Market Info

GBP fortunes still depend on Irish border news, AUD and NZD both lower

07/12/2017 | OzForex

Thursday 7 December

British Pound (GBP)

The pound is again lower this morning. In a Press Conference yesterday, Irish Prime Minister Leo Varadkar said that Theresa May had told him she would come back with fresh proposals late on Wednesday or Thursday. As the first of these deadlines slipped with no word from London, so nervous currency traders have marked down the value of the GBP. Michel Barnier, the EU’s chief Brexit negotiator, has told member states that the British government has just 48 hours to agree a text on a potential deal or it will be told that negotiations will not move on to the next stage. A failure to move talks on in December would mean that the terms of a transition period could potentially only be discussed after the next European council summit of leaders in March, leaving businesses in the UK to face more uncertainty over the shape and content of any post-Brexit transitional deal. This leaves the pound once more at the mercy of rumours and leaks about the precise status of talks between Dublin, London and the DUP. The Twitter feeds of interested parties – politicians and senior journalists – will be the primary source of information on what threatens to be a nervous day of trading. It begins in London with the GBP at USD1.3365 with GBP/EUR at 1.1335.

US Dollar (USD)

USD/GBP expected range: 1.3330 – 1.3440

The USD Dollar rose for a second consecutive day on Wednesday. Its’ index against a basket of major currencies opened around 93.00 and having slipped to 92.85 on worries about the stock market, it then had a steady and pretty much uninterrupted rise to a best level of 93.30 before closing in New York around 93.25 as stocks found some support. The USD at the moment seems unusually well-correlated to movements in equity markets both at home and abroad. The average daily move on the S+P 500 for the last three months has been barely 0.2% either way so although Tuesday’s 0.4% drop was not large by historical standards it was poor in the context of the last three months’ price action. To put this into perspective, the S+P 500 index on average has fallen by at least 5% on three or four occasions every year over the past decade. It hasn’t now done so at all during 2017. But, before jumping to the conclusion that a decent correction must now be imminent, note that December has not been the weakest month of any year going all the way back to 1928. It’s not just US equity markets which are under the spotlight at the moment: Asia’s equivalent of America’s FANG stocks, the so-called TATS (Taiwan Semi, Alibaba, Tencent and Samsung) have been down for 7 consecutive days with a cumulative drop over 10%. Keep a close eye on equities globally as the outlook for stocks (and bonds) is an important element of the investment case for the US Dollar. With S+P futures indicated 5 points higher this morning, the USD index opens up at 93.33.

European Euro (EUR)

GBP/EUR expected range: 1.1300 – 1.1385

The euro had another poor day on Wednesday losing around 60 pips from its best level in Sydney of USD1.1844 to trade down to a 2-week low of 1.1781 with GBP/EUR stuck in a very narrow range just 5 pips either side of 1.1340. The drop came despite figures showing German factory orders climbed in October for the third month in a row, confounding expectations of a decline. Factory orders increased 0.5% in October from the previous month, according to the Federal Statistics Office. September’s gain was also revised higher to 1.2% m/m from a previous reading of 1.0%. Details of the report showed orders from companies within Germany increased 0.4%, while international orders were up 0.5%. The international component was led by firms outside of the eurozone, where orders increased 1.6%. Clearly, there’s still plenty of demand for the very high-quality consumer goods, autos and machinery for which Germany is so deservedly famous. Elsewhere in Wednesday’s batch of data releases, Eurozone Retail PMI improved to 52.4 points in November, its highest level since June. Today brings German industrial production and we get to see how those higher orders translated into factory output. At 4pm there is a Draghi Press Conference hosted by the ECB in Frankfurt but in his capacity as Chair of the Group of Governors and Heads of Supervision (GHOS) of the Bank for International Settlements. In the meantime, traders are reluctant either to sell dips or to buy into the rallies so we’re left in a familiar USD1.1750-1.1930 range unless and until some genuine ‘news’ hits the screens.

Australian Dollar (AUD)

GBP/AUD expected range: 1.7610 – 1.7780

The Aussie Dollar had a bad day on Wednesday. Worse than expected Q3 GDP figures immediately knocked the pair from 0.7607 down to 0.7580 and after stabilizing during the European morning (without ever managing to get back on to a US 76 cents big figure) the AUS was hit for another 30 pips in the New York session. Overnight it has weakened further, with AUD/USD falling from 0.7465 to 0.7443 after a very disappointing set of merchandise trade figures was released. October’s trade surplus fell dramatically, falling to $105 million in from $1.6 billion the month before. This was way short of consensus expectations of a surplus around $1.4 billion. The worse than expected result was driven by both a 3 per cent slide in exports and a 2 per cent increase in imports, according to the ABS figures. A big factor in the export decline was a slump in iron ore sales, which fell by 10 per cent over the month to just over $7 billion. Coal exports were also down 3 per cent to $4.3 billion. Detailed data on Australia''s two biggest commodity exports show both the quantity and price of iron ore fell in October, while it was a massive fall in the volume of hard coking coal exports that caused most of the decline for that sector. These are the first trade numbers for Q4 and unless there’s a significant rebound next month, worries will grow about the contribution that net trade can make to GDP. AUD/USD opens right on key technical support at USD0.7440 and a break below this level would leave the pair at its lowest level in 5 months. GBP/AUD opens in London at 1.7732.