Sterling and Aussie Interrupt the Waiting Game

Sterling and Aussie Interrupt the Waiting Game

Sterling and Aussie Interrupt the Waiting Game

by Marc Chandler

Most participants seemed comfortable marking time ahead of tomorrow's ECB meeting, and an announcement President Trump's nominations to the Federal Reserve. However, softer than expected Australian Q3 CPI and a stronger than expected UK Q3 GDP injected fresh incentives.

Australia reported headline CPI rose 0.6% in Q3. The market had been looking for a 0.8% increase. The year-over-year rate slipped to 1.8% from 1.9%. The Bloomberg median had forecast an increase to 2.0%. The trimmed mean and weighted median measures also eased. One of the important factors in the undershoot was electricity prices about 2/3 of what was expected. The Reserve Bank of Australia is on hold and today's report simply underscores this fact.

The Australian dollar was sold off immediately and was continuing to trend lower in Europe. It is set for its fourth consecutive declining session. It has only risen in one session, according to Bloomberg data since October 13. It is currently testing the $0.7700 area (the 200-day moving average is a few ticks below there), which it has not seen in three months. A break here targets $0.7630-$0.7645.

Separately, the New Zealand dollar remains under pressure. It also has only posted one advancing session since October 13. However, the driver here is the new government. We have just completed an unusual 12-month period in which all the G5 countries held national elections, and there has generally been a shift to the right. New Zealand appears to have shifted to the left with a Labour-led government. It will seek to hike the minimum wage and change the central bank's mandate to include, as the US does, a full employment goal, alongside price stability.

However, the significance of these measures for global investors does not seem particularly salient, though some object to what they see is a return to demand management. We suspect such ideological considerations will lead to an overshoot. While we monitor prices for a reversal pattern, we see it moving toward the lower end of this year's range (~$0.6800-$0.6845), with a break signaling $0.6675.

We note that both the Nikkei and the New Zealand stock market snapped a rally today with modest losses. The NZX 50 fell less than 0.1% to snap a 15-session advance that began on October 3. The Nikkei broke a 16-session rally with nearly a 0.5% pullback. The MSCI Asia Pacific Index was off fractionally for the second session and for the sixth time in the past seven sessions.

The Aussie and Kiwi are the weakest of the major currencies today. Sterling is the strongest. The stronger than expected Q3 GDP renews speculation, which had been softening, of a rate hike next week as part of Super Thursday, when the BOE inflation report will also be issued. Growth ticked up to 0.4% from 0.3% in Q2. The market had expected an unchanged pace. The year-over-year rate was steady though at 1.5%. The upward revision to July services, showing a smaller decline in services spending offsets the slightly softer than expected August services.

The case for a hike is clear. Growth in Q3 was a little better than the MPC expected, inflation is above target, and the unemployment rate is slightly below what the MPC sees as sustainable. The market (OIS), according to Bloomberg calculations has an 87% chance of a hike discounted. The case against a hike is that inflation appears poised to peak shortly, the economy is softening, real wages are falling, which may be already squeezing households, where an increase in the base rate quickly is passed through to households.

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About the author

Marc Chandler has been covering the global capital markets in one fashion or another for more than 25 years, working at economic consulting firms and global investment banks.

Officially, Marc Chandler is Global Head of Currency Strategy, Brown Brothers Harriman since October 2005. Previously he was the Chief Currency Strategist for HSBC Bank USA and Mellon Bank.

Opinions expressed are solely of the author’s, based on current market conditions, and are subject to change without notice. These opinions are not intended to predict or guarantee the future performance of any currencies or markets. This material is for informational purposes only and should not be construed as research or as investment, legal or tax advice, nor should it be considered information sufficient upon which to base an investment decision. Further, this communication should not be deemed as a recommendation to invest or not to invest in any country or to undertake any specific position or transaction in any currency. There are risks associated with foreign currency investing, including but not limited to the use of leverage, which may accelerate the velocity of potential losses. Foreign currencies are subject to rapid price fluctuations due to adverse political, social and economic developments. These risks are greater for currencies in emerging markets than for those in more developed countries. Foreign currency transactions may not be suitable for all investors, depending on their financial sophistication and investment objectives. You should seek the services of an appropriate professional in connection with such matters. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete in its accuracy and cannot be guaranteed.

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