Good morning,

NZD: Whipsaws

The kiwi dollar had a quiet weekend but has started Tuesday in a volatile fashion, reacting to a speech by new PM Jacinda Ardern. Initially the currency swelled after the new PM promised a significant increase in the minimum wage but then erased those gains and continued to fall as she referenced a decision to review and reform the Reserve Bank of New Zealand. Any decision to tamper with the independence of the NZ central bank will be viewed very negatively by markets.

Options markets are pricing in additional costs of protecting against further NZD downside this morning but a dramatic fall to the downside looks unlikely given how strong the NZD carry story is i.e. how much interest traders get for holding the currency.

0.68 in NZDUSD is a line in the sand for the current trend. .

EUR: All about Thursday

We must, once again, wait until Thursday for the latest twist in the Catalan situation. While the Spanish state has enacted Article 155 that allows them to take control of the secessionist region of Catalonia, Senators still have to vote on it today and it still needs to actually take place. Catalans are apparently looking to form human shields to prevent Spanish forces entering key buildings; the euro will not react well to mass arrests, protests and running street battles between police and protestors.

In the meantime, we must wait for the ECB meeting on Thursday to drive the single currency and wider markets.

GBP: Trade without transition without divorce bill

Prime Minister Theresa May signalled yesterday that her government would not begin to negotiate on the plans for a transitional deal with the EU until talks on a trade deal also begin. Updating the Commons yesterday following last week’s European Council meeting the PM said “an implementation period is about a period which is adjusting to the future relationship. That’s the basis on which I put it forward to the European Union, and that’s the basis on which we’ll be negotiating an agreement on it.”

Sterling did not react at all to yesterday’s CBI Business Confidence Indicator which showed that industrial confidence in the UK had fallen to the lowest level since July 2016. Total orders also fell to -2 from 7 in the previous month.

The Day Ahead

Once again we are expecting a quiet day with traders and investors sat on their hands until the European Central Bank outline their plans for reducing the amount of money they spend every month on their QE stimulus operations. The ECB meeting takes place this Thursday lunchtime.

Have a great day

Jeremy Cook, Chief Economist