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By Nick Parsons

EUR jumps after manufacturing PMI. AUD dipped below 80 US cents but claws its way back. USD index down near Davos lows.


AUD / NZD

Expected Range

The New Zealand Dollar has done pretty well after its mauling a week ago. For a few hours around lunchtime in Europe on Wednesday, NZD/USD was back on a 74 cents ‘big figure’ though it couldn’t sustain this level post-Fed and has subsequently eased back in to the high 73’s having at one point in Europe been as low as USD0.7340. Against its Aussie cousin, however, the Kiwi has performed very impressively. The AUD/NZD cross on Monday hit a 7-week high of 110.70 but is now down at 1.0875; back exactly to where it was before the soft NZ CPI figures last Wednesday evening. <br><br> We wrote on Wednesday how the New Zealand Government had got a boost from credit ratings agency Standard and Poor’s, which reaffirmed its existing sovereign rating for New Zealand, saying, "The economy is wealthy and resilient, reflecting decades of structural reforms… Our ratings reflect solid fiscal performance and our expectation that higher government spending will not materially weaken the country's fiscal profile." Yesterday, investors seemed particularly impressed by an opinion poll showing support for the governing Labour Party surged to its highest level in more than a decade and approval ratings jumped for pregnant Prime Minister Jacinda Ardern. Support for Labour has surged 5.4 points since September’s fiercely contested election to 42.3 percent, its highest since it last held government in 2007. The number of respondents naming Ardern as their preferred Prime Minister also jumped 8.3 points to 38 percent since the last poll in September, overtaking National Party leader Bill English on 26 percent. <br><br> Today will be a day with plenty of economic numbers locally. We’ll have consumer confidence, building permits and the always-fascinating net migration statistics for December. Ahead of all this, the New Zealand Dollar opens in Asia at USD0.7390 and AUD/NZD1.0870.

AUD

Expected Range

Having spent fewer than 20 days in the past year above 80 US cents, AUD/USD was always going to require a much weaker US Dollar or stronger domestic economic data to sustain its recent climb higher. It hasn’t really had either of those and at one point on Thursday in the Northern Hemisphere, the AUD traded down on to a 79 cents handle for the first time in over a week. As has been the case with many currencies recently, though, just as they seem technically poised to break lower, there’s a sharp bounce higher. 40 pips isn’t a massive move, but it was enough to return the AUD on to 80 cents as investors nervously await Friday’s US employment report. <br><br> The first day of the month brings manufacturing PMI surveys around the world and Australia’s version – which is co-produced by Markit and CBA – was the first of 29 which were released on Thursday. The headline PMI fell from 57.1 in December to a four-month low of 55.4 in January. The Press Release seemed far more upbeat than the actual numbers and noted, “Growth of Australia’s manufacturing sector was sustained during January, underpinned by strong expansions in both output and new orders. In turn, greater inflows of new business encouraged firms to raise employment… In line with greater production requirements, firms hired additional staff. Although the rate of job creation eased slightly, it remained relatively marked. Payroll numbers have expanded in each month since September 2016”. <br><br> The RBA’s commodity price index increased by 7.1% in SDR terms in January, after increasing by 4.5% in December. Coking coal and iron ore prices led the increase, whilst the rural and base metals sub-indices also increased in the month. In Australian dollar terms, the index increased by 4.6% in January. Commodity prices were certainly one of the factors which helped the AUD rise last month, along with lower volatility across asset classes. We’ve already seen a big jump in volatility over the past few days and if commodities don’t sustain recent rises, then the outlook for the AUD will look much less positive. The Australian Dollar opens in Asia today at USD0.8035, with AUD/NZD at 1.0870 and GBP/AUD1.7750.

GBP / AUD

Expected Range

The British Pound continues to experience relatively wide daily trading ranges. As recently as Tuesday morning, GBP/USD was below 1.4000 before then jumping almost 2 cents. After a half cent drop post-Fed, in early European trading on Thursday it added nearly another cent to a high of 1.4265; its best level since the day of the ECB meeting last week. <br><br> There has been little or nothing on the UK data calendar which is obviously GBP-positive. The manufacturing PMI survey saw a further easing in the rate of expansion of the sector. At 55.3 in January, the index was down further from November’s 51-month high and at its lowest level since June last year. The Press Release noted, “The UK manufacturing sector reported an unwelcome combination of slower growth and rising prices at the start of 2018. Encouragingly, despite the slowdown, the latest survey is consistent with production rising at a solid quarterly rate of around 0.6% in January, with jobs also being added at a faster pace. However, output growth has slowed sharply since last November’s high, and the more forward-looking new orders index has slipped to a seven-month low. The trend in demand will need to strengthen in the near-term to prevent further growth momentum being lost in the coming months”. <br><br> As for politics, the Prime Minister spoke with UK journalists on her trip to China and said that EU citizens who arrive during the post-Brexit transition period must not have the same rights as those who came before. We wrote in our North American commentary on Thursday that, “It sounds like another row with the EU is brewing…” Sure enough, within a few hours, the European Parliament’s Brexit negotiator, Guy Verhofstadt, replied that, “The maintenance of EU citizens’ rights during the transition is not negotiable… We will not accept that there are two sets of rights for EU citizens. For the transition to work, it must mean a continuation of the existing acquis [EU law] with no exceptions.” The row looks more likely to escalate than to go away though for the moment hasn’t noticeably dampened enthusiasm for the GBP. The Pound opens in Asia this morning at USD1.4260, GBP/AUD1.7745 and GBP/NZD1.9290.

