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AUD / USD
We said at the top of our report today that the latest plunge in US equity markets came with little or new fresh news, and amidst a general feeling that many of the forced buyers of VIX had already covered their short positions in the week. Instead, there’s now a worry that the so-called ‘risk-parity’ funds might be the next wave of forced sellers, liquidating positions as both equities and bonds are delivering simultaneous negative returns. The US Dollar tends to do well in periods of asset market chaos and so Thursday was another day of general USD strength, albeit still in very choppy market conditions. The USD Index reached a 2-week high of 90.25 in the European morning but by the New York afternoon stood at 89.90.
Federal Reserve Bank of New York President William Dudley said recent stock-market declines weren’t that big and don’t yet change his outlook for the U.S. economy. “This wasn’t that big a bump in the equity market… The stock market had a remarkable rise over a very long time with extremely low volatility…. My outlook hasn’t changed just because the stock market’s a little bit lower than it was a few days ago. It’s still up sharply from where it was a year ago. Having a bump up like this has virtually no consequence on my view of the economic outlook”. In US stock markets over the past two decades, there has been lots of talk of the “Greenspan put”, the “Bernanke put” or the “Yellen put” to describe how stock market traders feel they are insured against declines by the Federal Reserve Bank. Perhaps the strike price on the “Powell put” is a bit lower than they’ve become used to…
There are no top-tier US economic data releases scheduled for today and FX traders have never, ever been interested in wholesale sales numbers. However, the inventories number feeds directly into the Atlanta Fed GDP model which will be updated later on Friday afternoon. The USD index opens in Asia this Friday morning around 89.90.
The volatility across asset classes continues with the Dow Jones Industrial Average down 600 points in just 4 hours during the North American morning and 800 points in the last 24 hours. The latest move lower came with little or new fresh news, and amidst a general feeling that many of the forced buyers of VIX had already covered their short positions in the week. Instead, there’s now a worry that the so-called ‘risk-parity’ funds might be the next wave of forced sellers, liquidating positions as both equities and bonds are delivering simultaneous negative returns. The US Dollar tends to do well in periods of asset market chaos and so Thursday was another day of general USD strength. AUD/USD traded down on to a US 77 cent ‘big figure’ for the first time since December, reaching a low around 0.7785.
NAB’s Quarterly Business Survey was released Thursday. The bank notes that, “The business conditions index (an average of trading/sales, profitability and employment) rose 1 point, to +15 in the December quarter – which is well above the long-run average – driven by improvements in employment, while trading conditions eased slightly and profitability was steady. Employment conditions have been holding up at levels that suggest we are likely to see further improvement in unemployment over coming quarters. Meanwhile, the business confidence index eased slightly to +6 points in the quarter, which is only a little above the average.” Almost all industries reported very elevated levels of business conditions for the December quarter, but despite some improvement since Q3 (inching back into positive territory), the retail sector continues to lag well behind the rest. NAB says, “The health of the retail sector remains quite critical to the economic given that consumption makes up the lion’s share of the economy. If subdued business conditions are telling us something about the mindset of the consumer, then faster and more sustainable growth will be more of a challenge if things don’t improve.”
In his speech to the A50 Australian Economic Forum dinner, RBA Governor Phil Lowe did not sound a man in any hurry to raise interest rates. He said, “given recent developments in Australia and overseas, it is likely that the next move in interest rates in Australia will be up, not down. If this is how things play out, the likely timing will depend upon the extent and pace of the progress that we make. As I have discussed, while we do expect steady progress, that progress is likely to be only gradual. Given this, the Reserve Bank Board does not see a strong case for a near-term adjustment in monetary policy. It will of course keep that judgement under review at future meetings.” The Australian Dollar opens in Asia at USD0.7790, with AUD/NZD at 1.0790 and GBP/AUD1.7855.
AUD / CAD
Stepping back from the minute-by-minute movements and taking a bigger picture view, since the beginning of 2018, USD/CAD has been largely contained in a range from 1.2260 to 1.2600 even though we have seen extreme volatility in equity markets, a 25bp rate hike from the Bank of Canada and ongoing uncertainty over the renegotiation of NAFTA. In yesterday’s New York session, the pair rose briefly to a high of 1.2610 but the break lasted less than two hours and soon returned to the 1.2575 area.
