G10 FX rates remain relatively stable despite heightened geopolitical risks

AUD/NZD: Softer New Zealand inflation & China activity data in focus

It has been another quiet trading session overnight in the foreign exchange market with the major FX rates largely unchanged. The biggest mover has been the New Zealand dollar which has fallen by around -0.5% against the US dollar and -0.6% against the Australian dollar. The main driver of New Zealand dollar weakness was the release of the softer than expected inflation data from New Zealand overnight. The latest CPI report revealed that the annual rate of headline inflation slowed to 5.6% in Q3 down from 6.0% in Q2. At the same time, the RBNZ’s measure of core inflation fell from a record high of 5.7% in Q2 to 5.2% in Q3. The favourable inflation developments have prompted the New Zealand rate market to scale back expectations for further RBNZ hikes this year. The last RBNZ policy meeting this year is held on 29^th November, and market participants are currently pricing in only around 4bps of hikes now. There is also less confidence that the RBNZ will hike rates further in this tightening cycle with another hike in the 1H of next year priced at just less than 50:50.

The developments support our long AUD/NZD trade idea recommended in our latest FX Weekly report (click here) although the rationale for the trade idea was that the Australian dollar should benefit more from a pick-up in China growth heading into year end. On that front market participants will be watching closely the release tomorrow of the latest month activity data from China for September and GDP report for Q3. A second consecutive month of stronger activity data would provide more encouragement that the stimulus measures are beginning to provide more support for growth in China.            

HIGHER VOLATILITY IN OIL MARKET HAS NOT SPILLED OVER INTO G10 FX

Source: Bloomberg, Macrobond 

GBP: UK wage data provides some relief ahead of CPI report   

The main economic data release at the start of the European trading session has been the latest labour market report from the UK. The report has provided some relief for the BoE by revealing that average weekly earnings growth eased to 8.1% 3M/YoY in August down from the peak of 8.5% recorded in July. It provides tentative evidence that wage growth is beginning to peak out although it remains uncomfortably elevated. Looking into the details, the average weekly earnings growth has slowed over the last six months when it expanded by an annualized rate of 6.6% in August  down from 6.9% in the previous six month period. A similar marginal slowdown is also evident for the AWE regular pay measure which excludes the impact of more volatile bonus payments. AWE regular pay increased by an annualized rate of 7.4% in the six months to the end of August compared to 7.6% in the previous six month period.

The BoE has indicated recently that the recent path of AWE is difficult to reconcile with other indicators of pay growth, and that mots of these have tended to be more stable at rates of growth that are elevated but not quite as high as the AWE series. The BoE noted that the Bank’s Agents were continuing to report that average annual pay settlements were in the region of 6.0 to 6.5% with contacts expecting settlements to begin to drift down. It is one of the reasons why the BoE decided not to hike rates further at their last meeting in September despite the upward AWE surprise in July. The softer AWE reading for August should support market expectations for the BoE to keep rates on hold again at the next MPC meeting on 2^nd November. The UK rate market is currently pricing in only around 6bps of hikes  and 11bps hikes by the December MPC meeting. It highlights that market participants are not yet as confident that the BoE’s tightening cycle is over. It would though take a big upside inflation surprise in tomorrow’s CPI for September to shake up expectations that the BoE will stay on hold next month. We expect the report to show further evidence that inflation pressures are easing. A softer CPI reading would drag the pound towards the bottom its recent trading ranges against the EUR and GBP. So far this month cable has been consolidating at lower levels between 1.2000 and 1.2400 and EUR/GBP has traded within a narrow range between 0.8600 and 0.8700.                           

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	10:00	ZEW Economic Sentiment	Oct	-8.0	-8.9	!!
UK	10:05	BoE MPC Member Dhingra Speaks	--	--	--	!
US	13:00	FOMC Member Williams Speaks	--	--	--	!!
US	13:30	Retail Control (MoM)	Sep	--	0.1%	!!
CA	13:30	CPI (YoY)	Sep	4.0%	4.0%	!
US	14:15	Industrial Production (MoM)	Sep	0.1%	0.4%	!!
US	14:20	FOMC Member Bowman Speaks	--	--	--	!!

Source: Bloomberg