AUD / CAD

Expected Range

The Canadian Dollar has held firmly on to a US 81 cents big figure since early Tuesday morning. In USD/CAD terms, this equates to 1.2345. On Wednesday, this pair extended the move down to 1.2263; a level not seen since late-September last year and Thursday it nearly matched this with a low print of 1.2270. It would have to fall all the way to 1.2195 for the CAD to hit 82 cents and during the whole of the last year, USD/CAD spent only a couple of weeks in September below that level. <br><br> The Canadian Manufacturing PMI picked up to 55.9 in January from 54.7 in December, to remain well above the 50.0 no-change threshold. Manufacturers reported a strong start to 2018, underpinned by faster rises in output volumes, new business intakes and staff recruitment. There were also signs that the resurgence in production schedules would continue in the months ahead, with incomplete workloads accumulating at the fastest pace since the survey began in October 2010. Improved demand conditions and sharp input cost inflation meanwhile led to the largest increase in factory gate prices for almost seven years. An incredibly upbeat Press Release noted, “The manufacturing sector is beginning to show signs of firing on all cylinders, as shown by the broad-based improvement in operating conditions during January… Canada’s manufacturing sector has now seen resurgent new business flows for three months running, underpinned by greater sales at home and abroad. Well balanced demand growth and an ongoing improvement in global economic conditions should help manufacturers sustain a strong rate of expansion in the coming months”. <br><br> There are no more Canadian numbers to come this week, which is probably a good thing as there don’t seem to be any superlatives left after the PMI report! The Canadian Dollar opens in Asia this morning at USD/CAD1.2275, AUD/CAD0.9860 and NZD/CAD0.9070.

AUD / EUR

Expected Range

The EUR dipped once more below USD1.24 at the end of yesterday’s Asian session but since then it’s been on an upward tear; rising a full cent off the low to be within touching distance of the 3-year high of 1.2530 reached during the ECB Press Conference last week. Indeed, the EUR finished at the top of our one-day performance table, rising against all the major currencies we track closely here. <br><br> In economic news, final Eurozone Manufacturing PMI printed at 59.6 in January, down from December’s record high of 60.6 and identical to the earlier flash estimate. The PMI has signaled expansion in each of the past 55 months. Markit’s Press Release noted, “The eurozone manufacturing sector made a strong start to 2018. Although January saw rates of growth in output and new orders ease from near-record highs at the end of last year, they remained among the best seen since the survey began in 1997.” Companies indicated that they were experiencing solid inflows of new business from both the domestic and export markets during January whilst manufacturing employment rose for the 41st successive month in January. The rate of jobs growth remained substantial and close to the survey record highs achieved in November and December of last year. <br><br> Given the first working day of the new month fell on a Thursday, we won’t get to see the service sector PMI numbers until Monday next week. For today, the EUR opens in Asia this morning at USD1.2495, AUD/EUR0.6430 and NZD/EUR0.5915.

AUD / USD

Expected Range

Like a prize fighter on the ropes, the US Dollar keeps getting knocked down each time it staggers to its feet. On Wednesday, its index against a basket of major currencies opened at 88.90 but was then pushed steadily down to a low point in the European afternoon of 88.52. After the latest FOMC Statement – which reads very slightly more hawkish than the December version – it climbed back Thursday morning to 88.98 before once again being punched lower to 88.40. <br><br> Whatever the many reasons analysts advance for the US Dollar’s decline – and many of them would sound more convincing if they had been made before it happened rather than an ex-post rationalisation – the performance of the US economy certainly isn’t one of them. The number of Americans filing for unemployment benefits unexpectedly fell last week, pointing to a tightening labor market and strengthening economy at the start of the year. Initial claims for state unemployment benefits slipped 1,000 to a seasonally adjusted 230,000 for the week ended January 27th. This was the 152nd straight week that claims remained below the 300,000 threshold; the longest such stretch since 1970. Separate numbers showed construction output rose almost twice as fast as expected with a +0.7% m/m gain whilst the January ISM manufacturing index dipped very slightly to a higher than expected 59.1 from a revised 59.3. This marked the 105th straight month of growth for the overall economy. <br><br> After this latest batch of economic data, the Atlanta Fed published updated estimates of its Q1 GDP forecast. Its first estimate was an already-punchy 4.2% but this has now been pushed up to 5.4%; the highest since Q1 2012. Of course, the model is not infallible and there is a well-established pattern of high numbers at the beginning of a quarter which then get revised progressively lower. As a starting point, though, it’s a pretty strong place to be. US 10-year bond yields are another 2bp to a recent high of 2.77% but’s of little help to the USD, whose index opens in Asia today at 88.40; just two-tenths above the Davos low last week.

By Nick Parsons

Very slightly more ‘hawkish’ Fed helps lift US Dollar off its lows. AUD very choppy but NZD the big winner on Wednesday as EUR and GBP give back gains.


GBP / AUD

Expected Range

Monday saw the first ‘down day’ for GBP/USD for the first time in 11 trading days, and at one stage early in the European morning on Tuesday, the pair dipped below 1.40 for the first time in a week. On a day which saw some large intra-day swings in both directions for all the major currencies, the GBP was the most volatile of all. GBP/USD fell 85 pips then rose 175 to be back where it opened on Monday morning in Asia around 1.4150. <br><br> Bank of England Governor Mark Carney appeared Tuesday afternoon before the House of Lords Select Committee on the economy. He refused to comment on the confidential government analysis of the economic impact of Brexit which was reported to have been shown to Cabinet Ministers over the weekend. These had suggested growth would be between 2-8 percent lower over the next 15 years. Instead, he repeated his view that the 2016 Brexit vote had, so far, effectively knocked 1 per cent of GDP off the UK, relative to where it would otherwise have been, through weaker corporate investment and damage to household consumption due to higher inflation. He also hinted that the Bank is actually preparing to upgrade its forecasts at its Inflation Report next month. “I would expect that in 2019 we will see a pick-up in this economy all things being equal – strong global growth, greater certainty... A disorderly Brexit, not a likely scenario at all, is less likely than at the time we did the assessment in the fall.” <br><br> After Mr Carney’s remarks, a strong rebound in the GBP took it to the top of our one-day performance table; up against all the major currencies we follow closely here, not just the US Dollar. With no top-tier UK economic statistics on Wednesday, the Pound opens in Asia this morning at USD1.4150, GBP/AUD1.7505 and GBP/NZD1.9290.