In its latest monthly poll, Reuters reports the Canadian dollar is forecast to strengthen over the coming year as expected Bank of Canada interest rate hikes and broad pressure on the US dollar offset uncertainty over the future of the NAFTA trade deal. The poll of more than 40 foreign exchange strategists predicted that the loonie will edge up to C$1.250 to the greenback, or 80 U.S. cents, in one month, from around C$1.255 on Wednesday. After a period of stabilisation, it is then expected to climb to C$1.230 in a year. A cynic might well observe that these moves can be seen in less than one day, let alone a year…
For foreign exchange markets, the speech by Senior Deputy Governor Carolyn Wilkins was something of a disappointment. Making no reference at all to monetary policy, instead she said evidence suggests innovation has been a driver of rising income inequality in advanced countries in recent decades, with technology benefiting skilled workers more than others. This is neither surprising nor insightful, though Ms Wilkins did say the Bank of Canada is currently looking at what impact digitalization and automation might be having on the labour market and the transmission of monetary policy. Ahead of the employment report today, where consensus is looking for only a 10k rise after a 78k gain in December, the Canadian Dollar opens in Asia at USD/CAD1.2595, AUD/CAD0.9820 and NZD/CAD0.9100.
AUD / EUR
We noted here yesterday that there were some tentative signs that investors might have been lightening up their positions in what had been one of the most crowded trades in the investment universe: long EUR/USD. On Wednesday, the pair fell on to a 1.22 handle for the first time in two weeks and – remarkably, given the volatility elsewhere – it has stayed on the same big figure for every minute of the past 24 hours.
ECB Chief Economist hosted a Q&A session on Twitter yesterday morning; an innovative and transparent method of improving central bank communication. He said the salary increase secured by Germany’s largest trade union this week is “fully in line” with the European Central Bank’s inflation forecasts. His comments dampened speculation that the 4.3% pay rise negotiated by labor union IG Metall and the Suedwestmetall employers’ federation in Germany – which we spoke about here earlier in the week – would prompt the ECB to raise its inflation forecasts and to tighten policy faster. Asked what he would choose if he could pick just one measure of inflation, he said, “If I really had to pick one, I would take the simplest one: core inflation.” Asked about economic models, he said, “Models are important to help us think about economic developments in a structured way, but the real economy is always more complex than models. Always to be complemented by other approaches, conjunctural analysis, and even anecdotal evidence!”
Mr Praet even displayed a great sense of humour for a central banker. One questioner asked, “Peter, how do we pronounce your name? Is the 'e' silent?” and received the classic reply, “In Praet indeed, but not in Peter.” Not to be outdone, his colleague and Executive Board member Yves Mersch said at an event in London that, “At these speeds, if you bought a bunch of tulips with Bitcoin, they may well have wilted by the time the transaction is confirmed”. Let’s hope that their peers around the world can make similarly witty and interesting observations as they try to explain the somewhat arcane business of monetary policy. The EUR opens in Asia at USD1.2265, AUD/EUR0.6365 and NZD/EUR0.5895.
AUD / NZD
The New Zealand Dollar has not been immune to the volatility seen across all assets and geographies. It was falling even before Thursday morning’s RBNZ interest rate announcement and then proceeded to fall even further as investors reflected on the contents of the Statement and the subsequent Press Conference. AUD/USD rose all the way from 1.0750 to 1.0885 whilst NZD/USD dropped to a 3-week low of 0.7180 early in the London morning. By the end of the day in Europe, however, AUD/NZD had reversed all its gains and was back on a 1.07 ‘big figure’ and NZD/USD was back on 72 cents.
The RBNZ left interest rates unchanged at 1.75% but cut its inflation forecasts and predicted it won’t reach the 2-percent midpoint of its 1-3 percent target range until late 2020, more than two years later than previously expected. Despite that, it maintained its projection that the official cash rate will remain on hold this year and start to rise in mid-2019. The RBNZ has been weighing the potential impact of Prime Minister Jacinda Ardern’s policies around immigration, housing, welfare and industrial relations on economic activity. The RBNZ said it has reviewed its estimates and “the net impact of these policies has been revised down in the near term.” The economic growth profile is “weaker in the near term but stronger in the medium term”. For the currency specifically, RBNZ said, “The exchange rate has firmed since the November Statement, due in large part to a weak US dollar. We assume the trade weighted exchange rate will ease over the projection period…. Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.”
Overall, the RBNZ statement reads pretty dovishly. Assistant Governor John McDermott said the bank’s stance on rates is neutral. “There is a significant probability that the next rate move could be an increase sometime in the future, and there’s also a substantial probability that the next move could actually be a cut.” So, rates could go up or down, inflation expectations are well anchored and will reach the mid-point of target in 2 years’ time; a situation he summed up in the Press Conference by saying “That’s central bank nirvana.” The New Zealand Dollar opens in Asia today at USD0.7220 and AUD/NZD1.0790.
GBP / AUD
The GBP was a bit firmer Thursday morning in London as investors looked forward to what’s become known as ‘Super Thursday’; a Bank of England MPC meeting with a rate announcement, published Minutes then a Press Conference to introduce the new Quarterly Inflation Report. In his appearance before a House of Lords Select Committee last week, BoE Governor Carney had hinted that the Bank was preparing to upgrade the forecasts in its Inflation Report and this is exactly what happened; albeit the language was more aggressive than had been expected. GBP/USD surged more than 1½ cents from 1.3890 to a high just over 1.4050. So far, so easy to explain…. Within the space of four hours, however, as the carnage continued in US asset markets, GBP/USD had reversed all its gains, coming back to its launching point with the precision of a Falcon-Heavy booster. GBP was still the best performer of the day although its 200+ pip gains against both the AUD and NZD were more than halved.
