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Just three weeks ago, on December 11th, the Australian Dollar stood at USD0.7507. Twenty days later, with gold up from $1242 to $1305 it was on a US 78 cents big figure for the first time since October 23rd and today is trading above its 20, 50, 100 and 200-day moving averages. Whilst some of this strength is merely the flip-side of a weak US Dollar, we should note that GBP/AUD is down over six cents since early December whilst AUD/EUR is up from 0.6376 to 0.6505 over the same period. <br><br>As the holiday season locally is well underway and even the RBA doesn’t bother with a monthly Board meeting in January, it’s easy to forget that the rest of the world returns to work today. Most of it won’t be enjoying the wonderful sunny climate of Australia’s beaches and in some parts of North America, the mercury on the thermometers is down to minus 20 degrees centigrade. As the Northern Hemisphere shivers and struggles into work, the first piece of economic news to digest will be China’s private sector manufacturing PMI index.
These figures are important for Australia as China is still the number one export destination, the largest market for agricultural goods and the most valuable inward tourism market. Australia needs a strong Chinese economy if it is to grow itself. November’s 50.8 reading for the so-called Caixin manufacturing PMI was the lowest since June and after the Aussie’s recent strong run it is likely going to need some more fundamental support if the positive momentum is to be sustained. Globally, there is a very wide spread of views as to what 2018 holds in store for the Australian Dollar. Morgan Stanley, for instance, sees AUD/USD at 0.67 by the end of next year whilst BoA Merril Lynch has 0.77 and UniCredit goes for 0.82. We’d note that in an environment of generally low asset market volatility and strongly rising commodity prices, the extra yield available in Australia looks very attractive. Experience also teaches us that it looks very attractive until it doesn’t and that reversals can be swift and sudden, especially if global growth concerns take the shine of metals’ prices. <br><br>The AUD opens in Asia this first morning of 2018 at USD0.7810 with AUD/NZD at 1.0990 and GBP/AUD1.7310. On the same day back in 2017 it stood at USD0.72 with AUD/NZD at 1.04 and GBP/AUD1.71.
GBP / AUD
The British Pound had a very good Christmas week, rising from a low of USD1.3350 on Tuesday all the way up to a best level on Friday of 1.3536 before ending the year in New York on Friday evening at 1.3515. The outlook for the British Pound over the next year has rarely been so polarized. On the one hand (as the economists say!) is a view that a 2-year transitional deal on Brexit can be relatively swiftly concluded which would see the UK adopt the policies and rules of the EU from the formal date of leaving in March 2019 out to March 2021. <br><br>This, it is argued, would be the best – or least bad – outcome for British business and allow more time to plan for a post-Brexit world of new trade and customs arrangements with the European Union. Under this scenario, it is further argued that the GBP can regain most of its post-referendum losses and see GBP/USD return to $1.50 with GBP/EUR closer to 1.20 than 1.10. On the other hand is a view that the EU has little incentive to agree either a favourable or an early trade deal for the UK. Playing tough would reduce the attractions for other nations of leaving the EU whilst benefitting from the powerful cyclical economic upswing within the Eurozone. <br><br>Under this scenario, it is argued that hard-line anti-EU Conservative MP’s would refuse to back a ‘shadow EU’ arrangement and would instead split the party and force a General Election on the issue. Whatever the anti-Brexit equivocations of the Labour Party, it is feared that a change of government would see the pound plunge to its post-referendum lows below USD1.20 and EUR1.10. It is against this highly uncertain political background that the first economic data of the new year are released this Tuesday morning. Consensus expectations are for the December manufacturing PMI index to slip back from 58.2 to 58.0.<br><br>The GBP opens in Asia this morning at USD1.3510 with GBP/AUD at 1.7315 and GBP/NZD1.9025. Exactly one year ago, it stood at USD1.23, GBP/AUD1.71 and GBP/NZD1.77.
AUD / CAD
The Canadian Dollar ended the holiday week alongside the euro at the top of the FX performance table. The recent clear messages from Bank of Canada Governor Poloz appeared finally to be gaining some traction with investors, whilst a jump in energy prices and a potentially very significant shift in the technical outlook all offered good support to the currency. <br><br>With continued supply disruptions globally, and a ferocious spell of cold weather over much North America, NYMEX crude on Friday hit $60.46; the highest since June 2015. For most of the north-eastern US encompassing New England, northern Pennsylvania and New York, the National Weather Service issued wind chill advisories or warnings as temperatures were expected to be below 10 degrees fahrenheit in a wide area until well into this first week of the New Year. For some incredible pictures of the cold, take a look at Niagara Falls with Google Images.
We’ve been highlighting here that the technical picture has definitely shifted in the CAD’s favour after the decisive close below USD/CAD1.2760 and it will be a currency to keep a close eye on in the first few days of 2018. Manufacturing PMI data are released later today but the really big test for the CAD will come with December’s employment report on Friday. For today, the CAD opens in Asia at a 10-week low of USD1.2550.
AUD / EUR
The EUR finished equal top of the FX performance table in the last, shorter holiday week of 2017. From a low point on Boxing Day of USD1.1846, the Single European Currency strengthened steadily with the move accelerating to reach a best level on Friday of USD1.2025; its highest since September 10th.
