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By Nick Parsons

AUD and NZD both higher against USD whilst CAD surges after very strong CPI and retail sales data


Australian Dollar

AUD

Expected Range

On nearly any other day, the Aussie Dollar’s performance would have put it top of the pile in the FX universe, but the very sharp rally in the Canadian Dollar pushed the AUD into second place on Thursday. The AUD was bid right from the start of the European session and as dealing books were handed over to New York, AUD/USD reached 77 US cents for the first time since way back on November 2nd. <br> <br> The chief feature of this move is that it didn’t come on a day when the US Dollar was particularly weak. In fact, the USD index ended the day pretty much where it began at 92.90. Nor was it driven by any specific piece of Australian news or macroeconomic data. We have been warning here all week that as markets become increasingly less liquid as the Christmas holiday approaches that foreign exchange markets could be prone to sudden and seemingly random shifts and Thursday’s move amply illustrates the point we made.<br> <br> The number crunchers at the Australian Bureau of Statistics sensibly closed for the holiday season at midday yesterday and there will be no data releases at least until it re-opens on January 2nd. In this final morning update, we’ll leave the final words to the ABS who noted earlier this week that, “Santa will be busy this Christmas visiting the 2 million Australian families with children under the age of 12. The 2016 Census shows that most children live in New South Wales (1.2 million), Victoria (947,408) and Queensland (795,908). While the ABS doesn't record official reindeer numbers, the Census recorded 35 deer farmers in Australia who we’re sure could help Santa should any of his deer get tired.”<br> <br> The AUD opens in Asia this morning at USD0.7705 with AUD/NZD at 1.0990 and GBP/AUD1.7355. We wish all our Australian readers a very Happy Christmas, whatever your holiday plans.

British Pound

GBP / AUD

Expected Range

The British Pound had another up and down session on Thursday. Though it was quite resilient in the face of disappointing numbers on consumer confidence and car manufacturing, it finished pretty much unchanged against the EUR and USD, though well down against the Aussie, Kiwi and Australian Dollars.<br> <br> Latest industry figures from the Society of Motor Manufacturers and Traders (SMMT), show a 4.6 decline in the number of cars rolling off assembly lines in November to 161,479, taking annualised output to 1.69 million. This is an 18-month low after deliveries to the domestic market collapsed by more than 28 per cent; Only 15 per cent of UK cars built in November — 24,276, down from 33,745 in the same month last year — stayed in the home market, indicating rising nervousness among buyers. If the weak trend persists in December, UK car production will have suffered its first annual fall since 2009, when Britain was in the depths of the financial crisis. In that year, production plunged 31% to 999,460 cars.<br> <br> Separate figures earlier today by GfK showed UK consumer confidence fell again in December. The index fell by one point to -13, marking almost two years of declining consumer confidence. As their Press Release noted, “We need to see several issues move on before the downward trend of the consumer mood changes. We need to have a better sense of how Brexit will pan out, and also of how quickly and how far interest rates will rise. But none of this will be resolved quickly so there’s every likelihood that 2018 will take us lower.”<br> <br> The Pound opens in Asia this morning at USD1.3370 and GBP/AUD1.7355 with GBP/NZD at 1.9075.

Canadian Dollar

AUD / CAD

Expected Range

The Canadian Dollar exploded higher on Thursday after an extremely strong set of economic data on CPI and retail sales. By the end of the day, it was way out at the top of the FX leader board, rising 0.5% against the AUD and more than 1% against all the other major currencies we track here.<br> <br> The Bank of Canada has a 2% target for CPI and in October it predicted it would average 1.4% in the final three months of 2017. Policy makers didn’t expect a sustained return to 2% inflation until the end of next year. Instead, CPI inflation accelerated to 2.1% y/y in November from 1.4% in October. While the jump was due to a surge in gasoline prices (up 19.6% y/y), the increases went beyond energy. Prices were up in seven of the eight major CPI components in the 12 months to November, with the transportation and shelter indexes contributing the most to the increase.<br> <br> We don’t yet know the impact of these higher prices on consumers expenditure but the October retail sales figures also released yesterday showed plenty of forward momentum. Statistics Canada reported retail sales rose 1.5% to $49.9 billion in October. Higher sales at new car dealers were the main contributor to the gain. Excluding sales at motor vehicle and parts dealers, retail sales increased 0.8%. Sales were up in 7 of 11 subsectors, representing 79% of retail trade. After removing the effects of price changes, retail sales in volume terms increased 1.4%.<br> <br> The Canadian Dollar opens much higher in Asia this morning than it did 24 hours ago. It begins at USD1.2725 with AUD/CAD at 0.9800 and NZD/CAD at 0.8920 and we still have the monthly GDP for October to look forward to later in the day.

Euro

AUD / EUR

Expected Range

The euro was pretty much side-lined on Thursday with no economic data in the Eurozone, and politicians keenly watching elections as the Spanish region of Catalonia went to the polls. The election was called by the Spanish prime minister, Mariano Rajoy, at the end of October when the central government took control of Catalonia and sacked the regional government after it staged an illegal independence referendum and made a unilateral declaration of independence. The latest opinion polls suggest Catalonia is set for a hung parliament, with the pro-independence Catalan Republican Left party (ERC) vying for first place with the unionist, centre-right Citizens party.<br> <br> Article 155 of the Spanish constitution – which allowed Prime Minister Rajoy to sack the Catalan government and call elections – will remain in force until a new government has been agreed and a new regional president elected by the Catalan parliament. For the moment, and indeed for the forseeable future, no government in Europe is willing to support a Catalonian push for independence and the exiled leader of the secessionists, Carles Puigdemont, could well face arrest should he return from Belgium.<br> <br> The EUR opens in Asia this morning at USD1.1865, AUD/EUR0.6490 and NZD/EUR0.5910.