In revising up both its UK and world growth forecasts, the Bank of England said that, “Over the past year, a steady absorption of slack has reduced the degree to which it was appropriate for the MPC to accommodate an extended period of inflation above the target. Consequently, at its November 2017 meeting, the Committee tightened modestly the stance of monetary policy in order to return inflation sustainably to the target. Since November, the prospect of a greater degree of excess demand over the forecast period and the expectation that inflation would remain above the target have further diminished the trade-off that the MPC is required to balance. It is therefore appropriate to set monetary policy so that inflation returns sustainably to its target at a more conventional horizon. The Committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainably to the target.”
In his subsequent Press Conference, the Governor was keen to play down the scale and speed of interest rate hikes and despite much probing from journalists, refused to agree that interest rates are likely to rise in May. The Statement noted, “Any future increases in Bank Rate are expected to be at a gradual pace and to a limited extent”. Market pricing doesn’t yet have a may hike as a done deal, though the implied probability of a 25bp increase has increased from just under 50% to something nearer 70%. All this, of course, is predicated based on two Brexit factors – that there is “a smooth transition”, and that it leads to an “average of potential outcomes”. Let’s see now what the politicians can do to facilitate this… GBP opens in Asia this morning at USD1.3925, GBP/AUD1.7845 and GBP/NZD1.9255.
After yesterday’s exceptionally quiet session in Asia (with barely 20 pips separating the high and low in EUR/USD), the Northern Hemisphere day was much livelier as investors tried to digest news of the new Coalition government in Germany. We have seen what happened in the VIX market in the US when investors in a very crowded trade all tried to pile through the exit at once and there were some tentative signs in EUR/USD that the same might be happening in FX. The EUR fell over a full cent in the late European afternoon to a low of 1.2260; its first time back on a 1.22 handle in two weeks.
On the one hand – as the economists say! – there was some relief that Germany might avoid a fresh, destabilising Federal Election, but on the other is a concern that Ms Merkel might have conceded too much to the left-wing SPD. Early reports suggested that the SPD would be handed the Finance Ministry – a major victory for the Social Democrats – while CSU leader Horst Seehofer, one of the most conservative figures on Merkel's side, would become Interior Minister. The SPD also look set to keep control of the Foreign Ministry and the Labour Ministry, with party leader Martin Schulz reportedly keen to be Foreign Minister. The SPD leadership confirmed the Coalition agreement in a group WhatsApp message, which began, "Tired. But satisfied."
Today brings the ECB’s Economic Bulletin while there are no less than four Governing Council members all giving speeches during the European morning. The EUR opens in Asia at USD1.2260, AUD/EUR0.6375 and NZD/EUR0.5910.
Something different began to happen in Wednesday’s trading in the Northern Hemisphere day. During the previous few days of extreme equity market volatility, the USD tended to do well as stock markets fell, with its best session (the European morning on Tuesday) coming as equities were smashed and US 10-year yields fell back to 2.70%. As the US indices recovered sharply Tuesday afternoon, so the US Dollar gave back all of its morning gains. This pattern continued into Wednesday, as the early call for the DJIA to open 200 point slower helped underpin the USD. But, as stocks extended gains and bond yields rose back to 2.79%, so the US Dollar continued to rise and finished the day at the top of our one-day performance table. We mention this at the top of our report because it goes a long way to explaining the performance of AUD/USD which yesterday tumbled over three-quarters of a cent from the high in Sydney to a 4-week low around 0.7825. AUD/EUR and AUD/NZD, by contrast, finished little changed on the day.
Bloomberg reported yesterday that Commonwealth Bank of Australia – the nation’s largest bank – has reduced its exposure to apartment developers by more than A$1 billion ($789 million), or 23%, according to data included in its first-half earnings report, released today. It’s also pulling back on loans to property investors, which rose just 0.5 percent compared to 7.5 percent growth for owner-occupier loans. Data released last week showed Sydney house prices, which surged 75% between February 2012 and July, have now dropped 3.1% from their peak. As the other major banks report their numbers over the next few weeks, analysts will be looking for any further signs of caution on the property market which has been a major driver of household consumption and consumer confidence over the past few years.
The main event for the rest of this week is on Friday when the RBA releases its latest Quarterly Statement of Monetary Policy, but before then in Sydney this evening, Governor Phil Lowe is scheduled to give a speech. He is usually full of interest and insight and this first set-piece event since the summer holidays at the A50 Australian Economic Forum dinner is sure to be closely-followed. The Australian Dollar opens in Asia at USD0.7825, with AUD/NZD at 1.0790 and GBP/AUD1.7735.
