Forex Commentary – Week Starting Nov 30th 

The summary of our FOREX commentary for the new week and actually start of the last month of this year:

  • U.S. November non‑farm payrolls is one of the last piece of major U.S. economic data before the Fed lifts interest rate on 16 December
  • The ECB is likely to announce more monetary stimulus at their policy meeting on Thursday which should see EUR/USD end the week lower and generate a drag on AUD/USD. AUD/EUR should end the week higher.
  • AUD/USD will also be affected by Australian Q3 GDP (Wednesday). We wonder how long AUD/USD can with stand further falls in major global commodity prices, particularly while the USD continues to firm. We believe this week’s RBA board meeting will be a non‑event. We see AUD/USD ending the week modestly lower.
  • NZD/USD and AUD/NZD will be guided by offshore developments and this week’s fortnightly global dairy auction. We anticipate NZD/USD to end the week lower and AUD/NZD end the week slightly higher.

USD Outlook

USD can edge higher this week on improving US economic activity and more aggressive easing from the ECB on Friday morning Sydney time. The November Fed Beige book (Wed) will continue to point to further modest expansion in US economic activity. Also, declining initial jobless claims suggests above average US non‑farm payroll gains in November .Tighter US labour market conditions will also translate to modest US wage growth pressure.

EUR/USD Outlook

 EUR/USD will remain under downward pressure this week. The focus remains on the ECB rate announcement and press conference (Thu).  Concerns that domestic economic momentum is not strong enough to offset the external headwinds, given the already prolonged period of low Eurozone inflation should see the ECB announce more stimulus.

Based on recent comments from various ECB officials and the track record over recent years, we think the ECB will exceed the lofty market expectations.  We are looking for the ECB to unveil a combination of a larger than 10bpt deposit rate cut (i.e. 15‑20bpts), an additional €540bn worth of asset purchases (via a 9 month extension of the current €60bn/month program to June 2017) and/or a lift in the pace of monthly purchases from €60bn/month to €70‑80bn/month.

The ongoing monetary policy divergence between the ECB and US Fed should push the Eurozone‑US two‑year swap spread (now ‑111bpts) further into negative territory and weigh on EUR.

GBP/USD Outlook

GBP/USD should remain heavy.  The UK PMIs are released, and the BoE Financial Stability Report (FSR) is due.  The UK manufacturing PMI should ease back following its October spike (Tue), while the services measure should track near current levels (Thu).  There is a risk the BoE announces further macro‑prudential measures to keep in check risks from bank lending and the housing market in the FSR (Tue).  If this comes through, this could see market participants push back expectations for the timing for the first BoE rate hike and weigh on UK two‑year swap rates.  A more negative UK‑US two‑year swap spread (now ‑5bpts) should keep the pressure on GBP/USD.

USD/CAD Outlook

USD/CAD will be supported on the crosses this week as Canadian interest rate expectations have scope to adjust higher. The BoC projects Canada’s GDP to grow 2.5% saar in Q3 (Wed). The risk is for slightly faster growth because retail sales volume, housing starts and net merchandise export volumes grew at an above average pace during Q3.

On Thursday, the BoC is widely expected to keep its policy rate unchanged at 0.50% and reiterate it expects Canada’s economy to return to full capacity around mid‑2017.

AUD/USD Outlook

AUD/USD will likely finish the week lower, driven by USD strength and dragged down by lower EUR/USD as the ECB delivers some more monetary easing on Thursday .

AUD/EUR should subsequently continue to grind higher this week. Australia’s Q3 GDP on Wednesday will provide some guidance to the local economy’s strength. We see the risk GDP comes in at 0.6% (QoQ), a little below consensus of 0.7% (QoQ). Business investment and government expenditure are expected to hold back the growth in GDP growth, with net exports the driver, contributing 0.9%pts.

We don’t anticipate the RBA board meeting or RBA Governor, Glenn Stevens speech on Wednesday to be market moving. Technical support for AUD/USD is currently at the 30 day moving average of 0.7162.

NZD/USD Outlook

NZD/USD will take its cue from foreign developments such as the US ISM and the ECB policy meeting and the New Zealand‑specific Global Dairy Trade auction.  We think the USD will be firmer this week and push NZD lower (see above).  We also expect dairy prices to remain low though they may lift modestly at the auction.  Nevertheless, in our view dairy prices are so low that income growth restraints will encourage the Reserve Bank of New Zealand to keep cutting the cash rate.

We expect the Reserve Bank of New Zealand to cut the cash rate in December though it is only ~60% priced.