New Zealand Dollar

AUD / NZD

Expected Range

Just as the Aussie Dollar got back on to a new big figure against the US Dollar, so too the Kiwi Dollar spent nearly the entire day back on 70 cents with only a very brief dip down to 0.6990 around 11am London time which was quickly reversed. <br> <br> The move higher in NZD/USD can be pinned almost entirely on the New Zealand GDP figures. Ahead of their release, growth forecasts at the major banks locally ranged from +0.4% at Westpac to +0.7% at BNZ with the consensus at +0.6% q/q for an annual 2.4%. The official figures out yesterday morning showed a rebound in the construction sector drove gross domestic product up 0.6% in the three months ending September with an upwardly-revised +1.0% in Q2 helping lift the annual rate of growth to 2.7%. Statistics New Zealand also revised its GDP figures for previous years, raising 2015 growth to 3.6 percent from 2.4 percent and 2016 to 4 percent from 3 percent.<br> <br> The main bright spot in the latest figures was the construction sector, which grew 3.6 percent, unwinding two quarters of falls as investment went into rail, road and other infrastructure. But growth was dented by dairy production, which has been hampered by wet weather and lower global prices. As we suggested in our preview of the data, the RBNZ’s last Monetary Policy Statement assumed a +0.7% quarterly increase so anything less than this will reinforce expectations that interest rates will be on hold until at least 2019. Notwithstanding the upward revisions to prior periods, this has been very much the reaction from analysts locally and helps explain why NZD/USD still hasn’t broken Monday’s high around 0.9027.

United States Dollar

AUD / USD

Expected Range

Given the one story which has dominated financial markets for the last few months, we can’t resist reporting that the US Dollar yesterday rose against Bitcoin to end the day at USD/XBT0.0000649. Against the currencies which can actually be used for the payment of goods and services, the USD was either unchanged (EUR and GBP) or lower (NZD, AUD and CAD). It’s index against a basket of major traded currencies slipped very slightly to end at 92.83; the lowest since December 5th.<br> <br> The bumper crop of economic data in the US on Thursday was somewhat mixed. The second revision to Q3 GDP showed the annualised pace of growth slipped from a previously reported 3.3% to 3.2%, whilst weekly jobless claims rose much higher than expected from 231k the prior week to 241k. Against this very marginal softness, however, the Philly Fed survey jumped from 21.5 in November to 26.2 whilst the November index of leading economic indicators rose 0.4%, in line with consensus forecasts and the 15th consecutive monthly increase. The index was boosted by strong ISM new orders, higher stock prices, the positively-sloped yield curve, elevated consumer confidence and somewhat easier credit conditions. <br> <br> Whilst their counterparts in the Southern hemisphere have sensibly headed off on vacation, there’s plenty still for the US statisticians to report on before their Christmas break begins. Friday brings not only durable goods orders, new home sales and the Michigan survey of consumer sentiment, but also the monthly personal income and expenditure numbers as well as the much-watched (and Fed targeted) PCE deflators. The US Dollar index opens in Asia this Friday morning at 92.86 but where it finishes in extremely illiquid market conditions in New York this afternoon is anyone’s guess…

By Nick Parsons

The longest day of the year Down Under: AUD and NZD steady as USD Dollar edges lower. NZD Q3 GDP is released today.


Australian Dollar

AUD

Expected Range

As we head into the longest day of the year in the Southern Hemisphere, the trading ranges for the Aussie Dollar have narrowed quite noticeably. Over the past 48 hours, AUD/USD has been stuck in a 32 pip range from 0.7647 to 0.7679 with little in the way of catalysts or investor enthusiasm to move it one way or the other.<br> <br> Having amused everyone yesterday with a Press Release entitled “Seasonally adjusted greetings from the ABS”, which looked at some of the quirkier numbers around Christmas, the official statisticians separately drew some insights into Australia’s ageing population. They noted that in 2016, nearly one in every six people (16 per cent) was aged 65 years and over, an increase of 664,500 since 2011. Additionally, in 2016, there were almost half a million people (486,800) aged 85 years and over, an increase of around 85,000 people over the past five years.<br> <br> In 2016, over a third of people aged 65 years and older (37 per cent) were born overseas. About two thirds of these (67 per cent) were born in Europe, while almost a quarter of older overseas born people (24 per cent) reported that they were born in England. While the majority of older people (82 per cent) only spoke English at home in 2016, Italian (3.2 per cent) and Greek (2.2 per cent) were among the most commonly reported languages other than English. <br> <br> We’ll leave the last words on both population and Christmas to the ABS without further comment: “if you are celebrating your birthday on Christmas Day you are in rare company as the last 10 years of data shows it is the second least common birthday, after February 29. However, the Christmas and New Year holidays are the most likely time for babies to be conceived.”<br> <br> The AUD opens in Asia this morning at USD0.7660 with AUD/NZD at 1.0980 and GBP/AUD1.7475.

British Pound

GBP / AUD

Expected Range

The pound had a very mixed day on Wednesday, rising through to mid-afternoon London time but then slipping back in the New York session. It ended little changed against a weaker USD which meant it fell against all the major currencies we track here.<br> <br> The IMF released its annual report on the UK economy, with its Managing Director Christine Lagarde in London for a Press Conference. The IMF had been criticised 18 months ago for taking sides with former Chancellor George Osborne in the run-up to the EU referendum. Defending its forecasts, Ms Lagarde said that, “the Brexit referendum result and the decision to invoke Article 50 are already having an impact on the economy even though the UK is not planning to leave the EU until 2019. <br> <br> She added, “We feared that if Brexit was decided upon, it would most likely entail a depreciation of sterling, an increase in inflation, a squeezing in wages and a slowdown and a reduction of investment. What we are seeing is that that narrative we identified as a potential risk is being rolled out as we speak. It’s not experts talking, it’s the economy saying that. Our forecast is 1.6 per cent GDP growth this year and 1.5 next year, which relative to the upward revisions we are advocating for other advanced economies is a bit of a disappointment.”<br> <br> The IMF’s statement concluded, “Despite a strong recovery in global growth and supportive macroeconomic policies, the impact of the decision to exit the European Union has weighed on private domestic demand. Business investment growth has been lower than would be expected in the context of strong global growth and high levels of capacity utilization, owing to heightened uncertainty about economic prospects.”<br> <br> The Pound opens in Asia this morning at USD1.3395 and GBP/AUD1.7450 with GBP/NZD at 1.9190.