AUD / EUR

Expected Range

The EUR managed to extend Tuesday’s gains and reached a best level of USD1.2470 by mid-afternoon Wednesday. It then abruptly turned around to lose a quick 60 pips as traders awaited the Statement from Janet Yellen’s last FOMC meeting and reflected on comments from ECB executive board member Benoit Coeure, in Dublin for the European Financial Forum. In a TV interview he said, “We have agreements that we should not target our exchange rates… we want to see exchange rates that reflect economic conditions in different places. We are not going to change it.” <br><br> Mr Coeuré said the ECB has been clear that it expects interest rates to remain at the current level, very low, for an extended period of time, and well past the horizon for asset purchasers. "Well past means well past. So that is not a discussion we are having, and we really expect interest rates to remain very low for an extended period of time." After Germany’s softer than expected CPI on Tuesday, France came to the rescue yesterday with an above-consensus 1.5% y/y increase in inflation, largely driven by an increase in service sector prices. This meant that the Eurozone aggregate numbers showed a very small drop to 1.3% which was higher than the median estimate of 1.2%. The core rate of inflation excluding food and energy rose from 0.9% to 1.0% and though it’s still some way below where the ECB would like, it is at least now moving in the right direction. <br><br> With the inflation numbers now behind us, attention at the start of this new month today will be on the manufacturing PMI’s across the Eurozone. The ‘surprise factor’ is limited by the pre-release of flash estimates in France and Germany but we’ll get fresh information on how other Eurozone countries are faring at the start of 2018. The EUR opens in Asia this morning at USD1.2415, AUD/EUR0.6485 and NZD/EUR0.5925.

AUD / CAD

Expected Range

Having been in a 1.2280-1.2390 range for almost a week, USD/CAD dipped yesterday back on to a 1.22 ‘big figure’ and in the North American morning extended the move down to 1.2263; a level not seen since late-September last year. After watching President Trump’s State of The Union address, the absence of anything inflammatory on trade in general or NAFTA in particular helped improve sentiment towards the CAD earlier in the European day and there was a decent rebound in monthly GDP at 08.30am local time. <br><br> Stats Canada reported that real gross domestic product increased 0.4% in November, with widespread growth across industries as 17 of 20 industrial sectors increased. Goods-producing industries rose 0.8% after declining 0.5% in October. November's gain was mainly due to increases in the manufacturing and mining, quarrying and oil and gas extraction sectors, partly as a result of restoration in production capacity. Indeed, the manufacturing sector was up 1.8% in November, the largest monthly increase since February 2014 as the majority of subsectors grew. Separate figures showed prices for products sold by Canadian manufacturers, as measured by the Industrial Product Price Index (IPPI), edged down 0.1% in December, mainly due to lower prices for energy and petroleum products and primary non-ferrous metal products. <br><br> There are more Canadian numbers to come Thursday when we get the leading indicator and the manufacturing PMI report. The Canadian Dollar opens in Asia this morning at USD/CAD1.2300, AUD/CAD0.9905 and NZD/CAD0.9050.

AUD / USD

Expected Range

For global foreign exchange markets, there didn’t seem anything too troubling in either the tone or content of President Trump’s State of the Union address but such is the prevailing negative sentiment amongst analysts that the US Dollar went down anyway. The USD index stood at 88.90 when the President began but it was then downhill all the way until late afternoon in Europe where it finished at 88.52. <br><br> Putting two FOMC Statements side by side always feels a bit like the job the Kremlinologists had back in the Soviet-era when they’d look at a photograph of the Politburo and see who had moved a pace or two to the left or right, who was missing and who were the fresh new faces. The Fed said that, “the labor market has continued to strengthen and economic activity has been rising at a solid rate. Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent”. So far, pretty much exactly what was said in December. But, whereas last month inflation was expected to, "remain somewhat below 2 percent in the near term", this line has been dropped and instead, "Inflation on a 12 month basis is expected to move up this year”. For choice, your author interprets this is a slightly more hawkish stance. <br><br> The US Dollar had begun to rally in the two hours before the Fed Statement and, as it’s examined in excruciating detail, there might even be enough to sustain the move higher. US 10-year bond yields are up at a fresh cycle high of 2.75% and the USD index opens in Asia today at 88.85.

AUD / NZD

Expected Range

Having fallen after last week’s very soft CPI figures, the New Zealand Dollar has staged quite an impressive comeback; not just against a generally weak US Dollar but also against its Aussie cousin too. For a few hours around lunchtime in Europe on Wednesday, NZD/USD was back on a 74 cents ‘big figure’ whilst the AUDNZD cross (which on Monday hit a 7-week high of 110.70) is down at 1.0935. <br><br> After a boost from overseas trade figures on Tuesday, the latest news to help the NZD is an update from credit ratings agency Standard and Poor’s, which reaffirmed its existing high-level sovereign rating for New Zealand, which is AA when borrowing in foreign currency, and AA+ in local currency. S&P said, "The economy is wealthy and resilient, reflecting decades of structural reforms” and that it had incorporated the new Government's ‘more expansionary’ plans into its forecasts, which now have New Zealand growing at an average rate of 2.8 per cent each year over the next three years. "Our ratings reflect solid fiscal performance and our expectation that higher government spending will not materially weaken the country's fiscal profile," S&P said. "New spending measures, including more generous welfare, education, and housing policies, are partly funded through the cancellation of the previous Government's proposed personal income tax cuts… As such, we do not expect the measures to materially affect the Government's fiscal position” <br><br> Unsurprisingly, NZ Finance Minister Grant Robertson welcomed the S&P statement. "This decision effectively gives a tick to the policy agenda outlined in the Government's Budget policy statement in December, which confirmed our commitment to the budget responsibility rules, together with the fiscal forecasts presented in the half year economic and fiscal update." Today we have the ANZ job advertising figures, ahead of which the New Zealand Dollar opens in Asia at USD0.7365 and AUD/NZD1.0935.

