Market Overview:

Although the US tax overhauls legislation remains struggling for support, continuing to impact sentiment on the USD, there was better news over the weekend on the trade front providing a more positive start to the week. The APEC Summit has seen the tentative agreement by 1 nations for a revamped TPP trade agreement to be known as the CPTPP This “refreshed” agreement minus the US and exclusion of a number of the more controversial clauses appears to be largely similar to the old TPP. Although the new agreement will now have to be passed by the individual 11 separate Governments before it can take effect, the outcome is positive for the Asian/Pacific trading bloc. Geopolitical concerns continue to simmer, with the war of words over North Korea continuing throughout President Trumps Asian visit, the US 3 Carrier fleet conducting exercises in the South China sea and a further statements on both trade and North Korea from President Trump expected on his return to the US on Wednesday. The Saudi Arabia situation continues to develop with prominent Saudi investors looking to pull funds out of the Kingdom, the longer this continues the greater the potential for European and US markets to be affected. The price of oil is already knocking on two year highs and gold remains in an uptrend. Direction for markets this week will also be driven by central bank commentaries, with bank Governors from Japan, UK, Europe and the US all set to speak over the course of the week. In political matters the Australian Turnbull government is losing its majority as the citizenship crisis continues unabated and UK political and Brexit uncertainties linger adding to GBP uncertainty.  Later in the week will see more Chinese data, including Industrial Production and Fixed Asset Investment. These data releases will be monitored by investors Yuan’s reaction as strong data will put upward pressure on the currency, with the potential for other international markets to rise.

Australia

The Friday release of the Reserve Bank of Australia’s Statement of Monetary Policy saw a significant downward revision to their CPI forecasts. Inflation is now not expected to get back up to the bottom of the target band (2%) until 2019. This decision to lower the forecasts to below the bottom of the band in 2018 and at the bottom of the band in 2019 is likely to have significant policy implications. This is now a central bank which is expecting that it will undershoot its core inflation target for another year, and that even one year out, inflation will remain at the bottom of the target zone. The new lower forecast no longer looks to portray a bank that is expecting to raise rates anytime soon, or even in the medium term. It looks increasingly likely at this stage that rates will remain on hold over 2018 and into 2019. Political concerns should take a backseat today to data releases, kicking off with business sentiment early this afternoon. Later in the day we will get Chinese October figures for retail sales, industrial production and fixed assets expenditure. The other main releases will be Q3 wages growth on Wednesday and October employment data on Thursday. These are key releases for monetary policy going forward, as the RBA will want to see evidence of a reduction in excess capacity and some positive wages growth to restore their confidence that inflation can lift into the 2-3% target range.

New Zealand

Uneventful start to the week for the New Zealand dollar as it marks time against both the USD and AUD with little in the way of major economic releases. Retail sales data on Wednesday and PPI figures on Friday are not expected to be market moving. The RBNZ last week was relatively dismissive of concerns over the government’s proposal for a switch in the central bank’s mandate to include a full employment objective; with official estimates showing that the output gap is now close to zero. The RBNZ has, in fact, brought forward their estimate for the first hike to Q2 ,2019 (versus Q3,2019). In reality it will probably be considerably earlier than this is with the market pricing for a Q4 2018 hike. The apparent success at the APEC meeting  of the TPP trade agreement is good for New Zealand, but market reaction has been muted, as all 11 signatories have to now get their respective governments to ratify the agreement a process that will be lengthy, but overall, a good start for PM Ahern’s first international outing.