Canadian Dollar

AUD / CAD

Expected Range

We warned here yesterday of the sometimes random nature of foreign exchange markets and highlighted the price action in the Canadian Dollar as an example of sudden directional shifts. On Tuesday afternoon USD/CAD broke through the November highs of 1.2900 and 1.2905; reaching a best level of 1.2912 before quickly reversing 40 pips lower. On Wednesday, the pair extended the move to the downside and the CAD finished the second-best currency on the day after the EUR.<br> <br> In economic news locally, wholesale sales increased a much stronger than expected +1.5% to $63.0 billion in October, more than offsetting the 1.1% decline in September. Gains were reported in six of seven subsectors, together representing 81% of total wholesale sales. The machinery, equipment and supplies and the personal and household goods subsectors contributed the most to the increase.<br> <br> Wholesale inventories, meantime, increased 0.8% to $82.1 billion in October, the sixth gain in seven months. The machinery, equipment and supplies subsector (+3.5%) led the increases, with higher inventories in all four industries in the subsector. In October, the increase was led by the construction, forestry, mining, and industrial machinery, equipment and supplies industry (+3.5%). The machinery, equipment and supplies subsector has recorded increases in four of the past five months, increasing 7.0% over that period.<br> <br> The Canadian Dollar opens in Asia this morning at USD1.2830 with AUD/CAD at 0.9835 and NZD/CAD at 0.8950.

Euro

AUD / EUR

Expected Range

The euro followed up on Tuesday’s rally with a second day at the top of the FX league table on Wednesday; all of its gain coming very late in the European day and in the New York morning. The absolute magnitude of the move was not great – a 40 pip rise from 1.1843 to 1.1883 but the market was so quiet generally that it was enough for the EUR to take top spot.<br> <br> A look at pricing in the FX options market shows just how quiet things are. As Bloomberg notes, in the run-up to the holiday season, and especially in the days around Christmas, liquidity in the market drops considerably, increasing the risk that a currency faces abrupt moves even on small volumes. “One-week implied volatility in the euro-dollar dropped for an eighth day on Tuesday and traded as low as 4.73 percent, a level unseen since August 2014. A close below 5 percent would mark a record low for this time of year since the euro came into circulation.<br> <br> One-week options structures cover a series of major US economic data including gross domestic product, durable goods, income and spending numbers, and the Federal Reserve’s preferred gauge of inflation PCE. Clearly, the market is not pricing any directional risk from these indicators or, indeed, any unforseen exogenous shock.<br> <br> The EUR opens in Asia this morning at USD1.1880, AUD/EUR0.6450 and NZD/EUR0.5872.

New Zealand Dollar

AUD / NZD

Expected Range

Wednesday’s movements weren’t large anywhere in the FX universe, though after the US Dollar the New Zealand Dollar was - only very marginally - the weakest of the major currencies we track here. NZD/USD recovered well from its 0.6958 low but spent the whole of the Northern Hemisphere session on a US 69 cents big figure; unable to regain the 70c threshold which it occupied between Friday and Tuesday.<br> <br> Though we love the detail and insights which Statistics New Zealand bring to their many different economic, social and demographic snapshots of the country, even their most ardent fans would have to concede that 11 weeks is a long time to wait for quarterly GDP numbers. Finally though, today we’ll get to see how the economy performed in the three months to September.<br> <br> We know that the June quarter benefited from a pickup in milk production and a spike in tourist numbers during the Lions rugby tour. GDP grew +0.8% in Q2 to take the annual rate to 2.5%. For the last quarter, growth forecasts range from +0.4% at Westpac to +0.7% at BNZ with the consensus at +0.6% q/q for an annual 2.4%. The RBNZ’s last Monetary Policy Statement assumed a +0.7% quarterly increase so anything less than this will reinforce expectations that interest rates will be on hold until at least 2019.<br> <br> NZD/USD opens in Asia this morning at 0.6980 with AUD/NZD at 1.0980. The GDP figures are released at 10.45am local time.

United States Dollar

AUD / USD

Expected Range

The Dollar fell steadily across time zones on Wednesday, unable to gather much support either from strong economic data (existing home sales), higher bond yields or a rallying stock market. By the end of the London afternoon its index against a basket of major currencies had fallen to 92.85; its weakest level for a fortnight. The fall came – and we are wary of inferring causality – as the 3-month cross-currency basis swap (the price of borrowing dollars) suddenly reversed the move of last week which had persistently weighed down on the EUR/USD exchange rate.<br> <br> The US Senate has at last approved the $1.5 trillion tax reform bill, which includes permanent tax breaks for corporations and temporary tax cuts for individuals, by a final vote of 51-48. Once enacted, the legislation will represent the most drastic change to the US tax code since 1986. The bill lowers the top individual tax rate from 39.6% to 37% and slashes the corporate tax rate to 21%, a dramatic fall from its current rate of 35%. Speaking at a Press Conference after the vote, Senate majority leader Mitch McConnell hit back against criticism that the tax overhaul was unpopular among the public. “If we can’t sell this to the American people, we ought to go into another line of work.” Let’s see if this line comes back to haunt him at some point in the future.<br> <br> For the day ahead in the US, there’s a bumper crop of economic data releases: The third estimate of Q3 GDP, weekly jobless claims, the Philly Fed index, the Chicago Fed index of national activity and then November’s leading economic indicator. The US Dollar index opens in Asia at 92.86.

