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AUD / NZD
The New Zealand Dollar began last week very much on the back foot after the disappointments of the December quarter CPI report. NZD/USD opened around 0.7350 and as a sell-off gathered pace - eventually taking it down to 0.7283 - so the AUD/NZD cross hit 110.70; its highest level since December 5th. From that point on, though, it was good news all the way for the NZD, kicking off with the monthly trade numbers, then a Standard and Poor’s ratings affirmation and finally a very positive opinion poll for Prime Minister Jacinda Ardern, which helped push NZD/USD to its best level of the week at 0.7415.
Friday was a dramatic day for the US Dollar, as well as for stock and bond markets around the world.
Immediately prior to the US labour market report, NZD/USD stood at 0.7360; pretty much in the
middle of the week’s trading range. Just a few hours later it was testing 0.7300 as the USD rebounded
sharply. It would be wrong to conclude that this was a poor performance by the Kiwi Dollar; if we look
at the very important AUD/NZD cross, it moved down from a 7-week high last Monday of 1.1070 all
the way to 1.0850; its lowest since the September Election.
The first RBNZ policy meeting of the year is on Thursday this week. Analysts are confident and
unanimous that there will be no change in interest rates. Nor are they generally expecting much
change to the Central Bank’s forecast track for interest rates, though the markets’ view on the timing
of the first hike in early 2019 is a bit later than the RBNZ has so far penciled-in. The quarterly
employment report is on Wednesday after the Waitangi Day national holiday on February 6th. The
New Zealand Dollar opens in Asia today having closed in New York on Friday at USD0.7305 and
AUD / USD
What a week for the US Dollar! On Thursday evening, you’d have been offered very long odds against the USD ending up on the week yet that’s exactly what happened. Neither President Trump’s State of the Union Address nor a somewhat more hawkish FOMC Statement could offer any support to the currency. It opened on Monday with its index against a basket of major currencies at 88.75, hit a best level of 89.25, but by Thursday evening was down at just 88.27; just a tiny fraction above its Davos low.
On Thursday, the incoming data – manufacturing PMI, construction spending and jobless claims -
were very strong indeed and 10-year US bond yields were by then decisively up through 2.70%. But,
having spent all week completely ignoring very strong incoming economic data and being totally
unmoved by higher US bond yields, it was not until Friday that the USD finally snapped higher on after
the employment report showed that average earnings growth had risen to 2.9%; the highest since
2009. Non-farm payrolls were only around the average of the previous 12 months at 200,000 and the
average workweek actually fell. But, with the bond market acutely sensitive to signs of inflationary
pressure, the earnings number sent 10-year Treasuries up to 2.84%; a huge rise in yields of 38bp since
the beginning of the month.
With bond yields surging, stocks tumbling and the Atlanta Fed publishing updated estimates of its Q1
GDP forecast to show 5.4% - the highest since Q1 2012 – the US Dollar finally caught a bid on Friday.
Its’ index against a basket of major currencies was already a couple of tenths higher during the
European morning, but after the employment report was published it jumped to a high of 89.00
before settling into the New York close around 88.90. As well as a new Governor of the Federal
Reserve Bank, there are plenty of his colleagues scheduled to speak later this week. Even arch-dove
Kashkari on Friday noted that he saw inflationary signs in the labour data and it will be interesting to
see if the speakers have soothing words for stock market investors or focus, instead, on the continued
normalization of US monetary policy.
GBP / AUD
The remarkable weeks just keep coming for the British Pound, though this time it was remarkable because GBP/USD actually finished pretty much unchanged having traded in a high-low range of 2¾ cents. After opening around 1.4135 in Asia last Monday morning, the GBP then broke its 11-day streak of never testing the previous day’s low; a sequence which had seen it rally from USD1.3450 all the way up to 1.4330. With that record gone, GBP/USD broke below 1.40 on Tuesday morning but just as it looked set for a big fall, it rallied sharply in line with all the non-US currencies and by Thursday it was back up at 1.4275.
There was little or nothing in terms of incoming economic data last week which would justify a higher
GBP. If anything, the news was very much on the negative side of the ledger. But, immediately prior
to Friday’s US labour market report, GBP/USD stood at 1.4220. By close of business it had fallen
almost exactly a cent to 1.4125. We said on Friday that, “the weekend Press is unlikely to be kind to
the government, and Prime Minister May returns from her China trip with even more uncertainty
about her own future and her ability to successfully negotiate a post-Brexit deal.” This is exactly how
it has turned out, with rumours of a leadership challenge and pressure on the PM to clarify her own
For the week ahead, there’s a Bank of England MPC meeting on Thursday. In his appearance before a
House of Lords Select Committee last Thursday, BoE Governor Carney hinted that the Bank is
preparing to upgrade the forecasts in its Inflation Report. “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.”
