By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
It should be no surprise to our readers that sterling is on the move. Between potential Brexit headlines, speeches from Bank of England officials and a number of key economic reports, we knew this would be an active week for the currency. Unfortunately, neither BoE-speak nor UK data provided much support for the pound on Tuesday. Although BoE Governor Carney said a hike may be appropriate in the coming months, he also suggested that inflation may peak around 3% in October and indicated that firms have become less confident about a smooth Brexit. BoE members Tenreyro and Ramsden also sounded less enthusiastic as both members talked about slack, spare capacity and inflation peaking. However Tenreyro, who is a brand new member of the policy committee added that a hike would be appropriate if the economy performs as expected. As for data, consumer price growth was right in line with expectations. CPI grew by 0.3% in September, which was slower than the previous month but year-over-year growth accelerated to 3% from 2.9% while core price growth held steady at 2.7%. Labor-market numbers are due for release on Wednesday followed by retail sales on Thursday. According to the PMIs, job growth weakened slightly last month and if that deterioration is reflected in the jobless claims AND average weekly earnings growth slows, GBP/USD could break 1.31.
The U.S. dollar ended the day higher against all of the major currencies but its weakness masks underlying pressure as the greenback eased off its highs by the end of the North American session. The intraday reversal tracked the move in 10-year Treasury yield, which went from up 2bp to down -0.5bp. U.S. data was slightly better than the previous month with import and export prices rising, industrial production rebounding and the NAHB home builders index ticking up. In response, USD/JPY spiked to a high of 112.48. While these reports are encouraging, the next rate hike is still 2 months away. Between now and then, the uncertainty of North Korea and Fed-chair selection should keep the greenback under pressure. President Trump is expected to announce his Fed-chair selection after he meets with Janet Yellen sometime this week. The odds that she will keep her job are slim. Fed Presidents Powell and Warsh, along with Stanford economist Taylor, are the top contenders. Powell, who favors gradual rate hikes, would be more negative for the U.S. dollar than Taylor and Warsh who have criticized the central bank’s easy monetary policies. If Yellen somehow manages to stay in her post, the dollar will rally wildly. Housing starts and building permits are scheduled for release Wednesday along with the Fed’s Beige Book report.
Euro traded lower against the U.S. dollar for the fourth consecutive trading day, extending its losses below 1.1750. However even with Tuesday's decline, the total losses over this period was just over 100 pips, which is not a big move. Although Eurozone consumer prices ticked up 0.4% in September, investor confidence plunged in October. Which was expected considering Spain’s political troubles and the uptick in the expectations component of the German ZEW survey confirms that the concerns are regional. The main focus for Wednesday's euro will be ECB President Draghi’s speech in Frankfurt. He’s not the only policymaker speaking – Praet and Coeure will also speak at the same event. We're not sure how much monetary-policy talk there will be as the topic will be “structural reforms in the euro area.” Still, the early European-session speech could dictate how EUR/USD trades for the rest of the day.
All 3 of the commodity currencies ended the day lower against the greenback but their losses mask an impressive intraday recovery in USD/CAD. Having come within 10 pips of 1.26, USD/CAD u-turned during the North American session to end the day much closer to 1.25. No Canadian economic reports were released Tuesday as oil prices gave up early gains. Yet investors saw reports that NAFTA talks will extend past year-end as positive for the currency. A delay isn’t great news, but it means that talks haven’t been scrapped. However between OPEC reaching a “general agreement” on an extension of the output cuts and Canada implementing more stringent borrowing rules, the Canadian economy and its currency still face downside risk. The New Zealand dollar shrugged off stronger consumer-price growth to trade lower on the back of a 1% drop in dairy prices. The RBA minutes had little impact on the Australian dollar although the central bank sounded upbeat, saying growth will rise gradually on current policy with a stronger labor market expected to support household spending in the period ahead.