By Nick Parsons

Roller-coaster day for the USD as bond yields rise but stocks fall. EUR was best performer on Tuesday. AUD and NZD hold on to Monday’s gains.


Australian Dollar

AUD

Expected Range

Tuesday really was an up and down day. Everything was going well for the Australian Dollar until late in the London morning. It had risen to a best level of USD0.7680 and looked on track to test last Friday’s high of 0.7688 before succumbing to a modest USD rally which saw the dollar index rise around a quarter point off its low. By the end of the European day, AUD/USD had fallen 30 pips to 0.7648 but in the last 2 hours of New York trading, the Aussie had recovered to 0.7665; almost exactly where it had begun 24 hours earlier.<br> <br> The Minutes of the RBA’s December 5th Board meeting showed the Bank was generally upbeat on the labour market, noting conditions had remained positive and had been stronger than expected over the previous year. Employment had increased a little in October and growth over the previous year had been well above average. Full-time employment had risen sharply and was growing at around its fastest pace in a decade. The unemployment rate had edged lower to be 5.4 per cent in October, which was its lowest level since 2013, and unemployment rates had been on a downward trend in most states. Forward-looking indicators of labour demand suggested employment growth would be somewhat above average over the next few quarters.<br> <br> For all the strength in employment, however, “growth in consumption was expected to have slowed in the September quarter and the outlook for household consumption continued to be a significant risk, given that household incomes were growing slowly and debt levels were high.” The RBA, it is clear, will not be raising rates until wages pick up: “How far and when stronger conditions in the economy and labour market might feed through into higher wage growth and inflation remained important considerations shaping the outlook.”<br> <br> The AUD opens in Asia this morning at USD0.7660 with AUD/NZD at 1.0960 and GBP/AUD1.7465.

British Pound

GBP / AUD

Expected Range

After Monday’s very strong performance, the GBP ended broadly unchanged on Tuesday. At one point towards the middle of the European afternoon it was firmly at the bottom of the one day performance chart but a late session rally left it net little changed on the day.<br> <br> To recap for our Antipodean readers, Theresa May said on Monday that, “the guidelines published by President Tusk on Friday point to the shared desire of the EU and the UK to make rapid progress on an implementation period, with formal talks beginning very soon… We will now work with our European partners with ambition and creativity to develop the details of a partnership that I firmly believe will be in the best interests of both the UK and the EU”.<br> <br> The phrase “very soon” was not defined and – as we pointed out here - there appears no desire on the EU side to work with creativity. Within just a few hours, the European Union’s chief Brexit negotiator, Michel Barnier, said Britain cannot have a special deal for the City of London. “There is no place for financial services. There is not a single trade agreement that is open to financial services. It doesn’t exist.” He said the outcome was a consequence of “the red lines that the British have chosen themselves. In leaving the single market, they lose the financial services passport.”<br> <br> With no economic data scheduled for release in the UK today, the pound opens in Asia at USD1.3380 with GBP/AUD at 1.7460 and GBP/NZD at 1.9140.

Canadian Dollar

AUD / CAD

Expected Range

The Canadian Dollar is not heavily traded in offshore markets, but price movements in Asia and Europe overnight became progressively smaller before a big break to the upside during North American hours. The CAD spent all of Monday trapped in a range from USD1.2848 to 1.2878 and an overnight trading range in Asia Tuesday which saw USD/CAD stuck between just 1.2860-1.2873. By noon in London yesterday the pair stood at 1.2860 but barely 2 hours later it was at 1.2891 and on its way to a high in New York of 1.2912; its highest in almost 5 months.<br> <br> We’d love to be able to explain what was behind the move but, as with the US Dollar on Tuesday, there was little or no fundamental driver. It’s certainly likely that ‘stop-loss’ orders were triggered above the end-November high of 1.2900 and the November 1st high of 1.2905 but the pair then gave back 35 pips of its rapid gain equally quickly. At this time of year as markets become increasingly less liquid, such seemingly random price action is an ever-present risk and careful consideration should be given when placing orders either to exit or enter currency transactions. Bear in mind, too, that the price spike came in what was the ‘home market’ for USD/CAD. Imagine what can happen in overseas time zones…<br> <br> The Canadian Dollar opens in Asia this morning at USD1.2885 with AUD/CAD at 0.9870 and NZD/CAD at 0.9005.

Euro

AUD / EUR

Expected Range

The euro had a very good day on Tuesday, rising back on to a US 1.18 big figure at the end of the Sydney session and staying on it for pretty much the whole day It hit a best level of 1.1829 in the European time zone; the same as Monday’s high. By the end of the day, however, and as the US Dollar weakened, it went on to hit a high of 1.1846 and finished as the strongest of the major currencies.<br> <br> Having stubbornly refused to take any encouragement from last week’s crop of positive data, the release of the German ifo Survey this time did provide some support. According to the ifo Press release which was unusually full of seasonal cheer, “Sentiment among German businesses is excellent ahead of Christmas, but no longer quite as euphoric as last month. The ifo Business Climate Index edged downwards to 117.2 points in December from 117.6 (Seasonally adjusted) points in November. This was due to less optimistic business expectations. Assessments of the current business situation, by contrast, were more positive this month. German businesses are full of festive spirits.<br> <br> In manufacturing the index dipped down from its record high. Manufacturers are no longer quite as optimistic about the months ahead. However, they are more positive about their current business situation, primarily due to an upturn in orders. Both indices close the year way above their long-term average. Manufacturers expect prices to continue to increase”.<br> <br> The EUR opens in Asia this morning at USD1.1845, AUD/EUR0.6470 and NZD/EUR0.5900. German PPI and Eurozone PPI data due on Wednesday are very unlikely to be market moving data points.