Yesterday morning in Europe, GBP/USD made another attempt to get back on to a 1.40 ‘big figure’ but could get no higher than 1.3995 before then losing more than a full cent against a strongly recovering US Dollar. Despite the weakness in the ‘cable’ rate, the British Pound actually ended the day higher against NZD, AUD and the EUR, whilst little changed against the CAD.
The EU’s leaked position paper – ‘Transitional Arrangements in the Withdrawal Agreement’ – which we highlighted here yesterday had the very rare impact of uniting the whole of the UK political spectrum against it. This unity probably won’t last long. Even the Liberal Democrats qualified their opposition by saying it proved the need to have a second referendum. Nonetheless, it would have provided a welcome respite for the embattled Prime Minister Theresa May, even if it will only last until her own Cabinet start tearing lumps out of each other once again. When pressed on the clause at parliamentary question time, the PM promised a “robust” response, even though to nearly all observers she seems to be in the position of a poker player bluffing with a pair of two’s…
There’s a Bank of England MPC meeting today. In his appearance before a House of Lords Select Committee last week, 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.” We’ll wait to see whether his bullish talk has survived the harsh reality of this week’s Brexit-speak. For today, the GBP opens in Asia at USD1.3875, GBP/AUD1.7725 and GBP/NZD1.9120.
As we explained in detail at the top of today’s report in the AUD section, something different began to happen in Wednesday’s trading in the Northern Hemisphere day. As stocks extended gains and bond yields rose back to 2.79%, so the US Dollar continued to rise and finished the day at the top of our one-day performance table. It’s index against a basket of major currencies is now up from a low last Thursday of 88.25 to 89.95 and is now back above the level from which it began to fall a couple of weeks ago when Treasury Secretary Mnuchin made his infamous comments in Davos.
Dallas Federal Reserve Bank President Robert Kaplan said Wednesday, the recent selloff is "basically a market event and these things can be healthy." Federal Reserve Bank of St. Louis President James Bullard said the latest market decline was no surprise given the elevated valuations of technology stocks and absence of any recent drops. “This is the most predicted selloff of all time because the markets have been up so much and they have had so many days in a row without meaningful down days”. Federal Reserve Bank of New York President William Dudley, meantime, said recent stock-market declines weren’t that big and don’t yet change his outlook for the U.S. economy. “The stock market had a remarkable rise over a very long time with extremely low volatility… My outlook hasn’t changed just because the stock market’s a little bit lower than it was a few days ago. It’s still up sharply from where it was a year ago.” There’s certainly no sign here either of concern about a deeper stock market correction, nor any desire at all to signal rates won’t be raised at the March FOMC meeting.
There are no top-tier US economic data releases scheduled for the rest of the week in the US, though it will be interesting to see if weekly jobless claims later today can extend their recent decline even further into record-setting territory. After its strong run of the past few days, the USD index opens in Asia around 89.90.
The NZD couldn’t sustain Tuesday’s strength. The AUD/NZD made an early attempt to probe into fresh 6-month lows but having reached 1.0750, it then reversed around 30 pips higher. Against the US Dollar, it broadly tracked the movements of its Aussie cousin, falling almost a full cent from its Asian high of 0.7345 to a 3-week low of 0.750.
New Zealand’s fourth quarter labour market report showed the seasonally adjusted unemployment rate fell to 4.5% in the December 2017 quarter, down from 4.6% in Q3; the lowest since the December 2008 quarter, when it was 4.4%. Although good news, the unemployment rate remains considerably above New Zealand’s lowest unemployment rate, which was 3.3%, recorded a decade ago in the December 2007 quarter, immediately before the global financial crisis. The employment rate held steady at 67.8 percent, the equal highest rate since the series began in 1986, as employment kept pace with the expanding working-age population. Women also remained at their highest ever rate of employment at 62.4 percent.
Ahead of this morning’s first RBNZ policy meeting of the year, it was interesting to see the official statisticians point out prominently in their data release that, “the underutilisation rate was just over 12 percent – reflecting about 340,000 New Zealanders with potential to work more. This measure is just as important as the unemployment rate”. Analysts are unanimous that there will be no change in official interest rates with most attention focused on the new forecast track that the RBNZ will be publishing and whether or not there is any explicit attempt to talk the currency lower. The New Zealand Dollar opens in Asia today at USD0.7250 and AUD/NZD1.0785.
