Currency View by OFX

Last week’s news

• Boris Johnson’s Brexit election gamble paid off spectacularly last Friday as the UK Conservative Party secured a crushing victory. They won their biggest majority in Westminster since 1987 whilst the UK Labour Party posted their worst performance since 1935 which led Jeremy Corbyn to state that he would not lead Labour into the next General Election. The GBP rallied immediately after the exit polls predicted a wide Conservative majority, reaching the important 1.35 level, and then closing the week around 1.3350, still a 9-month high.
• The Euro climbed on the back of a double whammy breakthrough in U.S.-China trade relations and a decisive victory by the conservatives. The EURUSD broke through its 200-day moving average resistance for the first time since June. The move came after an assured performance from European Central Bank president Christine Lagarde at her debut press conference that focused on the need for reflection rather than action. Things changed quite a bit on Friday and the common currency reversed all of its post-UK election jump, still managing to close the week stronger.
• Phase one of the US-China trade deal was formally announced Friday night, with the detail disappointing markets (S&P closed flat after trading stronger during Friday session) which may be explained by wind backs not being as great as predicted and other pending issues not being resolved. China made no formal commitment to agricultural purchases, and the deal still needs the legal details finalised before a presumed signing in January.
• Following the Fed announcement to hold interest rates at 1.75%, Chair Jerome Powell said at a news conference, “…both the economy and monetary policy right now are in a good place.” The Fed signaled it would keep interest rates on hold through 2020, as long as the economic outlook doesn’t change. Part of the FOMC statement that summarizes the Fed’s message was, “The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2% objective”. The U.S. dollar declined, while U.S. stocks edged higher. The relationship between the price of the U.S. dollar and U.S. stock prices has been very irregular this year.
• The only “domestic” driver for the Loonie was Governor Poloz’s speech, who said that the trend in the jobs market has been positive with more evidence of wages increasing. He added that global indicators seem to be bottoming. Market participants have been anxious to hear if Poloz will downplay the bad jobs numbers released two weeks ago, but they are also following the news from the U.K. election and the phase-one trade deal between U.S. and China. The Loonie lost 1% versus the Greenback last week. Poloz also announced he will step down in 2020 without saying who will replace him

Looking ahead

• Trade deal disappointment and lack of details has resulted in worrying price action from the technical side especially in AUD versus the USD. The much talked 200-Day Moving Average resistance break seen on Friday failed to sustain and we effectively ended up with an outside range day as the currency closed near the lows, opening the week unchanged.
• You would assume that a U.S-China trade deal, after more than a year of trans-pacific negotiations would calm traders, however options implied one-year volatility for the offshore yuan, a measure of how nervous people are about the Chinese currency, stood at 5.065% on Friday, above the roughly 4.5% in April and July, when expectations of an imminent truce ran high. On the spot market, the USDCNH fluctuated on an unusual wide range, signalling the same. Many analysts are now sceptical that more progress can be made ahead of the U.S. elections next year, raising uncertainties that tensions may once again flare down the road.
• For this week, it will be interesting to see U.S. GDP, which will show whether growth quickened in the third quarter, as well as manufacturing PMI numbers. Additionally, the Bank of England, Bank of Japan, Bank Indonesia, Banxico and Riksbank, are among the central banks that will be setting monetary.

Key market events this week

• GBP Consumer Price Index YoY (Nov) – Wednesday
• CAD Consumer Price Index YoY (Nov) – Wednesday
• NZD Gross Domestic Product YoY (Q3) – Wednesday
• Bank of Japan Interest Rate Decision – Thursday
• AUS Unemployment Rate and Change (Nov) – Thursday
• Bank of England Interest Rate Decision – Thursday
• JPY Consumer Price Index YoY (Nov) – Thursday
• US Gross Domestic Product Annualised QoQ (Q3) – Friday
• US Personal Consumer Expenditure Core YoY (Nov) – Friday