Chief Macro Strategist
Summary: After Q3 GDP data revision that reminds us that the UK is in the vanguard for economies lurching into recession, sterling has lurched into a new slide and is even threatening a break down versus the euro as EURGBP tests the highs since the Truss-Kwarteng mini-budget sterling wipeout. Elsewhere, a plunge in the kiwi is likely down to position squaring and rebalancing ahead of year end after a remarkable recent run.
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FX Trading focus: Sterling stumbles after weak GDP, Kiwi longs take profit. Last important US data point of the year up today: November PCE inflation.
The latest Q3 UK GDP revisions suggest the economy is weakening even more quickly than previously thought last quarter, as growth was revised down to -0.3% QoQ from -0.2% previously, and the Private Consumption figures was revised to -1.1% QoQ vs. -0.5% previously. The combination of a Bank of England that wants to soft-pedal further tightening and the promises of fiscal austerity from the Sunak-Hunt duo are a powerful negative for sterling as we look ahead into the New Year, which will likely bring relative UK economic weakness even if our thoughts that recession fears for next year globally are over-baked for the first two and even three quarters. The FX fundamentals are entirely the opposite for the euro, as the ECB attempts a maximum hawkish stance as it recognizes the risks that the fiscal impulse can keep inflationary pressures elevated from here. The two-year yield spread is close to its highest since October of last year.
Chart: EURGBP
A weak GDP revision yesterday didn’t appear to be the proximate trigger for sterling’s latest lurch lower, but does remind us of the relative weakness of the UK outlook and the combination of a heel-dragging BoE (on further tightening) and austere fiscal picture could set up further declines in the weeks and months. Worth noting that the key EURGBP is pushing on the top side of the range established since the volatile days surrounding the Truss-Kwarteng mini-budget announcement. A hold above 0.8800 could lead to a test of the higher end of the range since the 2016 Brexit vote above 0.9200. A higher euro is straightforward if ECB maintains its hawkish stance as the EU fiscal impulse is far stronger from here. The wildcard for the euro side of the equation is the usual existential one of peripheral spreads and whether these stay orderly if yields resume their rise next year.
Elsewhere, the kiwi saw a sharp further run to the downside yesterday with no proximate identifiable trigger. AUDNZD traded all the way to 1.0719 before backing off to below 1.0650 at one point this morning. I suspect that this was an extension of the position squaring after a the remarkable run higher in the kiwi over the last two months, driven both by relative RBNZ hawkishness, but in particular by RBA (and arguably BoC), sparking heavy flows in AUDNZD just after the pair had traded almost to a decade high on hopes for a Chinese reopening boosting the outlook for Australia. The current reality on the ground in China is even worse than during the zero Covid tolerance days, but we know that the Arguably, recent record low consumer confidence readings in New Zealand suggest that the RBNZ will need to climb down from its hawkishness, at least in relative terms to its peers, going into next year. After an incredible slide in AUDNZD and rally in NZDCAD, I suspect we will see powerful mean reversion in the coming three months in those pairs.
It feels like USD traders have checked out for this year. Hard to tell if today’s US November PCE inflation data can generate any excitement on a soft print after the soft CPI print earlier this month generated a lot of fuss that quickly faded on the very same day. A more interesting development would be a slightly hot core set of PCE core readings than expected today (the month-on-month core reading expected at +0.2% and year-on-year expected to have decelerated sharply to 4.6% from 5.0% in October.
EURUSD has traded within a 100-pip range for more than a week and the 1-month implied volatility has recently plumbed lows (around 7.50%) not seen since the beginning of this year and would probably be lower still had not the Bank of Japan roiled markets this week. But the USD will have a hard time ignoring any further slide in risk sentiment to close out the year. And the beginning of the calendar year is nearly always interesting for new themes and often for demarcating key highs or lows for the year. Consider the following from the last six years of the EURUSD trading history:
Table: FX Board of G10 and CNH trend evolution and strength.
The JPY still sits with a strong positive reading, but has yet to “trend” after the huge one-day move this week – a few more days of lack of movement and questions marks would begin to flourish around its status. Elsewhere, note the NZD going full circle and now broadly outright weak after its status as king of the G10 as recently as less than two weeks ago. Gold posted a sharp reversal yesterday.
Table: FX Board Trend Scoreboard for individual pairs.
Note that the weakness in risk sensitive currencies like SEK, NZD, AUD & GBP are seeing those edging into a downtrend versus the US dollar – worth watching for a deepening of these moves if risk assets continue south into the New Year. The EURCHF bears watching if the pair can take out 0.9900-0.9950 as currently the pair is caught in a very tight range. NZD is rolling over in many pairings.
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