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Theresa May and Brexit Put the Pound Front and Centre

Bob Mason
It’s round 2 on the Brexit front, with Parliament preparing for a Plan B vote. Will there be a Plan C?

Earlier in the Day:

Economic data released through the Asian session was on the heavier side this morning, with key stats including November consumer confidence and 3rd quarter wage growth numbers out of Australia, 1st estimate GDP numbers for the 3rd quarter out of Japan and October’s fixed asset investment, industrial production and retail sales figures out of China.

Later in the session industrial production and October’s tertiary activity index figures will also be released.

For the Aussie Dollar,

The Westpac Consumer Sentiment Index rose by 2.8% to 104.3, following a 1% rise in October, showing that optimists continued to outnumber pessimists, though the index remains 1.6% below its July high.

  • Family finances vs a year ago rose from 87.4 to 91.7, a 4.9% increase for the month and 8.2% year-on-year.
  • Family finances next 12-months rose by 3.2% to 106.1, while up by just 0.7% year-on-year.
  • Economic conditions next 12-months rose by 1.7% to 104.3 and by 8.4% year-on-year, the sub-index sitting well above its long run average 90.7.
  • Economic conditions next 5-years jumped by 9.7% to 104.1 in November, with the sub-index up 11.7% year-on-year.
  • Time to buy a major household item fell by 3.5% to 115.6, leaving the sub-index down 2.7% year-on-year.
  • Time to buy a dwelling jumped by 11.8% to 114.8, taking the sub-index up 16.7% year-on-year, the jump driven by the recent fall in house prices and relatively low interest rate environment.
  • The Unemployment Expectations Index fell by 1.9% to 120.4, leaving the index down 7.9% year-on-year, reflecting improved sentiment towards labour market conditions.
  • The House Price Expectations Index fell, down 2.3% to 99.0 in November to leave the sub-index down 27% year-on-year, with the sub-index at its equal weakest reading on record.

The Aussie Dollar moved from $0.72309 to $0.72317 upon release of the figures that preceded the 3rd quarter wage growth numbers.

In the 3rd quarter, wages rose by 0.6% quarter-on-quarter, which was in line with forecasts, whilst 2nd quarter wage growth was revised downwards from 0.6% to 0.5%, according to the ABS.

  • Year-on-year, private sector wages rose by 2.1%, while public sector wages rose by 2.5%, leading to a 2.3% rise in the Wage Price Index, year-on-year.
  • The quarterly growth rate was the highest since the 3rd quarter of 2015, with the healthcare and social assistance industries seeing the highest growth rate at 2.8%, while mining and retail trade industries lagged with a 1.8% wage growth rate.

The Aussie Dollar moved from $.72359 to $0.72244 upon release of the figures, which came ahead of the stats out of China.

For the Japanese Yen, quarter-on-quarter, the economy contracted by 0.3% in the 3rd quarter, which was in line with forecasts, while 2nd quarter growth was revised upward to 0.8%. Year-on-year, the economy contracted by 1.2%, which was worse than a forecasted 1% contraction, following 3% growth in the 2nd quarter.

  • Private consumption fell by just 0.1%, quarter-on-quarter, which was better than a forecasted 0.2% decline.
  • Quarter-on-quarter, capital expenditure fell by 0.2%, which was worse than a forecasted 0.6% rise, following a 3.1% increase in the 2nd
  • Quarter-on-quarter, external demand fell by 0.1%, which was in line with forecasts and the previous quarter’s decline.

The contraction was attributed, not just to natural disasters that weighed heavily on productivity, but also on weaker overseas demand, with a recovery in the 4th quarter hinged on domestic consumption and demand from overseas that could disappoint should the global economic outlook darken.

The Japanese Yen moved from ¥113.796 to ¥113.797 against the U.S Dollar upon release of the figures, before easing to ¥113.83 at the time of writing, down by just 0.02% for the session, with September industrial production and the tertiary industry activity index to come, the response to the GDP numbers muted.

Out of China,

  • Fixed asset invests rose by 5.7%, coming in ahead of a forecasted 5.5% rise and September’s 5.4% increase, year-on-year.
  • Industrial production increased by 5.9%, year-on-year, in October, coming in ahead of a forecasted 5.7% and September 5.8% rise.
  • Retail sales by contrast disappointed, with year-on-year retail sales rising by just 8.6%, coming up well short of a forecasted and September 9.2% increase.
  • Industrial production

The Aussie Dollar moved from $0.72246 to $0.72255 upon release of the figures, before easing back to $0.7217 at the time of writing, a loss of 0.01%, softer retail sales figures the negative on the day.

The Day Ahead:

For the EUR, economic data is on the heavier side for the day ahead, with key stats including 1st estimate GDP numbers for the 3rd quarter out of Germany, finalized October inflation numbers out of France and Spain and 2nd estimate GDP numbers for the 3rd quarter and September industrial production numbers out of the Eurozone.

We will expect focus to be on Germany’s GDP numbers, a forecasted quarter-on-quarter contraction likely to weigh on the EUR should the numbers be in line with or worse than forecasted, with any contraction ultimately a negative as concerns over the global economic outlook build.

Outside of the numbers, we can expect more chatter from Italy’s coalition government, which will also influence through the day and could ultimately overshadow much of the stats.

At the time of writing, the EUR was up 0.11% to $1.1302, with Germany’s GDP numbers and noise from Italy the key drivers for the EUR through the day.

For the Pound, its October’s inflation figures that are due out later this morning, with the annual rate of inflation forecasted to pick up to 2.5%, which would be a positive for the Pound, though softer wholesale inflation figures could pin back any major upside.

Outside of the numbers, we can expect more price action over Brexit, with the British PM now needing to sell the reported draft Brexit plan to her cabinet and beyond.

With Theresa May’s cabinet having been given the draft deal on Tuesday night, it’s going to be reaction time today and, if the ducks aren’t aligned, the Pound could be heading back to $1.28 levels in a hurry.

At the time of writing, the Pound was up 0.26% to $1.3011, with Brexit news the key driver through the day.

Across the Pond, October inflation figures are scheduled for release and we can expect some market sensitivity to the numbers, with a forecasted 0.3% rise in core consumer prices, month-on-month a Dollar positive, with the annual rate of core inflation forecasted to hold at 2.2%, supporting the FED’s current stance on monetary policy.

Outside of the numbers, we can expect some movement off the back of a scheduled FED Chair Powell speech, with members Quarles and Daly also due to speak through the day.

On the political front, Brexit, the Eurozone and the Oval Office will influence demand for the safe havens, with the markets likely to be in search of more progress on U.S – China trade talks.

At the time of writing, the Dollar Spot Index was down 0.26% to 97.048, with today’s inflation numbers, Capitol Hill and geo-political risk in Europe remaining in focus through the day.

For the Loonie, with another quiet day on the economic calendar front, crude oil will continue to provide direction, with the IEA’s monthly report scheduled for release in the early afternoon along with both the weekly API and EIA inventory numbers out of the U.S.

The Loonie was down 0.02% to C$1.3236 against the U.S Dollar at the time of writing, with crude oil prices continuing to be the key driver through the day.

This article was originally posted on FX Empire