AUD

Expected Range

Over the past 48 hours, the AUD/USD exchange rate has had five moves in excess of half a cent without any obvious correlation to incoming news or economic data. After a decent NAB survey on Tuesday, the Aussie Dollar fell half a cent then recovered. After a softer than expected set of CPI numbers on Wednesday, it managed to fall nearly 50 pips, rally nearly 60 then fall 60. Foreign exchange is always characterized as a ‘zero sum game’; for every winner there is an equal and opposite loser. That still holds true, but for AUD/USD it just felt like one of those days where everyone lost! <br><br> The big news in Australia was of course the quarterly inflation numbers. To an outsider it always seems a very strange use of professional resources to not produce monthly data but then to produce three different quarterly measures all calculated to three decimal places: headline CPI, the core trimmed mean and the core weighted mean. Without getting too bogged down in the detail, all three measures were a bit softer than consensus expectations; albeit not as big a ‘miss’ as we saw in New Zealand last week. <br><br> In terms of what the CPI data mean for RBA monetary policy, there’s still a split of views amongst the Australian banks. CBA say, “We expect the RBA will be comfortable with today's outcome as it broadly lines up with their projections for both headline and underlying inflation. All in all, there is nothing in today's outcome or the recent economic data to change our view that the cash rate is on hold until late this year”. ANZ are a bit more hawkish, saying “We continue to look for the first of two rate hikes in May, although this is based on our forecast that the wage price index prints a 0.5% quarterly rise for Q4 [when released in late February].” Writing in the Herald Sun newspaper, veteran RBA-watcher Terry McCrann says, “the RBA will leave its official interest rate unchanged at 1.5% and, more importantly, indicate it has absolutely no intention of changing the rate anytime soon; or indeed even beginning to think about changing it”. The Australian Dollar opens in Asia today at USD0.8055, with AUD/NZD at 1.0935 and GBP/AUD1.7615.

By Nick Parsons

FX markets becoming more volatile as US stocks drop sharply. Aussie CPI due this morning before Trump’s State of the Union address


AUD / CAD

Expected Range

Over the last few days, USD/CAD has settled in a 1.2280-1.2390 range with investors keen to get a sense of how the NAFTA uncertainties might be resolved. Having reached a high around 1.2375 around the end of the Asia session, USD/CAD then fell around half a cent during the European morning on Tuesday before settling around 1.2320. <br><br> There has been little incentive or desire to push the Canadian Dollar one way or another until at least we see what tone President Trump will strike in his State of The Union address. At Davos last week he was in generally conciliatory mood, with a speech generally summed up as “America First but Not Alone”. However, we saw on his Asia trip last year that what he says and how he says it can vary from one audience to the next and he might decide that a more aggressive tone on trade might strike a chord with blue-collar voters in America. Ahead of all this, trade in the CAD has been very quiet. <br><br> Once Trump’s speech has been analysed ad nauseum, investors can look forward to the monthly GDP and industrial production numbers later on Wednesday and the manufacturing PMI survey on Thursday. It should impress an Antipodean audience waiting for quarterly CPI figures that Canada can even produce GDP figures every month, let alone inflation numbers! The Canadian Dollar opens in Asia this morning at USD/CAD1.2325, AUD/CAD0.9965and NZD/CAD0.9040.

AUD / NZD

Expected Range

In the wake of last Wednesday’s soft quarterly CPI numbers, the NZD fell around 1¼ cents against the US Dollar, whilst the AUD/NZD cross on Monday hit 110.70; its highest level since December 5th. All the major currencies have experienced high volatility over the past 18 hours and the NZD has been no exception to this trend. As European traders arrived at their desks, NZD/USD fell to 0.7285 but subsequently recovered 70 pips before settling around USD0.7330. Sometimes a good check on NZD performance is to look instead across the Tasman Sea. The AUD/NZD cross is down more than half a cent from its recent high at 110.20; the Kiwi has indeed done quite well. <br><br> New Zealand’s monthly trade balance in December 2017 was +$640 million. The surplus was the largest ever in a December month, and the largest in any month since March 2015. According to the official statisticians, exports of milk powder, butter, and cheese lifted total exports to a record $5.6bn in December 2017. Monthly exports were $1.1bn higher than in the same month a year earlier. The previous highest values for both dairy exports and total exports were recorded in the 2013/14 dairy export season, when dairy prices were at a high level. Looking by destination, the largest increase in exports amongst was to China, up $343m (28 percent), led by dairy products (up $230m). <br><br> Later this week, on Thursday we have the ANZ job advertising figures and at the end of the week, the always fascinating numbers on net migration and visitor arrivals. The New Zealand Dollar opens this morning in Asia at USD0.7335 and AUD/NZD1.1020.

AUD

Expected Range

In the 24-hour period from lunchtime in Sydney on Monday to the same time on Tuesday, AUD/USD was trapped in just a 25 pip range from 0.8078 to 0.8103. Over the past 18 hours, though, it has been much livelier. A break to the downside early in the European morning took AUD/USD down to 0.8045 but six hours later it was up at 0.8110. Barely two hours after that, the AUD had given up half the gains made earlier in the day. The moves followed those in EUR/USD, rather than being driven by any fresh views or insights on the Aussie Dollar itself. <br><br> Yesterday brought the monthly NAB Business Survey. Their business confidence index bounced 4pts to +11, the highest level since July 2017 whilst business conditions were unchanged at +13 which is above the long-run trend of +5. We’ve been pointing out recently that the RBA’s monetary policy stance will likely be determined more by growth in wages and household consumption than what’s happening to business conditions. In this respect there was perhaps a bit of disappointment that labour costs rose at an implied quarterly rate of 0.8%; down from 1.2% in the previous month’s survey. <br><br> For today, the big news will be the quarterly inflation numbers. To an outsider it always seems a very strange use of professional resources to not produce monthly data but then to produce a whole range of different quarterly measures. There’ll be headline CPI, the core trimmed mean and the core weighted mean for statistics geeks to pore over. The market consensus is for the headline rate to rise 0.7% q/q with an annual rate of 2.0%. The Australian Dollar opens in Asia today at USD0.8085, with AUD/NZD at 1.1020 and GBP/AUD1.7505.