New Zealand Dollar

AUD / NZD

Expected Range

Like its Aussie cousin, the New Zealand dollar enjoyed a good morning in Europe, seemingly on track to retest the multiple highs of the last few days at USD0.7025 and 0.7027 and 0.7028. At noon in London it reached a best level of 0.7015 before turning sharply lower as the US Dollar rallied. By the close of business in Europe, NZD/USD was down at 0.6982 but in the last couple of hours of New York trading it recovered just a little to close at 0.6990.<br> <br> Yesterday we saw ANZ’s business confidence survey. It was this which did the greatest damage to the Kiwi Dollar a month ago when the headline measure plunged 29 points to an 8-year low of -39. Unfortunately, there was no discernible pick-up in December: a net 37.8% of respondents expected the economy to deteriorate over the year ahead. Digging into the details of the survey reveals one bright spot. Business expectations for their own firms to grow in the next year picked up to a net 15.6% of respondents, from 6.5% in November. The historical average for this series is +28. As the ANZ noted in their Press release, “The economy is doing the hard yards at the moment. Positive forces remain, but the turn in housing, flattening off in net migration and lack of capacity in the construction sector are all dampening near-term growth."<br> <br> Today there are effectively two sets of trade figures to analyse: the monthly merchandise trade numbers November and then the Q3 balance of payments data. The consensus (such as it is) appears to be for a monthly deficit around -$350m after -$871m the previous month. This would improve the rolling 12m deficit (a favoured measure in NZ if not elsewhere around the world) to around -$2700m from -$2986. For the quarterly snapshot, it is expected that the current account deficit as a percentage of GDP will drop from 2.8% in Q2 to 2.6% in Q3.<br> <br> NZD/USD opens in Asia this morning at 0.6990 with AUD/NZD at 1.0960.

United States Dollar

AUD / USD

Expected Range

The Dollar had a roller-coaster day on Tuesday after Monday’s difficult to explain drop. We reminded readers seeking to understand its decline of the wise words of Janet Yellen that “correlation does not imply causality”. It was certainly interesting to do a Google search on Monday evening and look at the multiple versions of “US Dollar drops as….” Your author was forced to spend 5 years of secondary education learning Latin (in the perhaps forlorn belief that this would improve his adult vocabulary) and is often reminded of the phrase “post hoc ergo propter hoc”. For the non-classicists, this translates as “after this therefore because of it” and is a trap into which many financial journalists frequently fall.<br> <br> Having opened in Sydney at 93.25 yesterday, the USD’s index against a basket of major currencies fell to 93.07 but rallied in the European afternoon to 93.20; not quite reversing all the decline but with a steadier tone nonetheless. Its’ rally came as US bond yields rose above their recent trading ranges with 10-year Treasuries up at 2.45% from 2.38% on Monday.<br> <br> From 4pm London time, however, and even as US bond yields sustained their earlier climb, the USD turned lower once more. A weaker equity market didn’t help investor sentiment but as we go to print the House of Representatives has just passed the tax reform bill 227-203, sending it to the Senate for approval.<br> <br> The US Dollar index opens this morning in Asia at 93.0. There’s not much on Wednesday’s US economic calendar though existing home sales are expected to have risen 0.9% m/m to an annualized pace of 5.52m.

By Nick Parsons

USD tumbles for no obvious reason. GBP best performer on the day, followed by EUR. AUD and NZD mixed but on balance a touch stronger.


Australian Dollar

AUD

Expected Range

The Australian Dollar had quite a good day on Monday, though perhaps not quite as good as a quick look at the AUD/USD exchange rate would suggest. It couldn’t quite get back to Friday’s 0.7688 high – which was the best level since November 10th – on a day when the US Dollar itself was the weakest of all the major currencies. Each of the three main global time zones saw AUD/USD trade sequentially higher though by the end of the New York session, it had reached a best level of ‘only’ 0.7676.<br> <br> The main event for investors in Australia to mull over was the Government’s Mid-Year Fiscal and Economic Outlook (MYEFO). This update traditionally gives the Government a good opportunity to make soothing noises to the international ratings’ agencies about economic growth and debt sustainability. In this regard, this latest MYEFO was exactly as expected.<br> <br> The Government continues to forecast a return to budget balance in 2019-20 and then a surplus of $10.2bn in the 2020-21 fiscal year. A slowdown in the housing market and slower growth in wages have reduced the estimate of 2017-18 GDP from 2.8% to 2.5% though the unemployment rate is now seen a quarter of a percent lower at 5.5% and CPI has been left unchanged at 2.0%.<br> <br> The initial reaction from the credit agencies was broadly positive. Moody’s said, “Overall, the modest changes in Australia’s fiscal and economic outlook maintain a credit-positive commitment to returning the budget to a surplus in fiscal 2021.<br> <br> Moody’s continues to see risks that fiscal deficits will be wider for longer than the government projects. This reflects our expectation for more subdued nominal GDP growth than over the past decade, a consequent dampening of revenue generation and a testing climate for spending restraint. The mild reduction in the expected profile for wages growth embodied in the forecasts remains a concern.”<br> <br> The AUD opens in Asia this Monday morning at USD0.7667 with AUD/NZD at 1.09458. The big event locally with be the 11.30am release of the RBA Minutes for the December Board meeting.

