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FX Update


Following the December 4th monetary statement was the minutes of this meeting releasing Tuesday. Comments from most members noted global conditions had remained positive but cautious. Labour markets had continued to tighten but growth in a collection of economies had slowed over the year. Softer global demands stemming from the global import tariffs between China and the US had created uncertainty and the main driver of the slowdown. Conditions in the housing market had continued to ease with Sydney now 9% down on where prices were back in July 2017. The Australian Unemployment rate jumped slightly to 5.1% from 5.0% after the release Thursday with a further 37,000 people added to the Australian labour force in November. This was made up of -6,400 full time employment and 43,400 full time workers which seems to be the reverse of last month’s figures. The Australian Dollar was uninterested in the data not moving far from the low 0.7100 levels versus the big dollar.       

New Zealand

The New Zealand dollar has underperformed over the week in the wake of deteriorating risk sentiment and local data releases. The Federal Reserve have raised their benchmark cash rate to 2.50% from 2.25% suggesting they will keep with the projected path with two further hikes next year. The release sank the kiwi Dollar lower across the board with it dropping to 0.6770 against the greenback. The NZD received a double blow soon after when quarterly GDP and the Current Account came in light. GDP printed down at 0.3% from the 0.6% markets were expecting, the figures dragged lower with weak construction and manufacturing. The GDP report suggests it’s the lowest quarter reading in nearly five years and well down on the 1% in the June 2018 quarter. The Trade Balance was benign.    

United States

The Federal Reserve Thursday morning raised the cash rate to 2.5% from 2.25% as widely expected, raising the cost of borrowing for the fourth time this year. In the statement which followed they have left the door open for a further two hikes in 2019. The Fed indicated the labour market was strong with economic activity rising at a steady rate. Job gains have been rising over recent months and the employment rate has remained low under 4%. Over the last twelve months general inflation has remained near 2%. The Fed believe little change in the long term indicators of inflation has given them scope to raise if required twice next year before the pause with the tightening campaign. After the hike and statement the US Dollar rallied sharply and equities were well down over 1%. Durable goods and Retails are still to print tomorrow morning so plenty more volatility to come.     

United Kingdom

“Look behind you” – were the word said by Theresa May after the opposition leader Jeremy Corbyn called May “a stupid woman” under his breath. It was picked up by lip readers but Corbyn denies saying it. May went on to say “we are not impressed and neither are they” during the Prime Ministers Questions in Parliament. Corbyn is insisting that he wouldn’t say sorry. As Brexit rolls on cabinet ministers have said recently many members could walk if a no-deal Brexit is made into government policy. The real reality of leaving the EU without a deal is very viable. If members of parliament don’t end up backing the current Brexit deal at next month’s vote during the week of January 7th we could see a deadlock. May though has ruled out another referendum saying it’s the government’s duty to see through the original result from the 2016 Brexit vote. The UK are due to officially due to leave the EU on March 29 2019 but terms of its withdrawal and the future of the terms will only come into force if the EU and UK parliaments approve it. Retail Sales printed at 1.4% way above the 0.3% expected and the official cash rate of the Bank of England (BoE) remains unchanged at 0.75% with the vote unanimously in favour 0-9 of no change.      


The Euro climbed to 1.1440 Thursday morning prior to the Fed rate announcement but was soon under pressure after the release of the statement. The Fed raised rates from 2.25% to 2.50%. The Euro moved to the downside after the Fed’s statement which was seen as dovish based on a revised forecast of next year’s hiking program and updated projections. Signalling only two rate hikes for 2019 versus three based on September estimates. The EUR dropped back to 1.1360 giving back half of this week’s gains. German and French manufacturing data released softer than expected reinforcing recent consensus that the economic slowdown has arrived in the Eurozone as the ECB anticipate economic growth to slow next year with inflation to remain below 2.0%. The German Business climate indicator published slightly lower than anticipated confirming the worsening conditions in the bloc.    


Negative risk sentiment this week has benefited the Japanese Yen as it correlates to big picture themes. Renewed pressure on US equities have seen the indices close the Thursday session down 2.4%. Expectations the Federal Reserve may only hike twice instead of three times in 2019 send a dovish view across markets. The Bank of Japan left the official cash rate at -0.10% yesterday with the BoJ governor Kuroda warning of heightening risks to the economic outlook, saying he is ready to move on further stimulus if its needed. Kuroda said the Japanese economy is expanding moderately but is slightly concerned with the US/ China trade tensions. The greenback has fallen from the weekly open of 113.60 to trade down at 111.10 Friday.    


The Canadian Dollar is again the worst performing currency over the week falling 1.5% against the Japanese Yen in conditions which have taken the CAD to new lows against the cross currencies. Versus the big dollar it has broken past resistance of 1.3380 to 1.3495 a level not seen since May 2017. Crude Oil is leading the way in the assault on the Loonie as prices have dived under the pivotal 50.00 to 47.96. This price is the lowest level in 15 months as fears over global economic growth hit home around concerns that there may be an oversupply in 2019. Next year’s OECD inventories are expected to rise reaching 3.0B barrels late in the year with projections reaching more than 88M barrels more than the end of 2018. OPEC have agreed to cut production by 800,000 barrels for the first six months of 2019. I am not sure this will be enough to stop a price fall to possibly $40.00 per barrel if we correlate this with the oversupply. On the data front markets await Canadian Retail Sales and GDP tomorrow morning.   

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