AUD / USD

Expected Range

After a rare top spot on our one-day performance table on Monday, the USD very marginally extended its gains early in Europe on Tuesday with its index reaching a high of 89.28; its best level since last Wednesday. As the EUR found bids after some solid Q4 growth numbers, however, the USD index quickly shed nearly three-quarters of a point to 88.60 before then rallying up to 88.95 on the Treasury Secretary’s latest currency comments. <br><br> Treasury Secretary Mnuchin told the Senate Banking Committee that he "absolutely supports a strong dollar over the long term… I strongly support we have a free currency market that we don’t intervene in." He also said also said that his comments on the dollar in Davos "were blown out of proportion by the media and were in no way intended to talk down dollar." The latest figures on US consumer confidence also helped support the Dollar. The confidence index rose to a higher than expected 125.4 from an upwardly revised 123.1 in December and though the p resent conditions measure decreased to 155.3 from 156.5, the future expectations gauge increased to 105.5 from 100.8. The Conference Board statement said, “Consumers remain quite confident that the solid pace of growth seen in late 2017 will continue into 2018.” <br><br> The big event of the day will be President Trump’s State of the Union address at 9pm EST. The speech is titled, “Building a safe, strong and proud America”. A senior administration official told reporters earlier this week that Mr Trump will be laying out future plans and reflecting on his first year in office, “speaking from the heart” to discuss jobs and the economy, infrastructure, immigration, trade and national security. With US 10-year bond yields up at a fresh cycle high of 2.73% despite a sharp fall on the stock market, the USD index opens in Asia today at 88.90.

AUD / EUR

Expected Range

The EUR did not escape the volatility which was the feature of all the major currencies on Tuesday in the Northern Hemisphere. Early in the European morning, it very briefly broke below Monday’s 1.2345 low and just as it looked as though the market was set for a technically-driven drop, the pair reversed to be 110 pips higher at 1.2450 by lunchtime. During the afternoon it was then down and back on to a 1.23 handle before finally stabilizing in New York around 1.2405. <br><br> In economic news, real GDP in the Eurozone rose 0.6% q/q in Q4, slowing slightly from an upwardly-revised 0.7% in Q3, in line with the consensus. As it’s the preliminary report, there was no detailed breakdown of the various components: consumption, investment, government spending and net trade. It was the 19th consecutive quarter of growth in GDP and put the euro region’s 2017 expansion at 2.5%. That’s better than had been anticipated by the European Central Bank, and it’s a pace the region hasn’t seen since before the financial crisis in 2008. A separate release showed Eurozone economic confidence remained close to a 17-year high in January, dipping slightly to 114.7 in January from 115.3. Industrial sentiment held at a record at the start of the year. Confidence slipped among services providers and increased among consumers and construction firms. <br><br> Today we’ll see the CPI figures for the whole Eurozone area. These come after Tuesday’s surprisingly soft German numbers where a -1.0% m/m fall in January took the annual rate down from 1.6% to just 1.4%. Lower energy inflation made the largest contribution to the weaker headline figure while food inflation picked up. Expectations for Eurozone CPI are for the annual rate to dip to 1.3% from 1.4%. The EUR opens in Asia this morning at USD1.2405, AUD/EUR0.6515 and NZD/EUR0.5910.

GBP / AUD

Expected Range

Monday saw the first ‘down day’ for GBP/USD for the first time in 11 trading days, and at one stage early in the European morning on Tuesday, the pair dipped below 1.40 for the first time in a week. On a day which saw some large intra-day swings in both directions for all the major currencies, the GBP was the most volatile of all. GBP/USD fell 85 pips then rose 175 to be back where it opened on Monday morning in Asia around 1.4150. <br><br> Bank of England Governor Mark Carney appeared Tuesday afternoon before the House of Lords Select Committee on the economy. He refused to comment on the confidential government analysis of the economic impact of Brexit which was reported to have been shown to Cabinet Ministers over the weekend. These had suggested growth would be between 2-8 percent lower over the next 15 years. Instead, he repeated his view that the 2016 Brexit vote had, so far, effectively knocked 1 per cent of GDP off the UK, relative to where it would otherwise have been, through weaker corporate investment and damage to household consumption due to higher inflation. He also hinted that the Bank is actually preparing to upgrade its forecasts at its Inflation Report next month. “I would expect that in 2019 we will see a pick-up in this economy all things being equal – strong global growth, greater certainty... A disorderly Brexit, not a likely scenario at all, is less likely than at the time we did the assessment in the fall.” <br><br> After Mr Carney’s remarks, a strong rebound in the GBP took it to the top of our one-day performance table; up against all the major currencies we follow closely here, not just the US Dollar. With no top-tier UK economic statistics on Wednesday, the Pound opens in Asia this morning at USD1.4150, GBP/AUD1.7505 and GBP/NZD1.9290.

By Nick Parsons

NAB monthly survey out this morning. USD rallies ahead of President Trump’s State of the Union speech Tuesday evening NY time


GBP / AUD

Expected Range

The British Pound’s remarkable 11-day sequence in which it never tested the previous day’s low against the US Dollar was good while it lasted, but has now come to an end. At one point, GBP/USD was almost 9 cents higher than its starting point around 1.3460 on January 11th having reached a best level last Thursday around 1.4330. Yesterday it didn’t just break below Friday’s low of 1.4145, but traded all the way down to 1.4035; the first ‘down day’ for the GBP in 2½ weeks. <br><br> The first few weeks of the new year have been mercifully free of Brexit news, but it is a subject which is now set to return with a vengeance; with just under 14 months left until the UK formally exits the European Union on March 29th 2019. Though the legislation has passed the House of Commons, this week it goes for debate to the House of Lords whose constitution committee has already said that the bill as it currently stands risked “undermining legal certainty” and should be substantially changed. The chair of the committee today said yesterday, “We acknowledge the scale, challenge and unprecedented nature of the task of converting existing EU law into UK law, but as it stands, this bill is constitutionally unacceptable.” <br><br> In what will be a relatively quiet week for UK economic data, Bank of England Governor Mark Carney is due to give evidence to the House of Lords Economic Affairs Committee on Tuesday afternoon. During his Q+A session at Davos last week, he attempted to quantify the loss of GDP which resulted from the EU referendum result 18 months ago and might well come in for some tough questioning over this. The GBP opens lower in Asia this morning at USD1.4075, GBP/AUD1.7375 and GBP/NZD1.9225.