British Pound

GBP / AUD

Expected Range

The British Pound performed better than its cricket team yesterday but that is setting the bar really low! It opened in Sydney on Monday morning at 1.3320 and by mid-afternoon London time had reached a best level of 1.3415. It gave up some of these gains in New York but nonetheless finished as the day’s strongest performer amongst the major currencies we track closely here.<br> <br> Although Prime Minister Theresa May has consistently declined to give what she calls a “running commentary” on Brexit negotiations, she always gives a statement to the House of Commons after EU summits. These used to be extremely dull, with little information content, but they have now become major set-piece Westminster events. The published text of her remarks to Parliament says, “the guidelines published by President Tusk on Friday point to the shared desire of the EU and the UK to make rapid progress on an implementation period, with formal talks beginning very soon… We will now work with our European partners with ambition and creativity to develop the details of a partnership that I firmly believe will be in the best interests of both the UK and the EU”.<br> <br> Though this speech gave a pre-Christmas lift to Conservative MP’s and their supporters, it doesn’t take much textual analysis to spot the two big problems: The phrase “very soon” is not defined and could actually mean many months pass before even the most tentative agreement is reached. More importantly, there appears no desire on the EU side to work with creativity. Michel Barnier, the lead EU Brexit negotiator said at the weekend that “no way” could there be a bespoke trade deal that mixed those that applied to Canada and Norway. “There won’t be any cherry picking,” he said.<br> <br> The GBP opens in Sydney this morning at USD 1.3382, AUD1.7452 and NZD1.9125. There are no UK statistics released this Tuesday.

Canadian Dollar

AUD / CAD

Expected Range

After last week’s very well-received speech, the Governor of the Bank of Canada gave an interview to the Globe and Mail newspaper this last weekend in which he played down the importance of so-called forward guidance. “I'm confident that other central banks, now that we are getting much more into normalcy, will gradually temper down the details around their forward guidance, too… I'm not going to judge whether the market got it right or not. But it does seem like the market has a tendency to seize on a new word as if it's a new secret code. Caution does not mean sitting back and doing nothing.”<br> <br> For the moment, the Canadian Dollar hasn’t really responded to these latest comments. It spent all of Monday trapped in a range from USD1.2848 to 1.2878; shrugging off a 30c fall in oil prices but failing to get any real traction from Mr. Poloz’s call on interest rates that, “We need to get ourselves up there for real, and to the 2-per-cent zone, so we have room to manoeuvre for the next shock that comes along."<br> <br> For the rest of the week, there’s still plenty to come on the Canadian economic data calendar. Wednesday is wholesale trade, Thursday is CPI and retail sales and on Friday it’s the monthly GDP numbers for October.<br> <br> The Canadian Dollar opens in Asia this morning at USD1.2870 with AUD/CAD at 0.9865 and NZD/CAD at 0.9005.

Euro

AUD / EUR

Expected Range

The euro had a good day on Monday, rising first in Asia, then in Europe and early in the New York day reaching its best level since just before last week’s ECB meeting. From an opening level around 1.1745, it reached 1.1818 before sliding back late in the day to the high 1.17’s. This strength in the Single European Currency came despite a very dovish speech from ECB Council member and Bank of Finland Governor Erkki Liikanen and the details of the final Eurozone CPI numbers for November.<br> <br> Ms Liikanen said the recovery of the Euro area economy and reduction of economic slack supports confidence in inflation converging towards our inflation aim in due course but, “An ample degree of monetary stimulus is still required for underlying inflation pressures to continue to build up and support headline inflation developments over the medium-term”.<br> <br> Inflation in the Eurozone was confirmed at 1.5% y/y in November. This was boosted by higher energy prices (which are now up 4.7% y/y) whilst food, alcohol and tobacco eased back to 2.3%. Core CPI rose just 0.9% y/y, in line with the preliminary estimate and it is for this reason that the ECB persisting with a very easy monetary policy even as the real economy is accelerating at a pace not seen since well before the GFC.<br> <br> The EUR opens in Asia this morning at USD1.1780 and AUD/EUR0.6506. The big data point on Tuesday will be the German ifo Survey which last month jumped to an all-time high of 117.5 and is expected unchanged at this level in December.

New Zealand Dollar

AUD / NZD

Expected Range

After its very strong performance last week, the New Zealand Dollar was much more mixed on Monday. It rose against the US and Canadian Dollars, was down a little against the euro and Australian Dollar and fell somewhat more against the British Pound. As with the AUD, it couldn’t get back to Friday’s highs against the USD with an intra-day high of 0.7027 a couple of pips shy of last week’s best level.<br> <br> The day began very well for the flightless bird. The BNZ performance of services index rose 0.7 points to 56.4 last month, above its long-term average of 54.4. All of the five sub-indices were above the 50 reading that separates contraction from expansion. The survey's new orders sub-index posted the highest reading, rising to 60.7 from 60.3, while activity/sales advanced to 60.5 from 58.2. This was the seventh consecutive month the new orders index has been above the giddy heights of 60 though the survey's employment sub-index continued to be a relatively softer component of the PSI; printing at just 50.6 from 51 in October.<br> <br> The week ahead is packed with economic data as the official statisticians clear their diaries ahead of the local holiday season. Q3 GDP figures will finally be published on Thursday with growth expected to slow to 0.6% in the quarter for an annual pace of 2.4 per cent, whilst today we’ll get to see if the sharp fall in ANZ’s November business confidence has been at all reversed. There is no published consensus for this number, but recall that last month it plunged 29 points to an 8-year low of -39.<br> <br> NZD/USD opens in Asia this morning at 0.6995 with NZD/EUR at 0.5937 and GBP/NZD at 1.9130.

United States Dollar

AUD / USD

Expected Range

The Dollar had a very poor day on Monday even if, with the benefit of hindsight, it is hard to pin the blame on any specific factor. Indeed, we’d repeat the wise words of Janet Yellen that “correlation does not imply causality”. Having opened in Sydney at 93.50, the USD’s index against a basket of major currencies reached a high of 93.55 in the first couple of hours of trading but from then on it was downhill all the way; falling in all three time-zones to a low of just 93.03 before rallying to 93.23.<br> <br> The blame for its decline cannot be placed on the equity market. The S+P 500 index added almost 20 points to yet another all-time record high with the Dow Jones Industrial average up almost 200 points. Nor can the finger of blame be pointed at the bond market. Ten-year US Treasuries were steady at 2.38% whilst 2-year yields climbed a couple of basis points to 1.83%. If political nerves were the culprit, this would surely have been reflected in a lower, not a higher, stock market. As for the day’s economic data, the NAHB homebuilders index smashed consensus expectations of 70 and rose to 74; its highest since December 1999.All we can say with confidence is that the Dollar fell. Be very wary of anyone who claims to know why.<br> <br> The US Dollar index opens this morning in Asia at 93.23 with all eyes still on the passage through Senate of the tax reform bill. US economic data for Tuesday are housing starts and building permits; rarely market movers but – as we saw Monday – sometimes markets move for no obvious reason at all.