In the space of just three trading days, USD/CAD rose exactly three cents from a low of 1.2260 last Thursday evening to 1.2560 on Tuesday morning. Mostly this was a story of USD strength, though the Canadian Dollar had also slipped on some of its major crosses with EUR/CAD, for example, up around half a cent over the same period. Taking a bigger picture view, since the beginning of 2018, USD/CAD has been in a range 1.2260-1.2580 and in yesterday’s New York afternoon held below the top of this range even as the USD jumped.
Statistics Canada yesterday reported monthly and annual figures for building permits. The municipalities issued $8.1 billion in building permits in December, up 4.8% following a 7.3% decline in November. The December increase stemmed from higher construction intentions in the residential sector. Across Canada, all components climbed in 2017, up 10.4% from the previous year. The value of permits in the residential sector has increased every year since 2009. In 2017, the residential sector increased 7.8%, pushed up primarily by the multi-family component (+13.7%).
The next big event in domestic economic news will be the employment report on Friday where consensus is looking for only a 10k rise after a 78k gain in December. Before then, Bank of Canada Senior Deputy Governor Carolyn Wilkins will give a speech today which could offer the next clues on the outlook for interest rates. The Canadian Dollar opens in Asia today at USD/CAD1.2570, AUD/CAD0.9830 and NZD/CAD0.9125.
As the trading ranges in equity markets progressively narrowed through the Northern Hemisphere day, so too the non-USD currencies then stabilised and even found a bit of support. The low for AUD/USD in Sydney yesterday was around 0.7837 but the European low was just above 0.7840 and during the New York session the AUD managed to rally around half a cent. This brought to an end a run of six consecutive declines for the AUD/USD pair which had dropped almost 3 cents from its high back on January 26th.
The Statement released after first RBA Board meeting of the year seemed pretty upbeat overall. “The Bank's central forecast for the Australian economy is for GDP growth to pick up, to average a bit above 3 per cent over the next couple of years. The data over the summer have been consistent with this outlook. Business conditions are positive and the outlook for non-mining business investment has improved… Employment grew strongly over 2017 and the unemployment rate declined. Employment has been rising in all states and has been accompanied by a significant rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead, with a further gradual reduction in the unemployment rate expected.” The currency comment was reframed to mention the trade-weighted value of the AUD, which “remains within the range that it has been in over the past two years.”
Although the RBA made its usual reference that, “An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”, there was no sense at all in which this was a deliberate attempt to talk down the AUD. We’ll now have to wait for any further clues until Friday when it releases its latest Quarterly Statement of Monetary Policy. The Australian Dollar opens in Asia at USD0.7890, with AUD/NZD at 1.0785 and GBP/AUD1.7695.
As with most of the non-US dollar currencies, the low point for the EUR came early in the European afternoon as nervousness mounted around what lay in store for US equity markets. As a much feared 3rd day of extreme downside pressure failed to materialise, EUR/USD rallied from a low just above 1.2320 to just about regain a 1.24 handle late in the New York day.
When ECB chief Mario Draghi addressed the European Parliament in Strasbourg earlier in the week he said, “Our confidence that inflation will converge towards our aim of below, but close to, 2 per cent has strengthened, but… we cannot yet declare victory”. Monetary policy has been famously described as like pulling on a brick with a piece of elastic. You pull and pull and nothing happens, then suddenly it hits you in the face. It seems a particularly good time to recall this analogy after Tuesday’s German Construction PMI which rose sharply from 53.7 in December to 59.8, its highest reading since March 2011 (and the joint-fourth best seen since the survey began in late-1999). A warmer than usual January resulted in a sharp and accelerated increase in total industry activity across Germany’s constructor sector and housing and commercial activity rose at some of the fastest rates seen in the survey’s 18 ½ year history, while growth in new orders was at a record-high.
In other news, Reuters reported that, “Industrial workers and employers in southwestern Germany struck a hard-fought deal on pay and working hours on Monday night, setting a benchmark for millions of workers across Europe’s largest economy”. The agreement between labor union IG Metall and the Suedwestmetall employers’ federation foresees a 4.3% pay increase from April and other payments spread over 27 months. Analysts calculate it is equivalent to a 3.5% annual raise The EUR opens in Asia at USD1.2400, AUD/EUR0.6360 and NZD/EUR0.5895.
The Canadian Dollar gave up its hold on US 81 cents on Friday immediately upon publication of the US employment report and on Monday, it lost its hold on 80 cents too. With the US Dollar generally well-bid, and as WTI crude oil extended its decline to almost $3 per barrel down over the last three days, so the CAD has struggled. From its low point on Friday in Asia of 1.2260, USD/CAD rose exactly 3 cents to a 3-week high of 1.2560.
