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Currency Market Analysis

Oct 18, 2019 | Currency Market Analysis

Global Themes

Decelerating US data weakens Greenback

• US industrial production, manufacturing slow in September
• Aussie unemployment falls
• Brexit deal, Chinese GDP on watch

US industrial production, manufacturing slow

NZD/USD opens at its best price in a month this morning as weak US data saw the Dollar index slip further. Industrial production shrank by 0.4%, and that equates to the first YoY contraction in three years. The Philly Fed manufacturing index also missed expectations, dropping six points to 5.6. That’s still in positive territory, but the prices paid gauge plummeted, indicative of a tempering in overall price pressures in the US.

In fact the Federal Reserve’s Charles Evans was on the wires last night suggesting modest wage growth is a sign that inflation isn’t an urgent threat. He has recently been on record stating that “providing too much accommodation” is more appropriate in a low inflation environment than not acting and leaving inflation expectations anchored. While there is clear disagreement amongst Fed members about whether to cut rates further or not, what we would say is they have a very large job to walk back market expectations ahead of their blackout period next week if they don’t intend on cutting, given there remains an 83% chance of a 25 basis points reduction on October 31. NZD/USD can see further upside as we near that meeting

Aussie unemployment falls

Kiwi pairs were also dragged higher yesterday by virtue of our Antipodean neighbours. A fall in the Australian unemployment rate from 5.3% to 5.2% was welcomed by both the Morrison government and markets alike. AUD/USD was the big overnight mover, up 1%, as markets reduced the chances of a rate cut in the “Lucky Country” by year end. NZD/USD wasn’t far behind on a rate synergy outlook, although we still think we’ll be joining the RBA at 0.75% when the RBNZ convene on November 13.

To be fair the drop in Aussie unemployment was fuelled largely by lower participation, although an addition of 26K full time jobs in September did help. The data supports Governor Lowe’s recent rhetoric that the Australian economy may be at a “gentle turning point”, making for a good opportunity for AUD sellers today, with the AUD/USD back at 1 month highs. We wonder if both countries will fare as well in the rugby tomorrow night?

Brexit deal, Chinese GDP on watch

The Aussie Dollar’s stellar overnight rally will be at risk with the release of a string of Chinese data out this afternoon. September quarter GDP is due out of the Asian powerhouse, along with industrial production, retail sales and fixed asset investment numbers. Recent coal consumption at the major electricity companies in China has rebounded strongly. If that shows up in a stronger industrial production and the GDP release we like a further extension in the Antipodean pairs late today.

Into the weekend and we are all about Brexit. A deal is tabled, and ready to go before the UK parliament, but already the DUP, Labour and the Scottish National Party are voicing concerns. That’s a worry for both UK PM Boris Johnson and the Pound as we hit the “last chance saloon” before the October 31 deadline. It’s also a concern for Yen pairs, whose recent gains could be under serious threat come Monday if the Brexit deal fails to make it through parliament. We won’t be surprised to see significant volatility and wide market spreads on Monday morning if this doesn’t go to plan. As always we’ll give you the full breakdown then. Enjoy the World Cup quarter finals!

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