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Brexit fallout continues to spook markets

Market Overview

Currency markets ended the week uneventfully after a huge week of Brexit related headlines. Currencies took a much earned breather with direction extremely tough to pick later in the week. The weakest currency of the main players the British Pound depreciated over 1.1% against the US Dollar and 3.1% against the surging kiwi Dollar. The New Zealand Dollar remains the strongest currency two weeks straight with analysts a tad baffled as to the ongoing bust through key resistance levels. A shift in Fed speak from Philadelphia Fed Reserve Harker rocked the boat when he said he wasn’t convinced a hike in December is the correct move to make citing rising uncertainty of economic outlook. Fed’s Evans also summarised by saying international trade is slower with Brexit and the US housing market all creating global uncertainties. It was his opinion though that these factors were not enough to make changes to the current monetary trajectory. This week’s RBA minutes looks to be a key headline this week when they will summarise the November meeting, with more than likely a hawkish bias based on recent positive economic data. US and China trade discussions have surfaced again over the weekend after weeks of halted communications. Both sides are working together closely to arrive at a long term solution with Donald Trump and Xi Jinping expected to meet again later in the month at the G20 summit in Argentina. Meanwhile Vice president Pence spoke with Xi Jinping at the Papua New Guinea Asia Pacific economic summit saying he was concerned China never had any intention of reaching a consensus – the Papua New Guinea prime minister saying the entire world is worried about the ongoing tensions between the two nations. They still appear a world away with negotiating a sustainable agreement. Brexit carnage will continue this week leaving the British Pound venerable again to whipsaw movement. Recent headlines are suggesting a vote of no confidence is building steam with Theresa May saying if she was ousted it wouldn’t make Brexit any easier. Last week Brexit secretary Dominic Raab and work and pensions secretary Esther Mcvey resigned in protest of May’s Brexit plan. US and Japanese Bank holiday Friday with Thanksgiving should bring an orderly end to the week.

Australia

We are expecting Tuesday’s minutes of the RBA to be consistent with recent economic releases, with upwardly revised revision to GDP and Inflation. Key recent data of late with a great employment report with a lift to annual wage growth will remain key to RBA policy with expectations they will return to expected inflation targets. The Australian Dollar rose to a 0.7330 high last week coming from 0.7165 early on outperforming all other currencies except the NZD. This week the Aussie could come under pressure with risk factors a concern as Brexit continues to make markets nervous. Australia’s housing market took a turn for the worst last week after moderating in October after seasonally new houses hit the for sale catalogues. Sydney has not overtaken Melbourne as the city with the largest declines in 2018.

New Zealand

The unbelievable run of the New Zealand Dollar continued last week with the kiwi surpassing 0.6830 a two month high against the US Dollar on its way to 0.6880 at the close. Equity markets traded lower Friday bringing back doses of risk to the table in most risk products, all except the NZD with the currency donning the best performing of the majors.  The biggest threat to the kiwi currently is the ongoing trade disputes between China and US. This week’s G20 meeting in Singapore could bring about a result but if not and rhetoric sees further pessimism, this could filter through to risk associated currencies with risk averse sentiment returning dropping the kiwi. This week’s sees a slow week on the economic docket with no significant data releases to get excited on. Offshore global headlines will determine this week’s moves.

United States

The US Dollar Fell sharply Friday as the newly appointed vice chairman of the Federal Reserve, Richard Clarida, said the Central Bank was close to being at a point of “neutral bias”. Further interest rate hikes would be dominated by publishing economic data. Mike Pence the Vice President made for uncomfortable times at the weekends Papua New Guinea summit when he said the two nations were poles apart on any agreement with trade tariffs. This is contrast to the Presidents recent remarks when he confirmed that the two countries were very close to cementing a deal. The US Dollar was a close second to the Pound as the weeks worst performing currency, with the US Dollar Index trading down at 96.48 from just under 98.00. Core Durable Goods orders will hold key interest this week with an expected turnaround to 0.4% increase in manufacturing production orders from the poor performing last five months. Thanksgiving holiday Friday.

Europe

ECB president Mario Draghi gave a speech Friday night at the Frankfurt European Banking Congress on his views around future policy. He confirmed the ECB’s longing to ditch the current Quantitative easing program at the end of this year but highlighted that the economy would endure a long path of low interest rates.  What was particular interesting is the next ECB rate announcement is four weeks away. He spoke about the need to increase wages and inflation as these were hardly visible and that uncertainties surrounding the long term outlook had increased. Its difficult to determine a decisive plan past the end of the QE program however it’s a clear signal that the ECB is willing to be cautious around the first rate hike. Draghi has never increased rates, he could be the first ECB president to not hike.  The Euro bounced off 2018 lows last week from 1.1215 pushing up towards 1.1400 at Friday’s close. Manufacturing data from Germany and France are the main items on the Euro calendar this week Friday.

United Kingdom

Thursday NZT saw the British Pound drop by its largest single day amount in 17 months with the resignation or Dominic Raab. With punters unhappy with the 585 page draft deal Theresa May is battling a possible no confidence vote. The fate of Brexit took a U turn when Raab resigned, significantly upgrading current uncertainty around the fate of Brexit. Dominic Raab said he has huge respect for Theresa May saying “it’s not flim flam” and that the UK was being bullied by the EU. This week holds possible key developments with Brexit as negotiators will hopefully agree on further details of UK’s future relationship with the EU ahead of the economic summit in Argentina. Theresa May must keep the momentum going as her own party fast boycotts her plans. She had a message for them “a change of leadership could threaten Brexit itself”. The Bank of England speak tonight around inflation and could be forced to continue to speak about their tightening bias even though markets see a strong potential for downward bias on the Pound.

Japan

We have seen fundamental risks develop in the past few trading sessions in the USD/JPY pair with renewed tensions around global trade. The pair is less hawkish as the Fed chairman Powell has changed his mindset on monetary policy the main driver of where the USD/JPY trades today. The pair traded as high as 114.20 but dropped to close at 112.70 and still looks bearish Tuesday. Bank of Japan’s Kuroda was on the wires but offered up nothing new concerning outlook. Japanese Trade Balance Seasonally adjusted) didn’t disappoint coming in at -0.3 Trillion compared to the -0.48 Trillion we were expecting boosting the JPY. Looking ahead to the week markets will focus on larger themes such as Brexit with no first tier data to release.

Canada

The Canadian Dollar has posted losses during the Monday trading sessions as the USD/CAD pair trades up at 1.3200 – 0.5% on the day. The disputes between the US and China show no signs of being resolved any time soon which will be detrimental for the Canadian Dollar. US vice President was rather blunt in his words regarding a resolution saying that China would need to dramatically change its stance and practises before the US would remove or adjust the current tariffs in place. Less than hawkish remarks from the Fed have been behind the recent risk averse feel to markets creating choppiness as a result. Crude Oil has managed to avoid breaking through 55.00 support bouncing off its four year low back to 57.30 Tuesday after a surge in global oil supplies darkened forecasts for demand. Canadian CPI and Retail Sales print late Friday to close the week.

Major Announcements last week:

• Australian unemployment drops to 5.0% from 5.10%
• US Core Retail Sales prints at 0.7% from 0.5% expected
• US Retail Sales releases at 0.8% after 0.6% expected
• UK Retail Sales prints worse than the expected 0.2% at -0.5%
• US Fed downplay recent hawkish tone

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