In economic news, Statistics Canada reported the country's merchandise trade deficit increased to $3.2 billion in December as rising imports outpaced export growth. This was at odds with consensus forecasts that the deficit would be smaller than November’s $2.7bn. Total imports increased 1.5 per cent to a record $49.7 billion in December, boosted by higher imports of energy products and industrial machinery, equipment and parts. Meanwhile, total exports rose 0.6 per cent to $46.5 billion driven by higher exports of energy products and metal and non-metallic mineral products. The bilateral trade surplus with the United States rose slightly to $3.42bn with exports and imports both falling a little during the month. Overall, there was nothing to ring any immediate alarm bells over NAFTA.
After the trade numbers, the next big event in domestic economic news this week will be the employment report on Friday. Two consecutive blockbuster jobs numbers prompted the Bank of Canada rate hike in January, though a third strong print would be a mighty surprise. Consensus is looking for only a 10k rise after a 78k gain in December. The Canadian Dollar opens in Asia today at USD/CAD1.2530, AUD/CAD0.9875 and NZD/CAD0.9150.
With very real concerns that Tuesday might develop into another bloodbath for US equity markets, the US Dollar index against a basket of major currencies rose as high as 89.70 in the New York morning. This took it right back to the level at which it stood before US Treasury Secretary Mnuchin’s comments in Davos which so enraged ECB President Mario Draghi. As stocks regained early losses, so the USD was sold and the index gave back around half a point to 89.25 even as bond yields began to climb once more.
St. Louis Fed President James Bullard is not an FOMC voting member this year but markets are hanging on every clue they can. In a speech at the University of Kentucky’s College of Business and Economics, Bullard said higher wages was not a key driver of inflation. “I caution against interpreting good news from labor markets as translating directly into higher inflation… The empirical relationship between these variables [wages and inflation] has broken down in recent years and may be close to zero… Continued strong labor market performance is unlikely to translate into meaningfully higher inflation,” he concluded. We said here yesterday that, “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.” There are four more still scheduled this week but the first out of the traps was definitely in market-calming mode.
Messrs, Evans, Dudley and Kaplan are all due to give speeches Wednesday, though there are no top-tier US economic data releases scheduled. The USD index opens in Asia around 89.20.
Having broken down through USD1.40 on Friday evening, the Pound’s fall accelerated in Europe on Tuesday, reaching a low of 1.3855 during the London afternoon immediately prior to the opening of the US stock market. After a very sharp initial decline, equities were soon trading in the green and the strong bid to buy USD quickly disappeared. Though the pound ended the day down against the AUD, NZD, CAD and EUR, the so-called ‘cable rate’ was marginally up around 1.3970 even though it couldn’t get back on to a 1.40 big figure.
As political tempers run very high amongst members of the UK Government as well as its backbench MP’s, the Guardian newspaper carries this evening what it splashes as an exclusive report that, “Brussels will have the power to punish the UK at will during the Brexit transition period by closing off parts of the single market to British companies, according to a leaked legal document drawn up by the EU.” The leaked position paper, entitled Transitional Arrangements in the Withdrawal Agreement, lays out in legal language the EU’s terms for the transition period and says use of focused sanctions to “suspend certain benefits ... of the internal market”, would give the EU the freedom to punish the UK without prematurely terminating the transition period and risking damage to its economic interests. That is the type of threat which is hardly going to soothe nerves in the UK…
There are no major economic releases in the UK today but with growing tensions on all sides of the ruling Conservative Party, it would be no great surprise to see international investors hedging some of their GBP exposures after January’s sharp and generally unexpected rally. For today, the GBP opens in Asia at USD1.3970, GBP/AUD1.7715 and GBP/NZD1.9110.
If you want to get ahead take a holiday! The NZD jumped to the top of the one-day performance table even as markets locally were closed for the Waitangi Day holiday. The outperformance was driven by a sharp drop in the AUD/NZD cross rate which fell a full cent to a 6-month low of 1.0760 on talk of stop-loss orders being triggered on the break down from technical support around 1.0850.
Traders get back to work this morning to focus on the Q4 employment report. The published consensus is for the unemployment rate to be steady at 4.6% though analysts at both Westpac and BNZ forecast a small decline to 4.5%, which would be a new nine-year low. Westpac note that, “Job advertisements, benefit numbers and business opinion surveys all point to steady rather than rapid improvement in the jobs market over the quarter… The employment figures will undoubtedly come under more scrutiny this year, with diminishing slack in the labour market and a new Government focused on tipping the balance of power more towards workers.”
Once the employment report is out of the way, it will be time to look forward to the first RBNZ policy meeting of the year on Thursday. Analysts are 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. Furthermore, ANZ note, “the spread between the New Zealand and US 10-year bond yield, at just 12bps, is the narrowest it has been since 1994. The 2-year swap differential has actually turned negative, with US 2-year bonds yielding 22bp more than their NZ equivalent.” The New Zealand Dollar opens in Asia today at USD0.7310 and AUD/NZD1.0785.
