Market Overview:

This week is a shortened week in the US, with FX trading expected to be curtailed by the US Thanksgiving holiday on Thursday, with many having Friday off for an extra-long weekend and retailers having “Black Friday” sales. US data releases continue to be supportive, with US markets remaining focused on the progress of tax reform legislation, which although passed in Congress still has to pass through the Senate. Over in the Eurozone, increased political uncertainty in Germany has weighed on sentiment and last night ECB head Draghi, reiterated that Eurozone inflation is still less than desired and that policy rates are likely to remain around current levels well past the end of the QE programme. Concern continues to mount in Germany as the political situation deteriorates, as after a month of exploratory coalition talks ended in a dramatic collapse just before midnight Sunday in Berlin when the pro-market Free Democratic Party, one of the prospective partners, walked out on a deal that Merkel said had been within reach. The collapse signals the limit of her pragmatic, non- ideological style of governing and leaves her options for staying in power for another 4 years substantially reduced. Possibilities now include setting up a minority government headed by her Christian Democratic-led bloc or asking President Frank-Walter Steinmeier to order another national election just months after the last one in September Both scenarios would be uncharted territory for Germany, which has had only eight chancellors in the seven decades since World War II. The EUR has fallen overnight. In Australia there are RBA minutes out today with the market looking for more further detail around the updates to RBA’s forecasts in the latest Statement of Monetary Policy (SoMP), specifically, the lowering of their inflation forecast. For New Zealand there is a Global Dairy auction later tonight where prices are predicted by futures markets to result in a 1% rise in whole milk powder.

Australia

The Reserve Bank of Australia (RBZ) released the minutes from there latest meeting this afternoon. There were no major surprises although the Australian dollar did suffer a bit on the back of a couple of comments. The RBA said there is “considerable uncertainty” in relation to how quickly wages might pick up and that the “pass through” into inflation could be delayed by many factors including retail competition. The outlook for consumer spending over the upcoming holiday period looks more subdued, as the picture given by November’s Westpac-Melbourne Institute Consumer Sentiment survey is one of income pressures, nervousness about the year ahead and consumers looking to keep Christmas spending on a tight rein. A repeat of 2016’s ‘tepid’ Christmas spend looks increasingly likely.

However there was more positive news from a report from one of Australia’s major banks, which indicated confidence that improving prospects for infrastructure construction and non-mining business investment will help sustain Australia’s economic growth at a steady (but moderate) rate, despite several obstacles ahead. It forecasted real GDP growth to strengthen in future quarters to 3.2% y/y by Mar-2018, ease to 2.4% by Dec-18 before picking up slightly to 2.6% by end-2019. It is still likely to see two RBA 0.25% hikes in the second half of 2018, subject to more progress being made on reducing unemployment and/or underemployment, with wages growth showing some (at least initial) signs of picking up. There is little in the way of Australian economic releases this week and the poor performance of base metals along with gold sinking almost $20.00 lower from Friday’s close, has continued the bearish AUD dominant trend. The currency still cannot recapture and hold over the 0.7600 level against the USD.

New Zealand

Later tonight will see another Global Dairy auction which should help drive direction for the New Zealand dollar. After 3 consecutive price declines in dairy prices at previous auctions, importers will be hoping that the futures market pricing of a 1% increase is correct, as this may well see the NZD gain against both the US and Australian dollars. Manufacturing PMI data released late Friday showed that activity in New Zealand’s manufacturing sector during October remained within a fairly tight band of expansion over recent months. The seasonally adjusted PMI for October was 57.2 which still represented very healthy and consistent levels of expansion, with the overall sector remaining in growth in all months since October 2012.

Political uncertainties around the new Government have significantly reduced as the coalition starts to bed in, and although there have been a couple of embarrassing moments, markets are overall happy that most major in place economic policies will remain largely unchanged.  On Thursday we will have retail sales figures for the 3rd quarter and Friday will bring import/export figures and trade balance data for October.

United States

The start to a shortened week in the US saw the US dollar higher and equities rise, driving gold to its biggest drop in two months, as Congress took a holiday break from tax legislation discussion and markets absorbed political developments in the Americas and Europe. With the USD up, precious metals declined, with gold having its largest drop since September, silver and platinum were also lower as was crude oil.

Markets had little reaction on news that Fed Chair Yellen had submitted her resignation to President Donald Trump, effective upon the swearing in of her replacement, Jerome Powell – he is expected to follow a similar monetary policy path to Yellen. Fed minutes are due out Wednesday, which will allow investors to judge officials’ eagerness to boost the benchmark interest rate in December, a move now widely expected by the market. US economic data releases continue to develop a positive note, showing steady growth with the all-important employment statistics largely in line with the Fed’s expectations. Out into next week after the holiday period, if progress in the tax legislation remains positive equity markets and the US dollar should retain an upbeat tone.