By Nick Parsons

USD surged late Friday on tax reform hopes. NZD and AUD were the week’s top two currencies; can they sustain recent gains into the holiday season?


Australian Dollar

AUD

Expected Range

The Australian Dollar opens this morning after its best week for several months; rising for four consecutive days then only finally giving ground to a resurgent US Dollar in the last few hours of trading in New York on Friday. After the very poor performance of the AUD over the previous few weeks and the general softness in many of the incoming economic indicators, there is no doubt that investors were either outright short of the currency or underweight relative to their neutral benchmark weightings. The sharp rise in the Kiwi Dollar last Monday led to some closing of these short AUD positions and by the time of the labour market report on Thursday, there were huge sighs of relief from those investors who had exited their bearish trades.<br> <br> AUD/USD jumped to 0.7668 immediately after the employment numbers were published on Thursday and then onto a high of 0.7689 on Friday; its best level since November 10th. As it seemed the US tax reform bill would, indeed, finally be passed, US equities had a huge late session rally with the S+P 500 index up almost 1%. This dragged up the USD in its wake to leave the AUD at USD0.7641 at the New York close. Over the course of the whole week, the Australian Dollar was the second-best of all the major currencies we track here; just knocked off top spot by its trans-Tasman cousin.<br> <br> The focus of attention today will be the Australian Government’s Mid-Year Fiscal and Economic Outlook (MYEFO). Budgets in Australia don’t have the same drama as their British equivalent though they are far less drawn out than in the United States. They are only occasionally market-moving events but they do give the Government a good opportunity to make soothing noises to the international ratings’ agencies about economic growth and debt sustainability.<br> <br> The AUD opens in Asia this Monday morning at USD0.7653 with AUD/NZD at 1.0934.

British Pound

GBP / AUD

Expected Range

The British Pound matched the performance of its cricketers last week: a bright start, then collapse and capitulation. It began in the warm afterglow of Prime Minister Theresa May’s Brussels deal on the Irish border though Tuesday’s inflation data then pulled the GBP lower. <br> <br> Just as investors were digesting the Fed Statement on Wednesday came news that the UK Government had been defeated on one of the night’s four parliamentary votes on Brexit. The implications of this for the British Pound appeared to us somewhat mixed. On the one hand, any defeat for the Prime Minister is something which will weaken her authority and arguably put her in a weaker negotiating position in Brussels. On the other, the substance of the 24-word Bill was to give Parliament a vote on the final terms of the Brexit deal. We wrote on Thursday morning that, “To the extent that it leaves the door open to a rejection of Brexit, this could perhaps be interpreted as a GBP positive, albeit not one which we’d put much weight on right now.” <br> <br> On Friday, it became clear that Prime Minister would be unlikely to dictate either the terms or the timetable for discussions on Phase 2 of the Brexit negotiations. Her EU counterparts refuse to be rushed and are arguing that no progress can be made until the UK Government sets out definitively what it wants to achieve. With the USD buoyant as the tax reform passage seemed set to pass and US stock markets surged, the British Pound plunged on Friday afternoon, ending the week almost on its lows at USD1.1315. From its recent high against the AUD it was down 5½ cents to 1.7425 whilst GBP/NZD was down just over 7 cents at 1.9055.<br> <br> The week ahead will again be dominated by Brexit, this time as the UK Government (542 days after the referendum!) is finally going to have a Cabinet meeting to decide what it wants from the negotiations. A long time has passed since Foreign Secretary Boris Johnson’s confident claim that he was “pro-cake and pro-eating it”.<br> <br> The GBP opens in Sydney this morning at USD 1.3321, AUD1.7415 and NZD1.9040. Their cricketers open at 132-4 in Perth. We wrote here on Friday that, “Those who love a bet will be wondering whether the currency or the sportsmen crumble first.” As it turned out, backing the double would have been the best bet…

Canadian Dollar

AUD / CAD

Expected Range

The Canadian Dollar spent the first few days of the week in a fairly narrow range, pulled up and down solely by movements in crude oil prices. It began at USD1.2855, reached a high of 1.2884 on Tuesday evening and a post-FOMC low of 1.2798. The highlight of the week, however, was a keenly-anticipated speech on Thursday from Bank of Governor Stephen Poloz which had the fascinating title “Things that keep me awake at night”. <br> <br> Overall, the context of his speech was that the Canadian economy is doing extremely well and is at a “sweet spot” in the economic cycle. “The economy has made tremendous progress over the past year, and it is close to reaching its full potential. We are very encouraged by this, and we are growing increasingly confident that the economy will need less monetary stimulus over time.”<br> <br> Needless to say, currency markets loved this speech. USD/CAD tumbled a full cent to a one-week low of 1.2735 and it was the best performing currency of the entire day, gaining even against a buoyant Australian Dollar. On Friday, however, the CAD was unable to resist in the face of the US Dollar’s late surge and USD/CAD ended the week very little changed from where it had begun at 1.2870.<br> <br> For the week ahead, there’s still plenty to come on the Canadian economic data calendar. Wednesday is wholesale trade, Thursday is CPI day and on Friday it’s the monthly GDP numbers for October (just one day after NZ finally gets round to publishing Q3 GDP data). First up today, though, are numbers on international securities transactions and consumer confidence. The Canadian Dollar opens in Asia this morning at USD1.2870 with AUD/CAD at 0.9850 and NZD/CAD at 0.9005.

