There has been little respite for the AUD over the last couple of days, having dropped for 5 consecutive days from the 0.7823 high seen against the USD at the start of the week. It is now around 0.7650 after this afternoon’s PPI data came in below expectations at 0.2% against expectations of 0.4%….the AUD sold off around 20 points on this release. The AUD/USD looks poised for further declines having broken through the key 0.7730 support level after softer inflation outlook on Wednesday, with tonight’s US Q3 GDP figure likely to provide the catalyst. Longer term with no inflation pressure to pursue rate hikes focus turns again to RBA monetary policy divergence from that of the US Fed, the Aussie’s carry and yield advantage is diminishing and investors look to be correcting recent upside moves.
A break of 0.7630 for the AUD/USD would be likely see an extension of the decline to the 0.7580 level. Technically the AUD is starting to look oversold but a correction ahead of tonight’s US CPI data is not expected and next week will bring US Non-farm payroll, so any bounce may well be shallow as traders will not want to bet against the USD in the lead up to Friday.
The New Zealand:
The New Zealand dollar remains firmly in the grip of post coalition blues having dropped from 0.7170 last Thursday when the coalition result was announced to the 0.6825 level currently. This is a drop of 345 points or 4.8%….what has changed since last Thursday…nothing and everything…! Fundamentals remain solid for the NZ economy although growth has been moderating for the last couple of months, but perception has changed significantly, especially in offshore markets where the new government is viewed as far more “socialist” than the previous National incumbent. It is this “perception” that has led to the NZD’s rapid decline, also aligning with a growing strength in the USD, as continued economic data points to US interest rates rising. The NZD/USD rate does look overdone on the short side and we would expect some correction from its current oversold status, but with the NZD currently trading at 0.6822 right against the support region of 0.6815/20 last seen back in May 2017 a break below this area could extend to the 0.6670 level. It is hard to see any bounce ahead of US GDP data tonight and with major data due out of the US next week ahead of the Friday Non-farm payroll figure we expect any NZD rally to be relatively shallow into the 0.6950/0.7000 region.
The United States:
US equity markets were back in the black last night, recovering from the previous day’s losses on stronger corporate reporting results and positive news on the Trump tax policy. The latest batch of earnings underscored the strength in the American economy a day before investors get the first reading on Q3 GDP later tonight. Among notable corporate results, UPS Inc. boosted revenue per package ahead of the crucial holiday season, Twitter added more monthly users, and Ford motor Co exceeded earnings estimates…a good change of pace from the disappointing earnings results of the previous day. Banking stocks and the USD were higher after the House Republicans adopted a budget resolution unlocking a process to cut taxes by the end of the year. No resolution on who the next Fed Chair will be as President Trump continued to string out his decision, giving mixed signals on his preference for Fed leader. Overnight, the contrast between the Fed’s future view and that of the ECB was brought into sharp contrast, as the ECB announced its taper policy reduction , while promising to maintain near-zero rates for as long as necessary. Tonight’s Q3 GDP figure is expected to show growth at a 2.5% annualised pace. The hurricanes are seen to have had adverse effects on consumption and construction, while solid durable goods orders partials suggest a lift in equipment investment. A solid Q3 GDP tonight would bode well for further USD upside reinforcing the Fed’s hand for a December rate rise.
The United Kingdom:
After a high of 1.3268 against the USD yesterday, the UK pound fell on the back of an awful UK sales report published by CBI for October and the slide continued afterward on the back of a stronger US dollar and is now around the 1.3125 level. Mixed results from the Q3 GDP figure released Wednesday with growth in the service, finance and manufacturing sectors offset by a fall in the construction and retail sectors. Real GDP growth in the U.K. remained steady in Q3, holding firm at 1.5% year-over-year. Sluggish GDP growth, tepid wage growth and above-target inflation put the Bank of England in a tight quandary. Above-target inflation and stagnant wage growth in the UK continued to weigh on economic growth in Q3. The consumer price index rose 0.3% in September and 3 percent over the year, while the core index held steady at 2.7%, year on year. Both of these measures are in excess of the Bank of England’s 2% inflation target, which has been exceeded largely due to the depreciation in the pound in the wake of last year’s Brexit vote. Markets are still convinced that the BoE will hike rates at next Thursday’s meeting but some commentators are now looking at February for the next rate adjustment. A surprise delay in any rate hike next week would place further downward pressure on the beleaguered GBP …immediate support is now at 1.3110 then 1.3080..resistance 12.3220then 1.3265..given that the GBP is now at 1.31252 and with the USD GDP figure due tonight downside looks favoured.
Comments from the ECB last night saw ECB President Mario Draghi provide details on the central bank’s plan to reduce stimulus, while promising to maintain near-zero rates for as long as necessary. The ECB cut QE purchase volumes in half to 30 billion euros a month starting in January 2018. The preliminary end date was moved from December 2017 to September 2018. Purchases may be increased temporarily if needed, and the end date may also be moved even further into the future if required. Draghi also said that purchases will not end abruptly, suggesting that QE will be extended beyond September next year, with purchases probably gradually tapered to zero. Markets took this as a dovish statement selling the EUR and pushing German bunds higher. The Catalan issue rumbles on and looks to dominate Spanish politics for some time but until comes to a head will remain a localised problem, although it is causing some unease in the wider Eurozone. The EUR/USD is now down at 1.1638 the lowest level since 26 July…an extension of the decline looks likely with next support at 1.1620 then 1.1585…resistance at 1.1720 now looks far away…short EUR is favoured ahead of tonight’s USD data…we expect next week’s USD data dump to place more pressure on the EUR.
CPI data out of Japan today showed a flat result, but an improving output gap and wages that have been rising for past 4 yrs. So little change then to the current BoJ policy or the current Abenomics policies in play. The BoJ inflation target of 2% is still some distance off. The USD/JPY has bounced around over the last few days, falling back to the 113..23 level then surging to a weekly high of 114.24. It is now trading around 114.12 with immediate resistance at 114.40 then 114.85..a strong US GDP figure could see this threatened tonight….support back at 113.60 looks unlikely to be tested over the next few days with the lack of Nth Korean flare-ups diminishing the JPY’s safe-haven attraction.
As expected the BoC kept rate unchanged at 1% on Wednesday which saw the USD/CAD climb to 1.2815 from a low of 1.2633 on the day. In accompanying comments the BoC said that it expected to be “cautious” with future rate increases, saw the economy running ‘close’ to potential over next 2 years with inflation rising to 2% by 2nd half of 2018, later than expected due to higher C$. Although it lowered Q3 growth to 1.8% from 2% it saw Q4 growth back at 2.5% commenting that there could be room for more economic growth than projected without inflation rising materially above target. The CAD is now further on the defensive with the USD/CAD now around 1.2865 with next stop at 1.2930 which may be tested on the US GDP result tonight…short CAD is the favoured side.