Europe

The main news in Europe centres around the developing woes of the Merkel’s German coalition talks. Chancellor Angela Merkel has declared failure in her bid to form a new government, throwing the future of Europe’s longest-serving leader into doubt and potentially pointing the world’s fourth-biggest economy toward new elections. Merkel now is left with few other good options. She can try to form a minority government with the Greens, but that would mean every legislative battle would require some kind of horse-trading with opposition parties. She could try to once more build a “grand coalition” with the Social Democrats, though Martin Schulz, the leader of Germany’s second-biggest party, reiterated his opposition to an alliance with Merkel over the weekend. It is said that Merkel’s preference would be to have new elections.

Other Eurozone news of note was comments from ECB President Draghi, who reiterated that although the Euro-zone’s economic recovery remains strong, a lack of inflation remains a concern. At the end of October the ECB confirmed that although they will halve their asset purchases at the start of 2019, they will continue purchasing for another nine months. The EUR/USD was lower dropping to 1.1720 overnight, although it is now back around the 1.1737 level and the tone remains bearish. Resistance is at 1.1745 with a recovery above the strong 1.1820/30 resistance line required to reverse the current negative stance…we favour a test of support at 1.1705 over the next day or so.

United Kingdom

Apart from the ongoing Brexit issues, the other dominating event this week is the UK budget due on Wednesday. Chancellor Hammond faces a difficult task, as faced with an economy which continues to struggle, mounting political pressure and uncertainty around the Brexit negotiations he is unlikely to have the headroom to announce any major changes. New budget rules introduced last year require the UK deficit to be below 2% of GDP by 2020-2021 and according to March forecasts by the Budget Office these only leaves GBP26 bio to cover any turbulence over the next few years, which will of course include the Brexit result.

Downgrades in productivity over the next few years will also reduce estimates of tax revenue. Budget content is expected to give some support for housing construction and also pay increases for the public sector, but changes are expected to be modest to ensure that they are passed in parliament given the Conservatives narrow majority. What market effect will this have? Probably more of the same, UK growth is likely to remain fairly sluggish for the next few quarters. Whilst the consumer squeeze has arguably passed its peak, wage rises continue lag price rises and households continue to take a cautious approach to discretionary spending.

The GBP/USD  is now around 1.3237 after jumping to a 3-week high of 1.3279 overnight with the Pound getting a boost by news suggesting that the UK government was planning to double its Florence Brexit divorce bill offer to the EU of £20B, to GBP 40 bio in the hope of accelerating post-Brexit trade talks. Support is now at 1.3195 a break of which would extend to 1.3160. Immediate resistance is around 1.3260 then 1.3280 but we expect consolidation around current levels going into Wednesday’s budget.

Japan

Japanese trade data has turned more positive, with the value of Japan’s exports in October growing by double digits for a fourth month in a row, exports increased by 14% for October from the previous year (expected +15.7%). This continued the best year to date performance since the 2008 global financial crisis. Imports had a more muted increase of 18.9% against an expected 20.2%. Overall trade surplus was JPY 285.4bio, lower than the forecasted JPY 330 bio. There is little in the way of market moving data releases out this week, with trading in Japan also truncated this week as banks and most markets will be closed on Thursday for the Japanese Labour Thanksgiving holiday. The USD/JPY is now back at 112.60 after an overnight low around 111.87. Immediate resistance is at 113.00 with a break over 114.40 needed to re-establish a more bullish trend. Support is around 112.30, then 111.95.

Canada

CPI figures on Friday showed Canadian inflation increasing 1.4% on a year-on-year basis in October, following a 1.6% gain in September pretty much the result expected. This confirms underlying inflation is stuck below 2% despite the Canadian economy’s strong performance over the last year and no lack of consumer demand. The Bank of Canada continues to expect that, with the economy running up against longer-run capacity limits, inflation will return to their 2% target on a sustained basis, however, they have expressed uncertainty regarding how much room the economy has to run before inflationary pressures pick up. Look for the BoC to hold off on any further rate increases until next year when the inflation starts to close on the targeted 2% level. The CAD is currently around the 1.2809 level with upside resistance at 1.2820 with support at 1.2720 then 1.2700.

Major Announcements last week:

• AU Employment change  -3.7K , expected +17.8K.
• US Retail sales  +0.2% expected 0.0%

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