Tuesday AM: GBP Eyes Carney, Construction PMI, Brexit Debate | AUD: Current Account | USD: Yield Curve Inversion | NZD: Dairy Auction

Foreign exchange report

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Global market sentiment remains broadly positive Tuesday, ensuring stocks, commodities and 'risk-on' currencies continue to outperform, even if some of the shine seen in Monday's markets has come off.

The Chinese Yuan led most Asian currencies - New Zealand and Australian Dollars included - higher, even as the prior day's rally sparked by the temporary U.S.-China trade truce slowed on questions over whether the two sides can strike a durable deal.

Rising crude oil prices also undermined currencies of key energy importers in the region and dampened some of the optimism amongst market participants.

While markets initially applauded the U.S.-China trade truce, the lack of specificity in the temporary agreement struck between presidents Donald Trump and Xi Jinping over the weekend in Argentina has raised concerns about the fragility of the deal.

"We remain sceptical as to how much longer this positive mood can last given the lack of details behind the Xi‑Trump handshake agreement," says Richard Grace, a strategist with Commonwealth Bank of Australia.

"Details of the weekend Xi-Trump dinner remain scant from Beijing and the White House. Even within the U.S. administration, we are seeing different interpretations, and attempts to dial back on the expectations of the outcome," says Terence Wu, currency analyst at OCBC Bank in Singapore.

Wu adds:

"Markets now run the risk of China eventually not corroborating the declarations from the US front, and may now be moderating the optimism it drew from the Xi-Trump outcome."



A five-day debate on the Brexit deal struck between the UK and EU commences today.

The debate comes ahead of a crucial December 11 vote on the deal that is widely expected to end in defeat for the government.

For Sterling, what will be of importance is the scale of the defeat: a crushing defeat leaves the UK prime minister with little room to manoeuvre and the possibility of her standing down is heightened considerably.

Should the defeat be narrow then expectations for the deal passing on a second vote increases: This would be good for Sterling we believe.

"MPs likely to back the WA on a second or third attempt, through gritted teeth," says Malcolm Barr with JP Morgan. "We continue to place a 60% probability on an orderly Brexit occurring in March or shortly after, based on the WA as currently configured."

Bank of England officials - including governor Carney - will appear before parliamentarians from 09:15 GMT onwards. They will give evidence to the Treasury Select Committee on the financial stability report produced last week.

However, it will be the Bank's Brexit scenario analysis that will really galvanise interest. Recall, under one 'no deal' scenario the Bank envisioned a 25% decline in the value of Sterling?

Expect 'Brexiteers' on the Committee to take a robust line with the Governor, expect the governor to point out these are not in fact forecasts and it is incumbent on the Bank to be prepared for any eventuality that Brexit might throw up.

Datawise, we will be watching the release of the Construction PMI for November at 09:30 GMT.

The expectation is for a reading of 52.5 to be delivered.

The number will come on the heels of a better-than-forecast Manufacturing PMI reading released on Monday.

There was little reaction by Sterling to the number.




The Australian Dollar continues to benefit from the investor-friendly mood in global markets that ensures the currency is now one of the best-performing global currencies of the past month.

Only the New Zealand Dollar has performed better in the G10 space.

Domestic data was supportive overnight with the current account delivering a surplus of A$10.7BN for the third quarter, remarkable if you consider markets were expecting a deficit of A$10.2BN.

The surplus comes largely on the back of a pickup in net exports to the tune of 0.4% in the quarter, double the 0.2% figure forecast.

The Reserve Bank of Australia meanwhile left interest rates unchanged at 1.50% in something of a non-event for markets.

However, analysis from economist Felicity Emmett at ANZ bank shows the RBA to be a "little less optimistic" on the outlook, noting comments around housing were "on the softer side, with the Bank likely to be concerned by the intensifying weakness in the housing market."

Ater reiterating that the “terms of trade have increased over the past couple of years and have been stronger than earlier expected” the Bank added that “most commodity prices have, however, declined recently, with oil prices falling significantly.”

Yet with the stellar trade data released today and the improvement in global investor sentiment, we see little room for the RBA to complain, and hence with the AUD will likely retain a robust undertone.



There are no significant data points to watch. But there is news for Dollar bulls to consider: For the first time in more than a decade, parts of the US yield curve have inverted.

This is widely held to be a precursor to recession.

"The 3 vs.5 treasury spread is trading sub -1.3%, signalling the market’s expectation of an end to the current tightening cycle — at least in the medium-term," says Nema Ramkhelawan-Bhana at RMB in Johannesburg. "Although the more frequently quoted 2v10 spread is still positive, its abrupt flattening in recent days is in line with the overall trend."

An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality.

"The shape of the yield curve changes in accordance with the state of the economy. The normal or up-sloped yield curve may persist when the economy is growing and conversely, the inverted or down-sloped yield curve is likely to press on when the economy is in a recession," explain Investopedia.

On of the key themes for investors at the turn of the year will be whether the impressive U.S. economic expansion of recent years is to finally fade, the movement in bond curves are giving their view.



There is little on the Euro's calendar today and the neutral tone in the single-currency is likely to extend.

"EUR/USD held sideways yesterday and currently seems reluctant to break down presently. However any attempt to make gains are quickly defeated and currently the market is relatively neutral," says Karen Jones, a technical analyst with Commerzbank in London.



Watch out for dairy price numbers which are expected to come out at some point in the London afternoon period.

"The regular Global Dairy Trade auction is tonight’s highlight.  New Zealand dairy production has expanded strongly this year and put a lid on prices. We predict another small fall in dairy prices which can modestly weigh on NZD," says Joseph Capurso with Commonwealth Bank of Australia in Sydney.

However, the improvement in global investor appetite is the key driver of the NZ Dollar's outperformance over the past month, and this should continue into year-end.

Capurso however also points out that "higher New Zealand interest rates are supporting NZD."

A 0.25% increase in the cash rate is almost fully priced for June 2020, one month ago, a rate hike in June 2020 was not priced at all.

It's all going the way of the NZ Dollar it would seem, for now at least.

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