Daily FX Market Roundup 12.17.19
By Kathy Lien, Managing Director of FX Strategy for BK Asset Management
With the exception of the sell-off in sterling, it was a relatively quiet day in the FX market. Euro traded in a 45-pip range versus the U.S. dollar with an even narrower move of 12 pips during the NY session. For the last 24 hours, the trading range for USD/JPY was a mere 19 pips. There was more volatility in the commodity currencies but even with those moves, watching the quotes was as dull as watching paint dry. Data was mixed with consumer confidence and ANZ activity outlook improving in New Zealand, job growth in the UK increased but wage growth slowed significantly. In the case of the U.S., house starts, building permits and industrial production all beat expectations for the month of November. However none of these economic reports mattered because for the U.S. dollar and risk appetite, the U.S.-China trade agreement lifted the greatest uncertainty allowing the focus to return to regional data. There are no major economic reports on the U.S. calendar this week but there are important numbers from Germany, the UK, Canada, New Zealand and Australia.
Although the UK added instead of shed jobs on a 3-month basis in October, wage growth slowed to 3.2% from 3.7%. So far this week, we’ve seen how much strain Brexit uncertainty has had on the economy. Yesterday investors shrugged off softer PMIs on the prospect of better investment demand but it failed to do so today after Boris Johnson threatened to leave the EU at the end of 2020 with a deal or not. As noted by our colleague Boris Schlossberg, “Mr. Johnson put forth a bill in Parliament that removed Parliament’s right to vote for an extension, negotiate on worker’s rights and provide oversight on trade negotiations. In short Mr. Johnson stripped Parliament of any oversight authority in Brexit negotiations as he drives a hard line with Brussels.” While this may be nothing more than political maneuvering it revives the challenging memories of political uncertainty. UK CPI and retail sales numbers are scheduled for release later this week – we are looking for softer data all around and when combined with renewed Brexit uncertainty, GBP/USD could fall below 1.30.
The euro is also in focus as U.S. and EU officials talk about the importance of reaching a trade deal. Trade relations between Europe and the U.S. are sour but not nearly as the U.S. and China. Parties from both sides of the Atlantic have been motivated to reach an agreement with U.S. Trade Representative Lighthizer calling it a “top trade priority” for the Trump Administration. Positive trade headlines will bolster the euro and criticism of EU trade practices by President Trump will hurt it. Eurozone data has been mixed and it's difficult to say whether tomorrow’s German IFO report will be stronger or weaker. Industrial production, PMIs and factory orders weakened over the last month, but the economy skirted a recession and is expected to strengthen (albeit slowly), which could bolster business sentiment. If the data is soft, it will confirm EUR/USD’s rejection of the 200-day SMA.
The Australian and New Zealand dollars fell sharply on Tuesday as USD/CAD consolidated its losses. The minutes from the last Reserve Bank of Australia meeting reinforced the central bank’s dovish bias – while they left rates unchanged, if the economy deteriorates further, additional easing may be necessary. NZD data beat expectations but the currency was dragged lower by AUD. That could change tomorrow if GDP beats – with retail sales and trade activity improving in Q3, stronger growth is expected. AUD/NZD fell to 4-month lows last week and could extend lower on good data. USD/CAD is in focus tomorrow with consumer prices scheduled for release. USD/CAD has been in a downtrend all month despite the Bank of Canada’s dovishness but that could change if inflationary pressures ease as suggested by IVEY PMI.