WorldFirst takes a look at the key trends of October and considers the many diverse events set to shape global currency markets in November.
AUD: Floating downstream
Month in Review
The Aussie dollar fell nearly 5 cents since September’s highs of 0.812 against the US dollar. This is due to a combination of weak inflation and strong US data amongst speculation that President Trump may appoint a considerably more hawkish Federal Chairman.
With the Australian housing market bursting at the seams, it may have come as a surprise to many that Q3 CPI data missed the mark by 25%, at just 0.6%. This can be attributed to foreign investors taking advantage of Australia’s record low interest rates and purchasing in major cities across Australia, predominately Sydney. The demand for housing has driven house and rental prices up, meaning the average Australian is giving up more of their pay cheque for a place to live and spending less on the business’ that are the backbone of Australia’s economy.
President Trump has made no secret of his desire to replace Fed Chair Janet Yellen, with the shortlist narrowing to two likely candidates – Stanford University Professor, John Taylor, and current member of the Fed Board of Governors, Jay Powell. The AUD managed to claw back some of the losses, after Bloomberg reported that President Trump is leaning towards Powell – the more dovish of the two candidates.
Iron ore closed out the month at under $60 for the first time since June, currently sitting at $57.83US/tonne – extending its losses from August 21 to 26.5%.
President Trump’s decision on whether to stick with Yellen, or appoint either Powell or Taylor as the next Fed Chair is expected to be the first significant non-data impactor for November. The appointment of Powell will likely strengthen the AUD against USD, not as much if President Trump chooses to stick with Yellen, the unlikeliest of outcomes in many eyes, with the appointment of Taylor likely to hit AUD the hardest.
As Australia’s largest export, iron ore will continue to impact the strength of the AUD. The horizon doesn’t look promising with climate control activists putting pressure on China to limit steel mill production, thus reducing the demand from Australia’s largest buyer of iron ore (whom from 2015-2016 was responsible for purchasing 82% of Australia’s iron ore exports).
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NZD: How low can you go?
Month in Review
It was a month to forget for the NZD, being one of the worst performers in the G10, with the NZD Index down to 72.70 (about 3% lower from the start of the month). So why did the NZD perform so poorly during October?
The biggest driver was the result of coalition discussion with the formation of the Labour and NZ First parties. A widely unexpected result, with the National Party winning the most votes in the election; however not enough to form a government.
Early policy signs of a Labour government reign has pushed the NZD down in the short-term, with suggestions of Labour’s platform to unwind the tax cuts planned from the previous government, and a suggestion that this government’s spending and debt levels would be much higher. The other policy being put forward is the NZ First’s proposed immigration plans, with a cut of annual intake from 70,000 down to 10,000.
Looking outside Government, we may see an influence on the current RBNZ structure, with the current government leaning towards a ‘Committee Structure’ vs a ‘Sole Decision Maker model’. This will mean that we could have involvement of non-RBNZ stakeholders in monetary decisions in the country.
Watch out for the GDT price index early in the month, as we have seen a recent downturn in the dairy price, and forecasted figure of -1% is foreseen next month. As commonly seen with the NZD, lower dairy figures sees a downturn in the currency.
Also, early in the month we have the last RBNZ meeting for the year and if the trend continues, we could possibly see the same statement of “monetary policy will remain accommodative for a considerable period”. It will be interesting to see the tone of Governor Spencer surrounding the current NZD levels being close to yearly lows.
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USD: Fed Chair and tax reform driving the greenback
Month in Review
The US Dollar was up for a second consecutive month, with the USDX (US Dollar Index) rising 1.5% -just shy of 95- it’s best level since mid-July. The greenback rose against every major G-10 currency, gaining the most against the NZD and Swedish krona. The main events for the month were:
- Minutes from the Fed all but cemented a December rate hike, with Fed fund futures pricing in an 85% chance of a hike. Where the Fed goes next is the big question, as the debate continues over whether low wage and price pressure are more of a long-term problem.
- US Non-farm payrolls decreased by 33k in September – the first time since 2010 as hurricanes Harvey and Maria put a halt to hiring.
- President Trump outlined a tax plan, which if passed by congress, would represent the most significant reform since the 1970’s.
- The search for the next Federal Reserve Chairman continued, with President Trump shortlisting Jerome Powell, John Taylor and existing chairwoman, Janet Yellen, as possible candidates.