After the dramas of the last couple of weeks, the Kiwi Dollar had a relatively quiet Monday, with the entire range against the US Dollar from the low (0.7275) to high (0.7327) only slightly more than half a cent. Measured against its Australian cousin, AUD/NZD rose around 20 pips from Friday’s closing level whilst GBP/NZD was down a full cent to 1.9230.
In economic data, the ANZ Commodity Price Index – when measured in global terms – rose 0.7% m/m in January, after a 3-month slide. The lift was broad-based with meat, dairy, forestry and aluminium prices all rising; the only fall was seen in milkfat products. Because the NZD continued to squeeze higher against major trading partners in January (NZD TWI up 1.8% m/m), this pushed the NZD commodity price index down 2.9% m/m. Only aluminium prices managed to increase in local currency terms. Whether measured globally or locally, the annual rates of price growth were 4.1% and 4.8% respectively.
Today in New Zealand is the Waitangi Day national holiday which marks the signing on February 6th 1840 of a treaty whose effect was to secure British sovereignty over the islands of New Zealand, which was proclaimed on May 21st that year. Markets are closed locally, though the NZD will continue to be traded elsewhere in the Asia-Pacific region. The first RBNZ policy meeting of the year is on Thursday this week. Analysts are 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 New Zealand Dollar opens in Asia today at USD0.7275 and AUD/NZD1.0860.
The Canadian Dollar gave up its hold on US 81 cents on Friday afternoon as USD/CAD punched up through 1.2345 immediately upon publication of the US employment report. By early afternoon in North America yesterday, the CAD lost its hold on 80 cents too. With the US Dollar generally well-bid, USD/CAD reached a high of 1.2515; its highest level in 3 ½ weeks as WTI crude slid almost a dollar per barrel from Thursday to Monday.
There were no Canadian economic statistics on Monday and very little in the way of political news either. Trade data for December is due on Tuesday and might be a reminder for some that Canada runs a trade surplus with the United States between €3-4bn per month, exporting roughly $35bn and importing around $31bn of goods. The former US ambassador to Ottowa made a very good point on Sunday that, “The term NAFTA is a toxic term, and I would leave that term and put it aside and not talk about it. I think that unfortunately it’s become a political punching bag of sorts and if we can replace that name with something else that we wouldn’t get stuck on it”. Now we just need to find a friendly new acronym that won’t upset President Trump…
Away from trade, the biggest event in domestic economic news this week will be Canada’s employment report on Friday. Two consecutive blockbuster jobs numbers prompted the Bank of Canada rate hike in January, though a third strong print would be a genuine surprise. The Canadian Dollar opens in Asia today at USD/CAD1.2515, AUD/CAD0.9890 and NZD/CAD0.9105.
The euro began the week quite well, rising from an opening level around 1.4245 to a best level just below 1.2475 during the European morning but then turned lower throughout the rest of the Northern Hemisphere day to a low point of just 1.2395. ECB chief Mario Draghi addressed the European Parliament in Strasbourg saying, “Our confidence that inflation will converge towards our aim of below, but close to, 2 per cent has strengthened, but… we cannot yet declare victory despite little indication that generalised imbalances are emerging”. Of more interest to FX markets were his remarks that recent volatility in the single currency was also a potential cause for concern, requiring “close monitoring” of the implications for price stability. In truth, there was nothing new whatsoever in these comments but on a day when the USD was finding some support, they were an excuse to knock EUR/USD a few pips lower.
The final Markit Composite PMI Index posted 58.8 in January, its highest level since June 2006 and above the earlier flash estimate of 58.6. The headline index has signalled expansion for 55 successive months. There was a better than expected services PMI in Germany (57.3) which offset a marginal French services PMI of 59.2 which was a touch lower than the initial estimate. Growth of manufacturing production continued to outpace that of service sector activity in January. Although easing over the month, the rate of expansion in manufacturing output stayed close to December’s near-record high. The performance of the service sector continued to strengthen, with business activity growth accelerating to its best since August 2007. Whilst German services activity is at an impressive 81-month high, Italy is the highest for 139 months.
As well as his remarks on the European economy, Mr Draghi also contributed to the Brexit debate, saying that without clarity regarding the shape of the UK’s future relationship with the EU, “well-managed preparations are… essential for dealing with frictions in the transition from the current situation to the eventual new equilibrium especially in the event that no transitional agreement is reached between the EU and the UK”. There would have been uproar in the UK if BoE Governor had said something similar! On the economic slate today, we have just German factory orders whilst ECB Board member and Bundesbank President Jens Weidmann is speaking at an event in Frankfurt. The EUR opens in Asia at USD1.2400, AUD/EUR0.6375 and NZD/EUR0.5870.
The pound had a poor day on Monday as the combination of domestic political uncertainty, the resumption of formal negotiations and poor incoming economic data finally took its toll. The Asian session has been pretty quiet and in early trading in London, GBP/USD actually managed to rally to a high of 1.4145. By mid-afternoon it was down below 1.4000 and though it managed to find some support around last week’s 1.3995 low, the subsequent bounce was far from impressive. The GBP finished firmly at the bottom of our one-day performance table.