United States

This week will be a busy week, with the release of U.S. inflation and growth numbers that could influence the Federal Reserve’s decision on the pace of future rate hikes. American tax legislation will also feature on market thinking this week, after pessimism increased over the chances of successful reforms helped drag global equities down from record highs seen last week. Also central bankers will be to the fore, with Mario Draghi, Janet Yellen, Mark Carney and Haruhiko Kuroda all speaking at a European Central Bank conference on Tuesday. (European time)  President Trump concludes his swing through Asia this week and is expected to make a major announcement on trade and the North Korean situation when he is back in Washington on Wednesday. US equity markets opened the week firmer, halting a two day slide and the USD edged higher, as investors awaited further developments on monetary policy and tax reform.  Concerns around Saudi Arabia combined with OPEC increasing next year’s demand projections, saw crude oil continuing to climb, trading up to a 30 month high and is now up 20% since the start of September. The USD was firmer against both the EUR & JPY, with the EUR/USD at 1.1663 up from 1.1621 lows on Friday. Immediate resistance is at 1.1690 a break of which would target 1.1750, immediate support is at 1.1620 then 1.1553. The USD/JPY was around 113.62 up from 113.21 at the close of last week, immediate resistance is at 113.85 ahead of 114.00, wui9th support at 113.20 then 112.95.

Europe

Positive news out from Germany, in that progress is being made in forming a government as it appears that Merkel may concede the coveted finance ministry portfolio to its new coalition partner (likely the FDP).  Elsewhere in the Eurozone, according to a report from French bank BNP Paribas, French growth is increasing with Household consumption supported by the jobs recovery, but restrained by the upturn in inflation. Investment and exports dynamics are favourable and risks have moved slightly to the upside, a welcome change in sentiment for the French economy. Later tonight will see the release of Q3 2017 GDP growth for the Eurozone region which is expected to come in at a healthy 0.6% for the quarter. On the currency front, the EUR should see some modest increase especially given the problems in the US over the tax reform. A break of the EUR/USD level of 1.1720 would see a target of 1.1750…but ahead of the US growth and inflation numbers upside for the EUR should remain constrained.

United Kingdom

Political pressure remains on beleaguered PM May after a report signalled that 40 Tory MPs are ready to sign a letter of no confidence in Theresa May. A separate leaked letter also shows Boris Johnson and Michael Gove pushing for a hard Brexit, also keeping pressure on the UK pound. Released on Friday, monthly estimates of GDP showed that output expanded by 0.5 % in the three months to October, slightly stronger than the official outturn for the third quarter of 2017 which was 0.4%. The report on Friday also commented that although economic growth is likely to be stronger in the second half of this year compared with the first, activity has slowed since last year. It is expected that the pattern of demand in the UK economy will rebalance towards international trade in response to strengthening global growth and the weaker GBP and away from domestic demand. If the economy continues to expand at this pace and inflation remains elevated, there is a case for the Bank of England to gradually raise the policy rate to prevent the economy from overheating. UK CPI figures for October will be out later tonight and are expected to show inflation remaining close to 3% on an annual basis, still driven mainly by the weak GBP. With still no clear Brexit strategy in spite of repeated demands from business groups, the GBP remains under selling pressure and is currently at 1.3126, down from the 1.3226 high seen on Friday. Immediate support is at 1.3090 the 1.3025, with upside resistance at 1.3220 looking safe for at least the next couple of days, but with GBP buying interest limited the downside is favoured.

Japan

The latest news for Japan has centred around the Trump/Abe meeting in Japan and the positioning of Japan in the success of the TPP agreement, concluded at the APEC summit. Figures released on Friday showed a slight reduction in confidence among the Japanese manufacturers, with the BOJ’s Tankan quarterly surveys, showing deterioration in November from a 10 year high seen previously. BOJ head Kuroda, commented yesterday that there was a “long way to go before reaching inflation target.” but this was merely reiterating what was already common knowledge in the market and had little effect on JPY levels. Apart from September industrial production tomorrow, there is little major data out for Japan over the rest of the week. The USD/JPY is currently around 113.63 and should hold steady 113.70-113.20 range over the next few days ahead of the major US data.

Canada

The Canadian dollar caught a fresh buying wave in US trading revisiting its highest level since last week around 1.2742 then slipping into a consolidative mode at 1.2740 …the USD peaked against the Canadian dollar near CAD1.2920 at the end of October, and before the weekend it had fallen to about CAD1.2665. Support is now back at 1.2630, but given the continued firmer crude oil levels for support more CAD upside against the USD cannot be discounted.

Major Announcements last week:

  • RBNZ leaves interest rates unchanged
  • UK Manufacturing Production 0.7% vs 0.3% expected
  • Chinese Industrial Production 6.2% vs 6.3% expected
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