Fundamental Analysis

Kiwi Bears Take Charge on New Government Announcement; Pound Slips after Retail Sales Slump

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The kiwi posted additional long red candles during the European session after the kingmaker New Zealand First party backed the opposition party early today, forming a new coalition government. The pound fully reversed yesterday's gains in the wake of worse-than-expected retail sales.

September's British retail sales tumbled by 0.8% from August, surprising analysts who had projected a smaller contraction of 0.1% as the pound's weakness raised import costs and hence hit consumers' wallets. The previous reading was also revised downwards from 1.0% to 0.9%. On an annual basis, retail sales grew at a slower pace at 1.2%, missing the forecast of a growth of 2.1%. The three-month average growth also narrowed, slowing to 1.5% y/y – a four-year low. Excluding auto sales and fuel, consumers' spending declined by 0.7% m/m, driving the yearly gauge lower to 1.6%.

Meanwhile in Brussels, the UK Prime Minister is preparing to address EU leaders in a bid to unlock Brexit talks and move negotiations to the next stage of UK's future relationship with the block. Yet, rumors are for the negotiations to remain deadlocked until December, with a senior EU diplomat claiming early today that trade talks have a 50-50 chance to start by year-end.

The pound pulled back by 0.15% to $1.3184 as the data pared the odds for further rate hikes in 2018. Still, chances for a rate rise at the BOE's meeting in November stood around 80%.

The Catalan leader, Charles Puigdemont, missed the second deadline today imposed by the Spanish government, refusing to renounce independence and eventually having to face the consequences. Instead, he sent a letter to the Spanish Prime Minister, Mariano Rajoy, early on Thursday, warning a declaration of a unilateral independence if Madrid keeps blocking dialogue. In response, Rajoy said that he would hold a cabinet meeting on Saturday to activate Article 155 which has never invoked before, allowing the Spanish government to impose direct rule over Catalonia.

With markets having already priced in Catalonia's story, with risks remaining if situations escalate, the euro jumped to a one-week high of $1.1849 as Reuters poll of economists showed that the ECB will announce on October 26 its decision to trim monthly asset purchases from 60 billion euros to 40 billion in January.

While US stocks were weakening, upbeat readings on US initial jobless claims and business conditions measured by the Philadelphia Fed survey did little for the dollar. The number of Americans applying for unemployment benefits for the week ending October 14 reached the lowest in more than 44 years at 222,000 – probably affected by the Columbus Day holiday on Monday of that week. Projections were for claims to rise by 244,00 from the downwardly revised 244,000recorded in the week before. The four-week average measure which wipes out weekly volatility dropped by 19,500 to 248,250.

In another report, the Philadelphia Fed Manufacturing index jumped by 4.1 points to a five-month high of +27.9, beating the forecast of +22.0.

Back in Washington, the Senate is expected to vote on the 2018 budget resolution, which if approved would allow the Republicans to pass their proposed tax overhaul through the chamber without support from the Democrats.

The dollar index was down by 0.21% on the day at 93.16. Dollar/yen declined by 0.44% to 112.40 after reaching a two-week high of 113.14 earlier in the day.

The kiwi dipped further into losses, touching a fresh five-month low of $0.7014 and being 1.8% down on the day on the news that the leader of the Labour Party, Jacinda Ardern, would enter into a coalition with the First Partyto govern for the next three years, succeeding Prime Minister Bill English of the National Party. Markets are also nervous on what this would mean for the country's monetary policy.

In energy markets, investors engaged in profit-taking amid tensions in the Middle East, sending oil prices to one-week low levels despite OPEC Secretary General Mohammad Barkido saying on Thursday that oil markets are rebalancing at an "accelerating pace". WTI crude slipped by 1.40% to $51.31 per barrel and Brent fell by 1.40% to $57.33.

Gold surged by 0.55% to an intra-day high of $1,289.56 per ounce before it slipped back to $1,287.45.

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