OVERNIGHT MARKET SUMMARY
The U.S. dollar index firmed modestly in relatively narrow ranges overnight as optimism over the tax reform bill was somewhat offset by concerns about a looming deadline for a possible government shutdown. The dollar’s mixed tone came after the House of Representatives yesterday voted to go to conference with the Senate to reconcile both chambers’ versions of the tax bill. A similar vote in the Senate is expected this week and could pave the way for the bill ultimately being sent to, and likely approved by the president before the year-end. However, funding for the government is set to expire on Friday and without a deal on a budget that will require some Democratic support, could result in many federal operations being shutdown until a budget deal is ultimately reached.
This morning, ADP reported an increase of 190,000 new jobs created in November, slightly above the forecast for 180,000. The solid hiring report from America’s largest payroll processor did little to lift the dollar. Investors will want to see a similarly strong pace of hiring and an uptick in wages from the BLS’s broader payrolls report due out this Friday before bidding the dollar meaningfully higher. Also likely capping the dollar’s upside is the Fed’s final FOMC monetary policy meeting of the year next week. America’s central bank is widely expected lift borrowing costs for a third time this year and much of the dollar’s near-term direction will likely be driven by the Fed’s outlook for 2018.
The British pound fell to a one-week low, considerably below Friday’s two-month peak against the dollar as nascent optimism surrounding the Brexit faded steadily this week. A deal on the Irish border issue remains elusive and if not reached this week, could result in delays to negotiations moving to the topic of trade between the EU and U.K. Sterling remains vulnerable to continued uncertainty associated with the Brexit.
The Aussie slipped from yesterday’s three-week high against he dollar after data overnight showed a slower than expected pace of economic growth in Q3 and household spending that increased by its smallest quarterly margin since 2012. The data largely cements expectations for the RBA to keep borrowing costs at record lows until 2018.
USD: The U.S. dollar firmed against a basket of its major rivals but held within largely familiar territory overnight. On one hand, the dollar continues to find support from the progress being made on tax reform, a key component of President Trump’s campaign promises to boost economic growth and a possible driver of a more rapid pace of dollar-supportive Fed policy tightening in 2018. On the other hand, investors remain cautious given that the road to the president’s desk for tax reform legislation remains long and not without potential pitfalls. Moreover, investors are increasingly focusing on Friday’s deadline for a budget deal to avoid a government shutdown. Outside of politics, Friday’s payrolls data will likely drive the dollar’s direction into next week’s Fed meeting. Beyond that, the Fed’s statement and the extent to which the bank still sees lending rates rising three additional times in 2018 will likely set the greenback’s tone into the final week’s of 2018.
GBP: Sterling fell again overnight, hitting its lowest level in a week against the dollar as nascent optimism surrounding the Brexit continued to fade. A breakdown in talks surrounding the Irish border issue could potentially delay broader Brexit discussions from moving into the critical trade phase until February- a scenario that would likely keep the pound biased lower. Sterling’s direction continues to be driven by headlines and the resulting shifts in sentiment surrounding the Brexit talks.
AUD: The Australian dollar fell from a three-week high overnight after a disappointing Q3 GDP print, which all but cemented expectations for the RBA to remain sidelined throughout next year. While Australia’s economy grew at its fastest annual pace in over a year in Q3, it still undershot expectations with a 0.6%(q/q) print. Importantly, household spending posted its smallest quarterly pace of growth since 2012 as lackluster wage inflation and high debt levels weighed on spending. The outlook for no changes to RBA rates while the Fed is expected to continue gradually normalizing U.S. policy should keep AUD/USD pressured.
CAD: The Canadian dollar backed off of a six-week high against the greenback ahead of the Bank of Canada’s final monetary policy meeting for the year today. While no change in Canadian rates is expected today, investor will look to the BOC’s statement to try to gauge the odds of a January or March increase in borrowing costs. Any upgrade to the bank’s assessment of the Canadian economy would likely support the CAD.
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