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Economies of Note

Market Overview

Australia

Commodity currencies were lower against the USD overnight, with the Australian dollar slipping to its weakest level since June. The AUD extended its losses after a disappointing trade surplus report which saw the data falling woefully short of expectations, coming in at 0.1B versus 1.4B expected. The sharp fall off in exports, down 1.8% for the month, indicates that demand from global markets such as China may be tapering, which is hardly supportive for the AUD long term.

Later today China’s November trade balance report could have a significant impact on both currencies.

Earlier in the week, the RBA maintained interest rates on hold at 1.5% with the policy statement viewed as mildly hawkish as they omitted the key phrase of “ inflation is likely to remain low for some time” that has been included over most of the statements this year.

Another disappointment was the lighter than expected GDP growth figure of 0.6% less than 0.7% forecasted. The data showed that on the positive side, business investment is finally on an upswing as the drag from the mining unwind fades and spending elsewhere picks up. But the stunning disappointment was the miserable 0.1% rise in household consumption.

The AUD should hold current levels through the day in the lead up to the US jobs data later tonight.

New Zealand

A fairly flat week for the New Zealand economy and NZ dollar this week with mixed economic news. The Global dairy auction on Wednesday saw prices higher for the first time in 4 auctions as supply concerns saw a 4.7% firming in prices. However this was tempered by a downgrade in farm gate prices by Fonterra for the 2017/18 season from $6.75/KgMs to $6.40/KgMs. Over the weekend we will have release of electronic card retail sales which will give a heads up to retail spending as we head into the Christmas holiday period.

Data continues to show that the previous froth is coming off the top with the economy more clearly delicately placed, with near-term risks being skewed to the downside as several of the key drivers of economic activity in recent years have been dissipating. Most notably, net migration has turned, the housing market has cooled, and construction activity is slowing.

However it should be remembered that the new government does have some plans that are expansionary  and traditionally Labour led governments do produce burst of economic activity as electoral promise s are put into effect.

United States

Will they or won’t they shut down the US Government! Talks are ongoing for the US Congress to hammer out a consensus on a spending bill, that will avoid partial government shutdown after money runs out on later tonight.

A big night for data releases with US Non-Farm Employment change, US Unemployment rate, US Average Hourly Earnings, and UK Manufacturing Production.

As usual, tonight’s U.S. non-farm payrolls report is one of the most watched piece of data as it will play a major role in shaping expectations for Wednesday’s Federal Reserve meeting. Will Fed Chair Janet Yellen, keep the Fed on a tightening track, hinting of further moves to come or will she take a step back and leave incoming Fed Chairman Powell with a clean slate?  Tonight’s job’s report may provide some clues to that question..

Strong job growth (a 200K+ increase) accompanied by a solid increase in wages could go a long way in boosting expectations for 2018 tightening.  Modest job growth (below 195K) accompanied by a subdued wage gains will keep investors sceptical of Yellen’s intentions. Either way, being the final NFP report before the year’s last Federal Reserve meeting it should undoubtedly have a significant impact on the greenback.

The USD traded higher against most of the major currencies overnight, but with only a mild rally over the week especially against the Japanese Yen, it signals market nervousness and caution over tonight’s jobs report. A Fed rate rise next week is pretty much locked in by the market, but the real question is now what track do they go on from there.

United Kingdom

UK news has been dominated all week by the twists and turns of the Brexit negotiations resulting in choppy trading between the UK pound and its trading partners. With the EU’s 48-hour Brexit deal deadline looming, it was no surprise that sterling experienced major volatility overnight.  At the very start of the US trading session the GBP/USD had been trading above 1.34, but then u-turned and dropped 100 pips in less than hour. It then stabilized and within that same time frame rebounded approximately 80 pips and eventually ended the day in positive territory.  There was very little rhyme or reason to this rollercoaster ride, which was sparked by nothing more than rumours and hope.  Investors are concerned that the UK will not be able to meet the EU’s pre-Summit deadline but as talks with the Irish DUP over the border issues continue, they are still hopeful. Calling this a tricky situation is an understatement and while the European Commission said today that the final deadline could be as late as Sunday, Prime Minister May will be racing against the clock.

Unless a deal is announced on Friday, (unlikely in our view) we expect the GBP to resume its slide as investors square up before the weekend and ahead of the US non-farm payroll figures.

Europe

Overnight, German data saw a lower than expected result for German industrial production, down 1.4% from the previous month, on a seasonally and working day adjusted basis. The French Trade Balance was worse than expected at +5.0 Billion and the market was expecting a deficit of 4.7 Billion. Later tonight we see release of German trade and current account surpluses, which are expected to show a decline for October.

The EUR ended the day pretty much unchanged against the USD and it has been over a week since the EUR has made any significant ground against the greenback. Currently the EUR/USD is  around 1.1772 but should find support at 1.1750 ahead of tonight’s NFP release. We expect tonight’s US jobs figure to provide a pivot point for this pair, with scope for an upside or downside move depending on the outcome.

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