Euro

AUD / EUR

Expected Range

The Euro had another disappointing week, failing to gain any upside traction even as incoming data continued to show the economic recovery in the Eurozone to be broadening and deepening. It opened in Asia on Monday morning at USD1.1765 but at its best spent barely 15 minutes on a 1.18 big figure before turning lower on Tuesday to the week’s low of 1.1724 as Press in Italy reported that President Sergio Mattarella will dissolve Parliament this month and set a March 4 election date. Given this uncertainty, 10-year Italian bond yields jumped 10bp. Although there was no contagion into other peripheral Eurozone bonds, investors haven’t recently needed much of an excuse to sell EUR and the Italian news was the trigger for Tuesday’s underperformance.<br> <br> Wednesday’s post-FOMC Dollar sell-off saw EUR/USD jump more than a cent, and on Thursday it reached its best level of the week at 1.1843, helped by very strong purchasing managers surveys: “The eurozone economy picked up further momentum at the end of 2017, with December seeing the fastest growth of business activity for nearly seven years. The best factory output and order book gains since 2000 pushed the manufacturing headline PMI to a record high, while an upturn in service sector to growth to the highest since early-2011 underscored the broad-based nature of the current surge in activity”.<br> <br> At the ECB meeting, new staff economic projections showed upward revisions to growth forecasts. 2018 GDP is now seen at 2.3% (previously 1.8%) with 2019 at 1.9% from 1.7%. 2018 CPI was nudged up from 1.2% to 1.4% though 2019 and 2020 were left unchanged at 1.5% and 1.7% respectively. The significance of the CPI forecasts is that on a 2-year horizon, inflation is not yet back at the ECB’s target of “close to but just below 2%”. This provides the justification for continuing the very accommodative monetary policy. <br> <br> By Friday’s close, the EUR had given up all of Thursday mornings gains and more; ending in New York at the session lows of USD1.1751 as the USD surged in a very illiquid market. <br> <br> EUR/USD opens in Asia this morning at 1.1745 with AUD/EUR at 0.6505. There’s no a great deal of economic news this week, though the highlight will be Tuesday’s German ifo survey and today’s final Eurozone CPI numbers.

New Zealand Dollar

AUD / NZD

Expected Range

The New Zealand Dollar ended a volatile week at the top of the pile; the best performer amongst all the major currencies.<br> <br> NZD/USD began at 0.6838 and jumped almost a full cent to 0.6930 during the first Asian session of last week on news of a new Governor at the RNBZ. Late in Monday’s US session, the pair broke above the late November high of 0.6943 and the much-improved technical chart picture left it well positioned to capitalise on the USD weakness after the FOMC Statement on Wednesday evening. By the New York close, NZD/USD was on a 70 cents handle for the first time since October 19th.<br> <br> Thursday saw a reversal lower in the NZD as the Government released its Half-Year Economic & Fiscal Update which was generally seen as being far too optimistic. Whatever the case, the NZD soon rebounded and by lunchtime in London on Friday it reached a fresh high for the week of USD0.7027 before succumbing to the US Dollar’s late surge to finish the week in New York at 0.6990. With the AUD/NZD cross falling very modestly from 1.0975 to 1.0930, this meant the Kiwi Dollar took the prize as the strongest currency of the week. The week ahead is packed with economic data as the official statisticians clear their diaries ahead of the local holiday season. Q3 GDP figures will finally be published on Thursday, whilst Tuesday we’ll get to see if the sharp fall in November business confidence has been at all reversed. Before then, today we get the performance of services index which will be watched to see if it can match the resilience of its counterpart in manufacturing.<br> <br> NZD/USD opens in Asia this morning at 0.6997 with NZD/EUR at 0.5959 and GBP/NZD at 1.9040.

United States Dollar

AUD / USD

Expected Range

The Dollar had a very volatile week but its index against a basket of major currencies ended almost exactly where it had begun at 93.50. On Monday the S&P 500 Index ended the day up 0.3% at 2,659; a new record close, led by the telecoms, technology and energy sectors. Tuesday brought the dollar’s high for the week at 93.81 as the Fed began its two-day FOMC meeting but then came news from a highly controversial Senate election in Alabama; a deeply conservative southern State. Mr. Trump had given enthusiastic support to a former judge, Roy Moore, who faced a series of allegations about misconduct and who had previously said that he does not believe that Barack Obama was born in the US and that Muslims should not be allowed to serve in Congress. Mr. Moore was defeated by Democrat Doug Jones; a move which not only questioned the President’s judgment, but reduces the Republican majority in the Senate to just one seat.<br> <br> The Fed Statement on Wednesday noted, “the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong.” In its new economic projections, it revised up 2018 GDP forecasts from 2.1% to 2.5% with further more modest upgrades to the outlook in 2019 and 2020. Though two of the nine voting members dissented, there were no downward revisions to future ‘dot points’ and the belief that inflation would indeed pick up was again reiterated.<br> <br> Despite what looked to be a very non-controversial Statement and subsequent Press Conference, the Dollar extended its decline in the last 2 hours of trading in New York, with the index falling to a 1-week low of 93.00. Thursday was pretty uneventful for the USD and Friday also got off to a sluggish start. From the New York opening on Friday, however, stocks began to surge on news that the last Republican hold-out on tax reform was now going to offer his support after being offered some concessions on child care provisions. The S+P 500 index jumped a stunning 25 points to a fresh closing high, dragging the USD index up three-tenths to end a volatile week exactly where it had begun at 93.30.<br> <br> The US Dollar index opens this morning in Asia at 93.50 with all eyes on the passage through Senate of the tax reform bill. Vice President Mike Pence has delayed a trip to the Middle East as the Republican majority is so slim the party can’t afford even to have one Senator away…

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