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US-China trade talks and a Brexit deal have supported risk currencies like the NZD; GBP has been the top performer; US Treasury yields haven’t responded to the better risk backdrop

Currencies
US-China trade talks and a Brexit deal have supported risk currencies like the NZD; GBP has been the top performer; US Treasury yields haven’t responded to the better risk backdrop

By Jason Wong

More optimism on US-China trade talks and a Brexit deal have supported risk currencies like the NZD, while GBP has been the top performer.  US equities are stronger, while US Treasury yields haven’t responded to the better risk backdrop.

GBP is currently up 1.2% to 1.30 and almost got to 1.3050, unwinding the losses seen earlier this week on some positive Brexit news. The UK and EU have provisionally agreed the text on the Brexit withdrawal treaty. The FT reported that while a text of the agreement is settled, negotiations could continue over coming days if political objections are raised by London or EU member states. The UK Cabinet will meet tonight NZ time to consider the agreement and earlier the FT had reported that May wouldn’t call for a meeting unless she thought she could win Cabinet support.  Earlier today she had been meeting Cabinet members one-by-one.  GBP could easily push a lot higher if the agreement can get wrapped up, and easily reverse course again if this all gets dragged out into December and beyond.

In economic data, while the UK unemployment rate ticked higher, UK wages growth was slightly stronger than expected, rising to its highest level in nearly a decade, adding to the case for further rate hikes by the Bank of England once the risk of Brexit negotiations has passed.  The UK 10-year rate is up 7bps to 1.52%.

The stronger GBP has spilled over into a stronger EUR, up 0.5% to 1.1275.  Holding back EUR performance of late has been the disagreement over Italy’s budget with the EU.  Later this morning NZ time the Italian Cabinet will meet to discuss its next move on the Budget so watch this space.  The stronger GBP and EUR, alongside better risk sentiment, sees the various USD indices down about 0.2-0.3% after earlier reaching a fresh high for the year.

The other key market driver has been a more positive vibe on US-China trade talks.  The two countries are back talking with each other, with Trump’s Economic Advisor Kudlow confirming that contact has been resumed “at all levels”.  Yesterday there were reports that China’s Vice Premier Liu was expected to visit Washington shortly, while he had also spoken to Treasury Secretary Mnuchin at the end of last week.  Talks are taking place ahead of the Trump-Xi meeting at the G20 summit that begins at the end of the month.

Positive trade talk news has been a supportive factor for the NZD and AUD.  The NZD has trended higher throughout the day and came off a high of 0.6768 earlier this morning, up 0.7% for the day, albeit most of that gain was made during the local trading session.  AUD hasn’t performed quite as well but is up through 0.72, while NZD/AUD is meeting some resistance around 0.9375.

Amongst the commodity currencies, CAD has underperformed against a backdrop of a further slump in oil prices, with WTI and Brent crude both down over 4%.  Brent is trading at $67, now down over 22% since peaking in early October.  In an update, OPEC sees the market currently in balance but sees demand falling by faster than expected next year against a backdrop of higher supply growth for non-OPEC countries.

In the bond market, US Treasury yields have traded a tight 3bps range between 3.1450-3.1750% for the day, despite better risk appetite and against a backdrop of higher UK and German rates, on the more positive Brexit news.  Yesterday there was a mild downside bias to NZ rates at the longer end of the curve.  The 2-year swap rate was steady at 2.20% while the 10-year rate was down 2bps to 3.09%.

The economic calendar is heavy over the next 24 hours.  Locally, REINZ housing market data are due this morning, while during the local session, Australian wages, Japan GDP and China activity data are released.  Tonight sees the release of European GDP, UK and US CPI data.


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