AUD / USD

Expected Range

Hold the front page - the US Dollar didn’t fall yesterday! The USD index reached a low point on Thursday last week of 88.20 before rallying into the NY close and then holding around half of its gains on Friday. It opened on Monday morning in Sydney around 88.75 and at one point during the European afternoon managed to break on to an 89 ‘big figure’ for the first time in four days. Its gains we’re broad-based and saw the USD rise against every major currency to take a rare top spot on our one-day performance table. <br><br> US economic data on Monday were pretty much in line with consensus expectations. They may be a bit obscure for some of our readers, but the personal consumption and spending figures are very important to the Fed for two reasons: First, they feed directly into estimates of GDP and second, they are accompanied by so-called a PCE deflator which is the measure of inflation the Fed is targeting. Whereas the RBA in Australia and the RBNZ in New Zealand have CPI targets, the US Fed has a PCE target. The headline measure of PCE inflation was 1.7% with the core ex-food & energy number as expected at 15%. <br><br> After the US numbers were published, the Atlanta Fed updated its GDPNow model. It had overstated the Q4 numbers last week but its first estimate of Q1 2018 is a very punchy 4.2% which would more than make up for any disappointments last Friday. Its’ next update will come on Thursday after the ISM survey and official numbers on construction spending. For Tuesday, consumer confidence is the main data point but the big event of the day will be President Trump’s State of the Union address at 9pm EST. The speech is titled, “Building a safe, strong and proud America”. With US 10-year bond yields up at a fresh cycle high of 2.71%, the USD index opens in Asia today at 89.00.

AUD / CAD

Expected Range

USD/CAD has settled in the lower part of a 1.2280-1.25 range. The CAD has been helped by continued strength in oil prices (WTI crude was back above $66 yesterday morning) and a sense that negotiations around NAFTA seemed to be proceeding well; albeit behind closed doors. <br><br> Trade ministers from Canada, Mexico and the United States ended the sixth round of NAFTA negotiations in Montreal on Monday, agreeing some progress was made but acknowledging that tough challenges still lie ahead to strike a new deal. US Trade Representative Robert Lighthizer said while some progress was made, he hoped it would accelerate and achieve major breakthroughs. "This round was a step forward, but we are progressing very slowly," he said. This was because trilateral negotiations are more "complicated and contentious" than bilateral talks. Nevertheless, in his closing remarks, Lighthizer said, “Some real headway was made here today… We're committed to moving forward." <br><br> After the relief that NAFTA talks haven’t completely collapsed despite plenty of outstanding differences between the three negotiating teams, investors can now focus on upcoming economic data releases. We get the monthly GDP and industrial production numbers on Wednesday and the manufacturing PMI survey on Thursday. The Canadian Dollar opens in Asia this morning at USD/CAD1.2325, AUD/CAD0.9980 and NZD/CAD0.9025.

AUD

Expected Range

The Aussie Dollar joined in the holiday mood last Friday on Australia Day, rising to a high of USD0.8135; its best level since January 2015. But, just as everyone heads back to work and the holiday memories fade, so too the AUD has come back down to earth. It’s still pretty elevated by standards of the last year and it’s spent less than 20 of the last 250 trading days at 80 cents or above but is now down almost half a cent from Friday evening’s high. <br><br> This morning locally, we have the latest NAB monthly business survey. Last time around, the business conditions index fell 9 points to +12 index points – albeit still well above the long-run average (+5). Meanwhile, business confidence was in line with long-run average levels, at +6 (down from +9 in October), although there had been a notable downward trend in the series since around the middle of the year. NAB commented at the time that, “there was nothing in this month’s Survey that would prompt us to alter our view of the Australian economy. We remain cautiously optimistic that Australia will see temporarily above trend economic growth in coming quarters”. <br><br> The next RBA Board meeting is on Tuesday February 6th and its members will have both the NAB Survey and quarterly CPI numbers to discuss in some depth. That said, it’s probably still the case that monetary policy in 2018 will be determined more by growth in wages and household consumption than what’s happening to business conditions. The Australian Dollar opens in Asia today at USD0.8095, with AUD/NZD at 1.1065 and GBP/AUD1.7375.

AUD / NZD

Expected Range

It seems a long time ago that the NZD/USD hit a high around 0.7430; the first time it had been on a US 74 cents ‘big figure’ since early-August 2017. In fact, it was only last Wednesday but the Kiwi Dollar has been hit hard in the wake of the quarterly CPI numbers. It has fallen around 1¼ cents against the US Dollar: whilst the AUD/NZD cross yesterday hit 110.70; its highest level since December 5th. <br><br> The main economic numbers locally today are the December merchandise trade report. The previous month brought an unexpectedly large deficit of $1,193; the first deficit for a November month since 2005 and compared to an average November deficit of $447 over the past five years. Even if the erratic ‘aircraft import’ was stripped out, the November deficit was still $930m. Analysts locally are looking for a very small surplus in December. <br><br> Later this week, on Thursday we have the ANZ job advertising figures and at the end of the week, the always fascinating numbers on net migration and visitor arrivals. The New Zealand Dollar opens this morning in Asia at USD0.7315 and AUD/NZD1.1060.

AUD / EUR

Expected Range

EUR/USD hit a 3-year high of 1.2530 during the ECB Press Conference last Thursday before then falling one and a half cents to 1.2375 on President Trump’s comments to CNBC about wanting a stronger Dollar over the longer-term. On Friday it couldn’t regain the highs and in the early evening in New York yesterday fell to a low of 1.2345. <br><br> Speaking in Brussels on Monday, The ECB’s chief economist Peter Praet said the European Central Bank will only stop pumping cash into the euro zone economy when it is confident that inflation is heading towards its target without its extra help. Praet is one of the key supporters of the ECB’s €2.55 trillion bond-buying programme and was responding to calls by officials – notably in Germany and the Netherlands – to stop the scheme later this year. Despite these dovish remarks, German 5-year bond yields yesterday moved back into positive territory for the first time since late-2015 whilst 10-year bunds were up 6bp to 0.69%. <br><br> Today in the Eurozone brings Q4 GDP figures where consensus estimates are for a +0.6% quarterly increase. We’ll also get German CPI figures which will then see analysts firming up their forecasts for the Eurozone CPI numbers on Wednesday. The EUR opens in Asia this morning at USD1.2385, AUD/EUR0.6535 and NZD/EUR0.5910.