Whether the Bank’s relative optimism will outweigh the political negatives, however, remains to be
seen. The Pound opens in Asia this morning having closed in New York on Friday at USD1.4125,
GBP/AUD1.7825 and GBP/NZD1.9335.
AUD / CAD
The Canadian Dollar began last week around USD/CAD1.2325 and the pair initially moved higher to 1.2375 on Tuesday on concerns about NAFTA and what might be said in the State of the Union speech. President Trump’s speech didn’t once mention Canada directly, however, and there were plenty of sighs of relief north of the border that NAFTA talks didn’t completely collapse. Trade ministers from Canada, Mexico and the United States ended the sixth round of NAFTA negotiations in Montreal, agreeing some progress was made but acknowledging that tough challenges still lie ahead to strike a new deal.
Prime Minister Justin Trudeau warned the United States on Friday that Canada "will not be pushed
around" on trade negotiations and Reuters reports that Trudeau again warned US negotiators that
Canada could walk away from the agreement if its terms are not met. “We will not be pushed around.
At the same time, we can remain confident about NAFTA…“The negotiations are complex and
challenging ... I’ve said many times, we are not going to take any old deal. Canada is willing to walk
away from NAFTA if the United States proposes a bad deal.”
On Thursday evening, after a good set of monthly GDP numbers and a particularly strong
manufacturing PMI report, USD/CAD was down at 1.2260; its lowest level since September 19th.
Immediately prior to the US employment report on Friday, the pair was at 1.2310. Yet, by the end of a
pretty wild week across asset classes around the globe, USD/CAD was at its highest level in ten days.
The final readings for the Canadian Dollar on Friday evening in North America were USD/CAD1.2425,
AUD/CAD0.9840 and NZD/CAD0.9075.
The Aussie Dollar was the worst performer amongst the major currencies in what turned out to be a very volatile week across asset classes. After a soft set of CPI data and a manufacturing PMI report which was nothing like as strong as the accompanying text would have suggested, AUD/USD was briefly back below 80 cents on Friday morning and immediately before the latest US employment report was trading around 0.7990. The US Dollar had not gained any support from rising US bond yields all week, but news of a 2.9% y/y increase in US average earnings (the highest since 2009) pushed 10-year Treasuries to 2.84% and the USD surged as analysts began to pencil in a 4th rate hike in the US for 2018.
Rising bond yields and a higher USD had a dramatic effect on the equity market with the Dow Jones
Industrial Average spookily down 666 points by the close; a 2.5% daily drop and the worst day of the
Trump Presidency. The weekend has seen a lot of commentary about how this is a ‘normal
correction’. What is absolutely not normal in recent experience, however, is that bond yields rose
even as stocks tanked. In every other correction of the post-GFC era, the assumption has always been
that falling stocks would be accompanied or immediately followed by lower bond yields. This hasn’t
happened this time around. Maybe it really is different?
We’ll see what the RBA has to say – if anything – about the value of the currency when it sits down to
its first Board meeting of the new year next tomorrow and on Friday when it releases its latest
Quarterly Statement of Monetary Policy. Before that, there are two service sector PMI reports this
morning and the Melbourne Institute monthly inflation gauge. The Australian Dollar begins this first
full week of the month having closed in New York on Friday at USD0.7920, with AUD/NZD at 1.0850
AUD / EUR
The euro had a week full of very positive economic news and, crucially, no attempt from anyone on the ECB Council to try to talk it lower – other than the usual boilerplate language about excessive volatility which traders have learned to take in their stride. EUR/USD began the week around 1.2425 and having been as low as 1.2345 and as high as 1.2515, it finished on Friday at 1.2455 as it withstood the USD surge better than most of the other major global currencies we follow closely here.
Economic news in Continental Europe continues to be extremely positive. 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.
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. Inflation continues to lag well below the
ECB’s target of “close to, but just below 2%” but there was a big rise in France last month which offset
some of the softness in Germany. Oil prices and a rapid pass-through into CPI through petrol prices
are now perhaps key to near-term progress towards the inflation target.
This Monday morning in Europe brings the service sector purchasing manager surveys and traders will
be looking to see if the strength in manufacturing has been replicated elsewhere in the economy. The
EUR opens in Asia having closed in New York on Friday evening at USD1.2455, AUD/EUR0.6360 and
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.
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.
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.
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.
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”.
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.
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.
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”.
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.
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.
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.
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.
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.
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”.
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.
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.
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.
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.
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.
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.
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.
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.
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.”
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.
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.”
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.
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.
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.
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.
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.
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!
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.
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.
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.
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”
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.
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.
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.
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.
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.
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).
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.
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.
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.
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.
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.
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.”
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.
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.
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.
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.
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.
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%.
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.
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.
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."
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.
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.
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.”
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.
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.
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%.
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.
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.
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”.
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.
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.
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.
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.
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