Sterling was the one exception but the UK has its own problems. Given the magnitude and consistency of the latest dollar decline, it may be time to reconsider your dollar positions. Outside of a one-day recovery on Monday, the dollar fell every day last week against the euro, Swiss franc, Japanese yen, Australian and New Zealand dollars. Of all the major currencies, the New Zealand and Australian dollars appreciated the most. Sterling on the other hand was unable to recapture its losses after falling sharply on Thursday in a move that also happened to be its biggest one-day slide in more than a year. There were three big stories last week – Brexit, US-China trade talks and the Fed and as we discuss each of these in further detail, it is important to remember that they will be the same three factors driving currency flows in the week ahead.
US Dollar
Data Review
- CPI 0.3% s. 0.3% Expected
- CPI Ex Food and Energy 0.2% vs 0.2% Expected
- Empire Manufacturing 23.3 vs 20.0 Expected
- Retail Sales Advance 0.8% vs 0.5% Expected
- Retail Sales Ex. Auto 0.7% vs 0.5% Expected
- Retail Sales Ex Auto and Gas 0.3% vs 0.4% Expected
- Industrial Production 0.1% vs 0.2% Expected
- Manufacturing Production 0.3% vs 0.2% Expected
- JP Q3 GDP (QoQ) -0.3% vs -0.3% Expected
Data Preview
- Housing Starts and Building Permits - Housing data is difficult to predict but should be muted given rising rates
- Durable Goods Orders - Durable goods orders are hard to predict but can be market moving
- Existing Home Sales and U. of Mich. Report - Home sales could improve slightly after prior decline and while interesting, these reports are only market moving if there is a major change
Key Levels
- Support 112.00
- Resistance 114.00
Currencies Have A History Of Thanksgiving Breakouts
First and foremost, this upcoming week is a holiday week in the US, which means there will be lower liquidity. However, don’t mistake less participation with more consolidation because last year pairs such as EUR/USD and AUD/USD hit one-month lows the week of Thanksgiving while USD/JPY hit a 1-month high. In 2016, the EUR/USD dropped to a one-year low this same week while USD/JPY hit five-month highs with similar moves seen in other major currencies. What this means is that the trends established over the past week could continue with USD/JPY extending its slide to 112, EUR/USD hitting 1.15 and AUD/USD rising to three-month highs.
Fed Powell And Clarida Warn About Headwinds
The reasons why the recent dollar decline is important is because some of the factors that drove the dollar higher this year are beginning to change and if that continues, the dollar’s bull run will be over. It is still too early to tell but the momentum is certainly skewed to the downside. There have been four main factors driving the dollar higher this year – economic outperformance, rising interest rates, equity market pressure and trade policy. Although the latest economic reports were decent with consumer price growth rising and consumer spending growing at its fastest pace in five months, core demand growth is not as impressive. But more importantly, Federal Reserve officials are growing less hawkish with Chair Powell expressing concerns about next year’s headwinds last week and Vice Chair Clarida adding that there is some evidence of global slowing and they need to factor in the global outlook. Clarida, in particular, does not expect a big increase in inflation this year. With that in mind, both central bankers are still confident enough in the domestic economy to proceed with a December rate hike but there’s a good chance that it will be accompanied by a less-hawkish outlook. While there aren’t any significant US releases on the calendar this week (we primarily have housing numbers), this new sentiment could add pressure on the greenback in an otherwise thin trading week.
Euro
Data Review
- GE CPI 0.2% vs 0.2% Expected
- GE ZEW Current Situation 58.2 vs 65 Expected
- GE ZEW Expectations -24.1 vs -26 Expected
- EZ ZEW Economic Sentiment -22.0 vs -19.4 Prior
- GE GDP (QoQ) -0.2% vs -0.1% Expected
- EZ Industrial Production -0.3% vs -0.4% Expected
- EZ GDP (QoQ) 0.2% vs 0.2% Expected
- EZ CPI 0.2% vs 0.2% Expected
Data Preview
- GE PPI - Potential for downside surprise given slower increase in wholesale prices and CPI
- GE GDP and GE, EZ PMI’s - Potential for downside surprise given lower ZEW, lower EZ industrial production but German factory orders were stronger
Key Levels
- Support 1.1300
- Resistance 1.1500
Euro Headed To 1.15
Despite all of the UK’s troubles, it was a great week for the EUR/USD, which closed above the 20-day simple moving average for the first time in over a month. The currency was completely unfazed by last week’s softer economic reports including Germany’s ZEW survey, Q3 GDP and Eurozone trade balance. Euro traded almost exclusively on anti-dollar flows and risk appetite and we expect the same in the coming week as the currency looks past any weakness in Germany’s PPI report or Eurozone PMIs. With stocks recovering and the dollar turning lower, we see EUR/USD hitting 1.15 and possibly even 1.1550. In the long run though, the Eurozone is not immune to the UK’s troubles. According to the latest economic reports, the EZ economy is losing momentum and if you add to that a no-deal Brexit and lower oil prices, the case for ECB policy normalization weakens significantly. We still see the central bank ending asset purchases in December but they may be forced to lower their inflation forecasts.