By Nick Parsons

Wednesday’s CPI is the most important number of the week for the AUD


AUD / EUR

Expected Range

All last week’s economic news in the Eurozone was without exception positive. Indeed, Germany’s ZEW Survey noted, “The latest survey results reveal an optimistic outlook for the German economy in the first six months of 2018. With 95.2 out of 100 points, this is the most positive assessment of the current economic situation since the introduction of the survey in December 1991.” For the foreign exchange market, however, none of this was ‘new news’ and the EUR was little changed for the first couple of days around USD1.2250 as investors awaited Thursday’s ECB Council Meeting. Just ahead of that, of course, came US Treasury Secretary Steve Mnuchin’s dramatic intervention which sent the EUR up a couple of cents to 1.2455. <br><br> The big issue was whether Draghi would change forward guidance on interest rates (he didn’t), try to talk the EUR lower (he didn’t) or sound in any way concerned about the impact of a strong EUR on growth and inflation forecasts (he didn’t). The standard practice amongst Central Bankers when asked to speak about the actions of another is a diplomatic “no comment”. Instead, Mr Draghi entered a war of words with unnamed (but clearly American) officials for manipulating the currency, saying “someone else’s FX talk doesn’t comply with agreed terms...” EUR/USD hit a high of 1.2530 during the ECB Press Conference before falling one and a half cents on President Trump’s comments about wanting a stronger Dollar. Thursday was a very dramatic and volatile day in the world of foreign exchange. <br><br> The week ahead brings Q4 GDP figures on Tuesday where consensus estimates are for a +0.6% quarterly increase. If it is, instead, 0.7%, then the Eurozone will have grown more rapidly than the United States in the final quarter of the year. Also on Tuesday we’ll get German CPI figures which will then see analysts firming up their forecasts for the Eurozone CPI numbers on Wednesday. Thursday brings the final Markit PMI numbers across Europe, whilst investors need to be prepared at any time for the usual post-ECB briefings and clarifications. The EUR ended last week at USD1.2430, AUD/EUR0.6525 and NZD/EUR0.5915 and all eyes this week will be on who can declare victory in the first currency battle after Davos.

GBP / AUD

Expected Range

The British Pound ended last week after an 11-day sequence of rallying without testing the previous day’s low. From the day the ECB talked about changing the language around forward guidance on monetary policy on January 11th, (ironically in an attempt to smooth market volatility) GBP/USD has risen more than 7 cents and at one point was almost 9 cents higher having reached a best level on Thursday around 1.4330. The GBP’s gains came against a background of improving survey evidence and a solid set of labour market numbers which continue to confound the pessimists who have called for a UK recession ever since the EU referendum 18 months ago in June 2016. <br><br> Friday’s Q4 GDP numbers were a touch stronger than consensus forecasts but exactly in line with the +0.5% rise which the Bank of England expected in its November Quarterly Bulletin. The reaction has so far been fairly predictable: “Leave” supporters claim proof the UK can survive post-Brexit whilst the “Remain” camp argue it could all have been so much better. The weekend Press in the UK has focused on what the GDP numbers might mean for monetary policy, with some analysts now bringing forward their forecasts for the next hike in interest rates. HSBC, for example, said that along with increasing numbers of people in work, the figures “support our view that the Monetary Policy Committee will raise Bank Rate again in May.” <br><br> In what will be a relatively quiet week for UK economic data – with Thursday’s manufacturing PMI probably the highlight – there’ll be plenty of time to focus on politics and Brexit. Most newspapers reported that Prime Minister Theresa May has cancelled plans to give another high-profile speech such as the one she gave in Florence last year. The reason for this is not just because, allegedly, she does not know what she wants herself, but that anything she says is likely to worsen divisions amongst her own Cabinet and backbenchers. An opinion poll by ICM in The Guardian on Saturday said that voters support the idea of holding a second EU referendum by a 16-point margin. 47% of people would favour having a final say on Brexit once the terms of the UK’s departure are known, while 34% oppose reopening the question. Amidst the political intrigue, the GBP begins the new week having closed in New York on Friday at USD1.4165, GBP/AUD1.7460 and GBP/NZD1.9245.

AUD

Expected Range

The Aussie Dollar began last Monday just below US 80 cents, having broken above this psychological level a couple of time the previous week, but on both occasions having failed to hold there. By the end of last week, a combination of decent local economic news (the Westpac leading index) and US Treasury Secretary Mnuchin’s words on the benefits of a weaker dollar helped cement the AUD onto this new ‘big figure’. Indeed, from Wednesday afternoon local time the Aussie Dollar never looked back and it went on to reach a high on Friday of USD just below 0.8135; its best level since January 2015 when it was around three-quarters of the way through its multi-year decline from an all-time high around USD1.10 to just 70 cents. <br><br> As Australians head back to work at the end of the Summer holidays and a long weekend, so too economic news flow begins to pick up. On Tuesday its the monthly NAB Business Survey but more important will be Wednesday’s quarterly CPI numbers. It is a constant source of wonder – though probably linked to internal politics around funding – that the official statisticians don’t produce monthly inflation numbers. It means the government and central bank have to rely on private sector estimates for a timely read on price pressures, then have a whole series of official numbers (headline, trimmed mean, weighted median etc) which can sometimes be difficult to interpret. Anyhow, the general consensus is that headline CPI will rise around 0.7% q/q to take the annual rate up to 2.%. <br><br> The RBA doesn’t have a Board meeting in January so its meeting on Tuesday February 6th will be its first chance for two months to publicly review all the incoming data. Too great a focus on the AUD/USD exchange rate would be misleading as it’s more of a story around the US Dollar, whilst the AUD/NZD cross rate is pretty much unchanged from the day of the last RBA meeting back in early December. As for its other pairs, the AUD is around one cent firmer against both the GBP and EUR than it was when the RBA last met to decide official interest rates. Whilst any comment they make on exchange rates will be seized on by analysts, it’s probably still the case that monetary policy in 2018 will be determined more by growth in wages than by what’s happening to the external value of the Aussie Dollar. The Australian Dollar starts this new week having closed on Friday at USD0.8105, with AUD/NZD at 1.1025 and GBP/AUD1.7460.

