was settled. This was not new information, but markets nonetheless reacted positively.
The pound is almost certain to see some movement tomorrow on the monetary policy outlook. September’s consumer price index figures are set for release, with overall inflation expected to reach 3%. Core price growth, however, is forecast to remain steady at 2.7%, which might somewhat curb hopes that the Bank of England (BoE) will be moved to tighten borrowing costs any time soon.
Speaking of the BoE, Governor Mark Carney, new Deputy Governor Sir David Ramsden and new Monetary Policy Committee (MPC) member Silvana Tenreyro will appear before the Treasury.
Jobless claims and average weekly earnings figures on Wednesday, retail sales data on Thursday and government borrowing figures on Friday will ensure there is a steady supply of economic data to keep the pound fluctuating for the rest of the week.