British Pound
Data Review
- Claimant Count Rate 2.7% vs 2.6% Prior
- Jobless Claims Change 20.2k vs 23.2k Prior
- Avg. Weekly Earnings 3.0% vs 3.0% Expected
- Avg. Weekly Earnings Ex. Bonus 3.2% vs 3.1% Expected
- ILO Unemployment Rate 3 Months 4.1% vs 4.0% Expected
- Employment Change 23k vs 25k Expected
- CPI 0.1% vs 0.2% Expected
- RPI 0.1% vs 0.2% Expected
- PPI Input 0.8% vs 0.6% Expected
- PPI Output 0.2% vs 0.2% Expected
- PPI Output Core 0.3% vs 0.2% Expected
- Retail Sales Ex Auto Fuel -0.4% vs 0.2% Expected
- Retail Sales Inc Auto Fuel -0.5% vs 0.2% Expected
Data Preview
- No Data
Key Levels
- Support 1.2700
- Resistance 1.3000
More Volatility For GBP – 1.25 Next?
Sterling will continue to be one of the biggest stories as we wait to see if there will be a no-confidence motion on Prime Minister May. Last week, the British pound dropped more than 1.5% in one day as Prime Minister May’s Brexit deal dissolves into flames. The situation is still evolving but UK Brexit Secretary Raab’s resignation was in fierce opposition to May’s intensely negotiated withdrawal agreement with the European Union. So while the draft deal has the support of the EU, it may not pass her own government. In his resignation letter, Raab said he “cannot in good conscience” back the proposal because the regulatory regime for Northern Ireland poses a serious threat to the integrity of the UK and because he “cannot support an indefinite backstop arrangement, where the EU holds a veto over our ability to exit.” While PM May talked confidently about moving the agenda forward and shepherding the deal through Parliament, the chance of the deal being approved in its current form is low.
What’s worse is that Tory MPs may have enough votes - 48 are needed - for a letter of no-confidence that would force a vote in Parliament. If the rebels within her ranks really do have the votes to force a no-confidence motion, UK politics will be thrown into an even greater existential crisis. Even if PM May were to survive the vote, it would almost certainly suggest that a general election will be called as Ms. May's minority coalition partner, the DUP, vehemently opposes the current deal and will likely leave the government. The prospect of a general election ahead of the Brexit deadline in March would only create more chaos in what is already a highly volatile situation. The initial reaction in the market would likely send cable toward the 1.2500 level. Data has also been terrible with CPI growth easing and retail sales falling. If this data trend continues, it will be difficult for GBP to sustain any recovery.
AUD, NZD, CAD
Data Review
Australia
- AU Consumer Inflation Expectation 3.6% vs 4.0% Prior
- Employment Change 32.8k vs 20..0k Expected
- Unemployment Rate 5.0% vs 5.1% Expected
- Full-Time Employment Change 42.3k vs 24.6k Prior
- Part-Time Employment Change -9.5k vs -16.8k Prior
- NAB Business Conditions 12 vs 14 Prior
- NAB Business Confidence 4 vs 6 Prior
- Westpac Consumer Confidence 104.3 vs101.5 Prior
- CH. Retail Sales 8.6% vs 9.2% Expected
- CH. Industrial Production 5.9% vs 5.8% Expected
New Zealand
- Business NZ Manufacturing PMI 53.5 vs 51.7 Prior
Canada
- Existing Home Sales -1.6% vs 0.2% Expected
- Manufacturing Sales 0.2% vs 0.1% Expected
Data Preview
Australia
- RBA Meeting Minutes - Likely to contain a hint of RBA optimism
New Zealand
- Performance of Services Index and Q3 PPI - Potential for upside surprise given a sharp rise in NZ CPI and stronger business PMI
Canada
- Retail Sales and CPI - Sharp rise in price component of IVEY PMI signals higher inflation
Key Levels
- Support AUD .7200 NZD .6800 CAD 1.3000
- Resistance AUD .7400 NZD .7000 CAD 1.3200
Trade Talk Optimism Should Take AUD And NZD To Fresh Highs This Week
The Australian and New Zealand dollars ripped higher this past week on the hope that President Trump will forgo another round of tariffs on China. Ever since the Midterm Elections, his tone toward China has been softening. According to the president, China has sent a list of things they are willing to do on trade because they want to make a deal. He thinks the list is pretty complete and said the US hopes to make a deal, but it is not acceptable yet. With that in mind, Trump added that “The US may not have to impose further tariffs on China.” We know how this game is played and it's hard to believe that the trade war is over until both sides make it public and official. There are two weeks to go before the G20 meeting and we believe that trade-talk optimism will continue to carry AUD and NZD higher. Both countries reported stronger data this past week with Australian labor data beating and the New Zealand business PMI index moving upwards. The RBA minutes are scheduled for release and they should reinforce the central bank’s optimism. As for New Zealand, the sharp rise in CPI points to a higher PPI for the third quarter. All of these factors will help AUD and NZD but at the end of the day, a permanent bottom rests on the outcome of the trade talks. If Trump re-escalates trade tensions after the meeting, then China is back to square one and AUD/USD traders should brace for a correction.
USD/CAD: Watch CPI And Retail Sales On Friday
In terms of USD/CAD, on a technical basis, it appears to a have peaked at 1.3260. After climbing to a three-month high mid-week, the rally in USD/CAD fizzled on the back of US dollar weakness. Now it says a lot for the resilience of the loonie when it refuses to fall despite softer data and tumbling oil prices. Lower existing home sales and house prices had virtually no impact on the currency. Although the gains in the loonie can be attributed to the recovery in crude prices, Western Canada Select, which is more important for CAD, dropped to its lowest level in 4 years. Canadian bond yields also fell, widening the spread against the loonie. Given the currency’s recent weakness and the slide in oil prices, it is easy to forget that the central bank is hawkish. At their last monetary policy meeting, they said: “the policy interest rate will need to rise to a neutral stance to achieve the inflation target.” This view will be put to test at the end of this week with the release of Canadian CPI and retail sales. Good numbers would confirm the top and take the pair to 1.30.