AUD / CAD

Expected Range

All of the drama for the Canadian Dollar came two weeks ago as it became the first G7 Central Bank to raise rates in 2018. Last Monday’s opening level of USD/CAD1.2490 proved to be the high of the week as the USD slid, WTI crude rose steadily to a high around $66.50 per barrel and negotiations around NAFTA seemed to proceeding well, albeit behind closed doors. Much of Prime Minister Justin Trudeau’s speech to the World Economic Forum in Davos focussed on gender inequality and the benefits to be derived from hiring, promoting & retaining women. On more immediately market-sensitive issues, he said, “We’re working very hard to make sure that our neighbour to the south recognizes how good NAFTA is and that it has benefited not just our economy but his economy and the world economy.” He also said the new Trans-Pacific trade deal would create “well-paying middle class jobs for decades to come” even though it did not involve the United States. <br><br> Also in Davos, Bank of Canada Governor Stephen Poloz said he did not know what potential there may be for further interest rate hikes this year, reiterating that policymakers remained both data dependent and alert to developments with NAFTA. "We've explained to people that there are a number of important issues that force us to not be mechanical or to use a rule or to plan ahead in that way. We've said we are totally data dependent." Asked if the BoC was also "NAFTA dependent," Poloz said: "Oh yes, very." But he said it was impossible to do the arithmetic ahead of time to know what policy response may be needed if the trade deal is terminated or significantly altered. "If the economy began to slow as a result, then we'd be able to put those pieces together, then it would go into the mix, the inflation target would be at risk, and we'd be cutting rates into that. But a lot of things could move at the time.” <br><br> For the week ahead, we get the monthly GDP and industrial production numbers on Wednesday and the manufacturing PMI survey on Thursday. Officials from the United States, Canada and Mexico will wrap up the sixth of seven planned rounds of talks on the North American Free Trade Agreement in Montreal on Monday, with little sign yet of agreement on US proposals to overhaul the $1.2 trillion pact. On Sunday, Mr Trudeau told a televised meeting of Liberal legislators in Ottawa that the government was working hard to get a better NAFTA deal, although it was a day of rest for the three Chief NAFTA negotiators who had the day off. Officials say if the three conclude the process should continue, an additional round of talks will start in Mexico on February 26th. The Canadian Dollar ended last week at USD/CAD1.2315, AUD/CAD0.9990 and GBP/CAD1.7445.

AUD / NZD

Expected Range

The New Zealand Dollar outperformed its Aussie cousin in the first part of last week before reversing all the gains and more in the final two days. AUD/NZD started around 1.0980 but fell all the way to 1.0860 on a combination of poor Australian consumer confidence numbers and a decent performance of services index locally. On Wednesday, as the USD slide accelerated and deepened after the Mnuchin comments in Davos, NZD/USD hit a high around 0.7430; the first time it had been on a US 74 cents ‘big figure’ since early-August 2017. After a much weaker than expected set of CPI numbers, however, the NZD went into reverse. NZD/USD immediately tumbled a full cent to around 0.7325 and then on to a low Thursday around 0.7290 with AUD/NZD back up to 1.09 then 1.10. <br><br> The median published estimates were for a quarterly increase in CPI of 0.4% which would have left the annual rate at 1.9%. Instead, StatsNZ reported that prices rose just 0.1% in the December 2017 quarter to take the annual rate down to 1.6% as higher petrol prices, air fares, and housing-related costs were offset by lower prices for vegetables, new cars, and a range of household goods. Analysts were quick to revise down their interest rate expectations. ANZ said the data have pushed its expectations for the Reserve Bank of New Zealand to hike the official cash rate back from November 2018 to mid-2019. ASB said, “it reinforces that there is no need for the Reserve Bank to raise interest rates anytime soon," whilst amongst the offshore banks Morgan Stanley noted “the weakness seen in 4Q inflation should see the RBNZ on-hold over 1H18, possibly with an added emphasis on the need for a weaker currency”. <br><br> There’s plenty of data to be released locally this coming week. December trade figures on Tuesday should rebound from a very poor performance in November whilst on the housing market, today brings residential lending data and Friday we get the building consents numbers. On Thursday we get the ANZ job advertising figures and at the end of the week, the always fascinating numbers on net migration and visitor arrivals. It’s a holiday in Auckland today which might keep activity low but the FX market is open locally and through the rest of the Asia time zone. The New Zealand Dollar opens this Monday morning having closed in New York on Friday at USD0.7360 and AUD/NZD1.1025.

AUD / USD

Expected Range

The US Dollar had a dramatic week which saw it fall a net 1.7% against a basket of major currencies. Its index opened last Monday morning around 90.25 but by Tuesday evening, had fallen all the way to a fresh 37-month low of 89.77. On Wednesday things got worse as the US Trade and Treasury Secretaries unleashed their own particular brand of Alpine diplomacy at the WEF in Davos. Though Treasury Secretary Steve Mnuchin initially stuck to a familiar script that, “longer term the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency," he went on to say that, “Obviously a weaker dollar is good for us as it relates to trade and opportunities.” Less than 12 hours later, the USD index was on an 88 ‘big figure’ and on Thursday hit at a fresh low of 88.20; its lowest since early-December 2014. <br><br> Late in the New York afternoon on Thursday, in an interview with CNBC, President Donald Trump said, "the dollar is going to get stronger and stronger and ultimately, I want to see a strong dollar,", further adding that Treasury Secretary Steven Mnuchin's comments were taken out of context. After he then delivered his “America First but not Alone” speech to a packed conference hall in Davos on Friday, the USD steadied somewhat to end a very dramatic week at 88.70. <br><br> The week ahead brings plenty of news on the US economy as well as Jerome ‘Jay’ Powell’s first meeting as Chairman of the Federal Reserve Bank. Market-derived probability estimates show just a 3% chance of a 25bp hike in rates, with the overwhelming view being this will not come until the March 21st FOMC meeting. On Tuesday we get the latest reading on consumer confidence, Wednesday it’s the Chicago NAPM then on Thursday the ISM manufacturing survey. The first Friday of the new month, as usual, is the labour market report where consensus estimates are for non-farm payrolls to have increased about 180k with the unemployment rate steady at 4.1%. Ahead of all this, the USD index stands at 88.70.

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