The selection of the next Federal Reserve Chairman remains the most important macro factor likely to drive the USD next month. If Powell or Yellen are selected, it will be a continuation of the status quo, however, the nomination of Taylor, would be viewed as more hawkish. The extent of the ongoing USD rebound will also depend on the tax policy outlook. Failure to deliver, would return the USD to its medium-term weakening trend. However if passed, tax reform would drive a significant boost to the USD.
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EUR: Under pressure
Month in Review
The Euro spent the month of October under significant pressure, kicking off with Catalan President, Carles Puidgemont, announcing he would seek to enforce the decision of Catalan voters and move towards independence. President Puidgemont will also seek dialogue with the Spanish government in the coming weeks. An immediate declaration of independence was not forthcoming and the euro initially found itself a little stronger as a result. We have spent a lot of the last couple of months talking about political situations and balls in courts, but the pelota is very much still in the Catalan court as demands and negotiating positions are yet to be set out. Euro markets continued to watch the situation intensely, however if the parliament declares independence, it is likely that the central government in Madrid would act quickly to suspend the regional body and take over authority of the government in Barcelona. For now, the Spanish government has cut its growth forecast for 2018, courtesy of the Catalan issues, but the problems remain a Spanish problem with occasional effects on the single currency.
Traders are much more likely to be exorcised by October’s European Central Bank meeting, which saw Mario Draghi refuse to call an end to ECB crisis measures. The ECB announced it will extend its economic stimulus programme until at least September next year, pushing down the euro as investors digested the news. The ECB has been the most active investor in the region’s bond markets since the scheme (known as quantitative easing) began in early 2015. Under the plan, central bankers will continue to spend €60bn a month on buying mostly government, and some corporate debt, through to the end of the year – before halving their purchases. Instead of announcing a final date for bond buying, however, something the ECB did not do before the Eurozone crisis, the bank said it stood ready to extend QE beyond September – or even raise the level of monthly purchases should conditions worsen again. It also stuck to its line about keeping interest rates at record low until “well past” the end of QE.
Markets will be digesting the ECB’s QE decision over the next week or so, however the central bank also emphasised that it will move extremely cautiously. It kept its pledge to step up or extend buying further if needed, changed the language on its reinvestment strategy for maturing debt, and reiterated that banks will be able to borrow as much as they need in refinancing operations. If you want to take one word away from Mr Draghi’s press conference, it would should be “prudent.” With “patient” a close second. That seems to sum up the very dovish tapering of the QE program, and Mr. Draghi’s remarks.
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GBP: Rate hike on the table for BoE
Month in Review
The GBP finished the month in positive territory against the AUD. This is largely thanks to a 2% jump when the UK GDP figures surprised to the upside, only hours after the quarterly Australian inflation release came out below expectation. This saw the GBP/AUD reach the highest levels seen since June.
Last week the GBP/EUR regained lost ground from earlier in the month, as the ECB meeting saw broad EUR weakness, while we are sitting right in the middle of range for the GBP/USD around 1.3200.
Looking at the GBP/USD technicals, a drop back below the 1.3100 level might continue to find strong support at 100-day moving average, currently around the 1.3065 region. A break below this level could see an exaggerated move lower, with 1.30 the next key support level.
As stated above, GDP date was the big news of the month, with the quarter-on-quarter figures showing growth of 0.4%, beating the 0.3% expected by the market. This in turn has helped drive a rate hike from the Bank of England, although further hikes are questionable following the BoE’s supporting statements after the increase.
All eyes will be squarely focused on the Bank of England this week, who are expected to announce their first rate hike in 10 years. At the time of writing, the market is currently pricing in an 89% probability of a 25 basis point increase in the BOE’s key rate, but traders will be more interested in the language of the MPC minutes, vote split and the quarterly inflation report to gauge the policy outlook further ahead. Given the pound has increased in value by approximately 3-6% against most of the major currencies over the last 8 weeks, there may be some downside risk coming out of the meeting if the Bank take on a more dovish tone, especially given the rate hike is now almost fully priced in by markets.
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These comments are the views and opinions of the author and should not be construed as advice. You should act using your own information and judgement. Whilst information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice. Please consider FX derivatives are high risk, provide volatile returns and do not guarantee profits.