The UK service sector PMI fell from 54.2 in December to just 53.0 in January; the slowest upturn in services output for 16 months. Growth was reportedly curtailed by the loss of existing clients and lingering concerns surrounding the UK’s exit from the EU. January data pointed to a slowdown in growth of services activity across the UK, which stemmed from relatively weak gains in new work. Job creation nonetheless picked up as companies retained positive expectations surrounding the outlook. Although the latest results revealed an easing of inflationary pressures, rates of increase in both input costs and output charges remained above their long-run trends.
In a meeting at Downing Street between UK Brexit Minister David Davis and Chief EU negotiator Michel Barnier, Mr Davis claimed with a completely straight face that, “the UK government has published a great deal about what it wants. It wants a comprehensive free trade agreement, and a customs agreement, allowing trade to be as frictionless as possible. It is perfectly clear what the UK wants”. For his part, Mr Barnier said, “Without the customs union, outside the single market, barriers to trade and goods and services are unavoidable… the time has come for the UK to make a choice”. This, of course, is the very opposite of what the Prime Minister wants. Any clear choice or hard decision will immediately inflame half her Cabinet and will heighten pressure for her to quit as Prime Minister. There is no ‘unity candidate’ waiting in the wings because there is no unity on the Government side in the House of Commons. At some point, if the UK political situation continues to deteriorate, a ‘Corbyn discount’ may even have to be priced into the pound. For today, the GBP opens in Asia at USD1.3995, GBP/AUD1.7715 and GBP/NZD1.9230.
Having hit 88.27 on Thursday evening – just a tiny fraction above its Davos low – the USD index rallied to 88.85 by Friday’s close. Yesterday it extended this rally to a best level of 89.27; the highest for almost two weeks. The move came amidst continued volatility in US stock markets. The DJIA index recovered from an initial 350-point drop to be down just 30 points before lunchtime then plunged over 1000 points in the afternoon. Amidst the big swings in equities, bond yields moved lower with 10-year Treasuries between 2.83-2.85% throughout much the day before the late sell-off in stocks sent the yield down to 2.80%.
In economic news, the ISM non-manufacturing index jumped 3.9% in January from an already-high 56.6 in December. This was the 96th consecutive month of expansion in activity and if the headlines were good – the index was at its highest level since August 2005 – the details were even better. New orders jumped over 8 points to 62.7; the highest since January 2011 whilst employment surged to 61.6; the highest since records began in 1997. Overall, the majority of respondents’ comments were positive about business conditions and the economy. They also indicated that recent tax changes have had a positive impact on their respective businesses.
New Federal Reserve Bank Governor Jerome Powell was sworn in yesterday and there was no shortage of analysts pointing out comparisons between the situation today and when new Chairman Alan Greenspan took office on August 11th 1987; barely two months from the stock market crash of Black Monday, October 19th, that year. There are plenty of Mr Powell’s colleagues set to give speeches this week; Messrs, Bullard, Evans, Dudley, Kaplan and Harker will all be offering their views on the economy. It will be interesting to see if the speakers have soothing words for stock market investors or focus, instead, on the continued normalisation of US monetary policy. The USD index opens in Asia around 89.25.
The Aussie Dollar had a much better day than many people had feared on Monday, rising against all the major currencies we track closely here apart from the resurgent US Dollar. AUD/USD hit a best level of 0.7950 before then losing half a cent to 0.7900 as an extremely volatile session in the US equity market saw the DJIA follow Friday’s 666-point drop with a 1,000+ point loss to erase all the gains for 2018. AUD/USD has now fallen for 6 days in a row, dropping a total of 2.2%. Context Analysis point out that in the 737 trading days since 2 April 2015, the sequence of falls has extended to 7 days only once; on 23 December 2016.
There was certainly nothing in the Australian services PMI report to offer much comfort to the AUD. The PMI registered 53.8 in January, down from 55.1 in December, to signal the slowest pace of expansion in Australian service sector output since last October. Both incoming new orders and employment increased to the weakest extents since data collection began 21 months ago. On the price front, output charges rose at the slowest rate since July 2017 amid a softer upturn in input costs. Despite the general weakness in the survey, confidence strengthened in January to a four-month high. Around two-thirds of monitored companies forecast output to rise over the next year, with positive sentiment attributed to planned expansion into foreign markets, organic business growth and new marketing initiatives.
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 today and on Friday when it releases its latest Quarterly Statement of Monetary Policy. The Australian Dollar opens in Asia at USD0.7900, with AUD/NZD at 1.0860 and GBP/AUD1.7705.
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
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.
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.
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
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 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
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