Catalonia and Brexit to influence the EUR and the GBP

Earlier in the Day:

There were no material stats scheduled for release through the Asian session, leaving things pretty flat in the Asian major currencies at the time of writing.

The Yen was down just 0.01% to ¥113.34 against the Dollar, with the Aussie Dollar up 0.1% to $0.771 and the Kiwi Dollar up just 0.01% to $0.7018.

Perhaps the resilience of the Kiwi Dollar has been most impressive through the week. Better than expected 3^rd quarter GDP numbers saved the day for the Kiwi on Thursday. As things stand, the very fact that both consumer and business confidence are wailing and the economy had seen slower growth in the 3^rd quarter, suggests that more doom and gloom may be on the horizon. If things do slow further, the chances of a 2018 rate hike certainly look grim and we could see the Kiwi Dollar slide down to sub-$0.67 levels as soon as the first quarter of next year.

The Aussie Dollar has managed to perform somewhat better than the Kiwi this year, but things are also looking a little precarious for the Aussie Dollar. Consumer confidence has eased and the RBA’s concerns over rising household debt and tepid wage growth has not abated, in spite of improving labour market conditions. Household consumption has not taken a hit yet, but the RBA’s hands look to be tied, with any rate hike likely to hit disposable incomes and consumer spending hard.

For the Yen, Prime Minister Abe’s re-election was certainly an important result, with the Japanese economy showing some teeth this year. The Prime Minister appears to be off the hook for now, with the U.S administration having been distracted with the tax reform bill. How Trump decides to address trade terms will likely remain the key risk for the Japanese economy over the near-term, though household spending and wage growth are also issues that the BoJ continues to face.

Of the three central banks, the RBA looks to be the closest to being able to shift on monetary policy, though risks to the economy are ever present, while the lack of inflationary pressure in Japan has kept the BoJ silent on its policy outlook for next year.

While it was relatively quiet in the FX world, the Asian equity markets had a little more vim this morning in response to a bounce back in Europe and the U.S on Thursday. The Hang Seng, ASX200 and Nikkei were in positive territory at the time of writing, though the volumes were on the lighter side.

The Day Ahead:

For the EUR, it’s another tough day ahead, having slipped to an intraday low $1.1817 early in the Asian session today, before recovering to $1.1849 at the time of writing. The slide comes in the wake of the Catalan election result, with Catalan separatist parties reportedly winning the election. JuntxCat, the ERC and the CUP have declared victory, with a majority and the fact that the region’s pro-independence parties have taken the majority of seats spells more trouble for Spanish Prime Minister Rajoy.

With the markets likely to be focused on Spain through the day, economic data out of the Eurozone will have a more muted impact than normal, with French consumer spending and 3^rd quarter GDP numbers, along with Germany’s January consumer sentiment figures scheduled for release in the early part of the session.

The numbers are going to have to be pretty good to shift focus back to the numbers, though for the EUR, its likely to take some time for the Catalonian pro-independence parties to form a coalition, which could see EUR resilience to the outcome build.

For the Pound, economic data includes 3^rd estimate GDP and business investment figures for the 3^rd quarter, together with current account figures for the quarter. Barring any deviation from 2^nd estimates, the numbers are unlikely to have a material impact on the Pound. UK markets are on half day and Brexit continues to be the key driver going into the holidays. News has hit the wires overnight of the British Government being taken to court over the legality of Article 50. Another nuisance for the Government that could add further delays to talks that are considered to be behind scheduled.

At the time of writing, the Pound was down 0.07% to $1.3377, with more declines through the day a possibility should the Brexit chatter pick up.

Across the Pond, while the markets will continue to slice and dice the tax reform bill to get a sense of the likely impact it will have on the U.S economy, there are some key stats to consider through the U.S session.

The FED’s preferred Core PCE Price Index figures are scheduled for release, together with November personal spending and durable goods orders numbers. Any pickup in inflation could see the Dollar make strong gains, with the markets currently on the dovish side from a policy perspective, largely because of a lack of inflationary pressure. Durable goods orders and personal spending will also be key, with the markets looking for strong demand and consumption. We would expect finalized consumer sentiment and new home sales numbers to have limited influence later in the day.

At the time of writing, the Dollar Spot Index was up 0.12% to 93.391, with direction through the day hinged on this afternoon’s stats, though it’s always wise to keep an eye on Capitol Hill, with the administration having secured an extension to fund the government through to 19^th January.

For the Loonie, economic data through the session is on the lighter side, but will have further influence, following Thursday’s stats that saw the Loonie bounce to $1.27 levels against the U.S Dollar. October’s GDP numbers are due for release, with any shift from forecasts expected to impact. The Loonie was down 0.02% to $1.2743 against the Dollar at the time of writing.