<br><br. the="" euro="" was="" the="" best="" performing="" major="" currency="" in="" 2017.="" in="" early="" january="" as="" worries="" grew="" about="" upcoming="" elections="" in="" the="" netherlands,="" austria="" and="" france="" and="" the="" rise="" of="" populist="" anti-eu="" parties,="" there="" were="" concerns="" about="" a="" true="" existential="" crisis="" for="" the="" currency.="" eur/usd="" hit="" a="" low="" point="" for="" 2017="" of="" just="" 1.0341.="" with="" the="" resounding="" victory="" for="" emmanuel="" macron="" in="" the="" french="" presidential="" elections,="" it="" seemed,="" instead,="" that="" the="" franco-german="" axis="" at="" the="" centre="" of="" eu="" politics="" for="" two="" generations="" would="" be="" strengthened="" and="" reinforced.=""></br.><br><br>The euro has subsequently shrugged off a poor election outcome for German Chancellor Angela Merkel and the dissolution of the Italian Parliament ahead of elections to be held in early March 2018. The economic recovery has gained traction across the whole of the EU and though inflation has not yet followed, it surely will if recent increases in energy prices are sustained. Whilst much of the good news for the euro may already be ‘in the price’, its positive momentum and excellent economic growth story leave it well poised to extend recent gains in the first part of 2018. Its first test will come later this morning when December’s final PMI manufacturing figures are released for all the Eurozone countries.<br><br> On this first trading day of 2018, the EUR opens in Asia at USD1.2000, AUD/EUR0.6510 and NZD/EUR0.5920. One year ago, it began 2017 at USD1.05, AUD/EUR0.69 and NZD/EUR0.66.
New Zealand Dollar
AUD / NZD
As the Aussie Dollar has surged over the past few weeks, the New Zealand Dollar has done very well to generally keep up with the pace. For sure, the AUD/NZD cross has risen from 1.0870 back on December 13th to 1.1000 this morning but for the past 10 days it has been solidly within a 1.0970-1.1100 range which has lifted NZD/USD back onto a US 71 cents big figure for the first time since October 18th. <br><br>Whilst the gains in the Australian Dollar are largely linked to commodity prices, this most certainly is not what has been driving the New Zealand Dollar higher recently. Instead it is a combination of factors: a global investor base which was running short or underweight positions in the currency after the uncertainties of the September election, the announcement of a new but highly experienced Governor at the RBNZ and the extra yield available on New Zealand’s money and bond markets which looks attractive in an environment of generally low asset market volatility. We’d note the short position appears now to have been unwound, the change of personnel at the RBNZ is no longer news and the yield advantage in NZ is pretty slim by historic standards. This doesn’t of itself signal the top for the Kiwi Dollar as momentum is itself a powerful force in foreign exchange markets. <br><br>After a very strong run recently, however, the NZD may need the support of improving macroeconomic data both at home, in China and the broader APEC region if its recent gains are to be sustained. For all the focus on domestic economic policy after the September elections, recall that the countries of Asia-Pacific Economic Cooperation (APEC) take more than 70 percent of New Zealand’s exports, provide 71 percent of tourism arrivals, and account for around 75% percent of New Zealand’s foreign direct investment. The New Zealand Dollar opens in Asia this first trading day of 2018 at USD0.7105 with AUD/NZD at 1.099. At the same point in 2017, it stood at USD0.69 with AUD/NZD at 1.04.
United States Dollar
AUD / USD
Following a very poor pre-Christmas week, the US Dollar then did even worse into year-end. Its index against a basket of major currencies fell to a 14-week low of just 91.77 before rallying slightly to end the year at 91.91. <br><br>For the calendar year 2017, the USD fell almost 9%; the first annual decline since 2012. Its high for the year was way back on January 3rd when EUR/USD hit a low of 1.0341. Since that point, the euro rallied more than 13%, its biggest advance since 2003, and was the largest G-10 gainer against the US currency last year. The US Dollar’s decline came despite the stock market recording more than 70 fresh all-time highs during the year and three hikes in interest rates from the Federal Reserve Bank. Donald Trump is still President of the United States, a historic tax reform bill has been passed and the money markets are pricing further interest rate hikes next year. <br><br>Overnight Fed Funds Futures are pricing in a 95.2% probability of a hike by December 2018, with a 37.1% expectation for rates to be between 1.75 and 2% and 25.8% expectation for rates to be between 2 and 2.5%. For the next ‘live’ FOMC meeting in March, money market pricing reflects a 54% probability of a 25bp hike to 150-175bp. For the last week, none of these potential US Dollar positives seemed to matter. As the New Year begins, it will be fascinating to see if 2018 is a mirror image of 2017; against a background of near-universal bullishness on the USD, its index peaked on January 3rd last year at 103.3 and it was downhill almost all the way from there. USD sentiment may not yet be at historically bearish extremes, but it is certainly very depressed. Will the US Dollar spring a surprise in the opposite direction this time around? <br><br>The US Dollar index opens in Asia this Tuesday morning at a more than 3-month low of 91.90. The 2017 low was 91.00 back on September 5th…
The Aussie Dollar has had a pretty good post-Christmas run. Boxing Day saw AUD/USD hit a high of 0.7730 - its best level since October 25th – and yesterday during the New York morning the pair extended its gains to a near 10-week high of 0.7777.
The price action was first driven a couple of weeks ago by a squeeze on short positions in the institutional and hedge fund community, but the AUD has over recent days been helped by higher commodity prices. Gold has recovered almost $50 per ounce from its mid-December lows whilst the price of three-month copper on the LME rose to a three-and-a-half-year high of $7,201 a tonne yesterday and iron ore is up almost 25% over the past two months. On the London Stock Exchange on Wednesday, the miners Anglo American, BHP Billiton, Glencore, Rio Tinto and Antofagasta rose by between 1.6% and 1.8% per cent whilst precious metal miners also rose on higher gold prices, with Fresnillo and Randgold Resources gaining 2.0% and 1.4% respectively.
It remains to be seen whether this recent strength in the AUD can persist, especially as 10-year Australian bonds now yield only 24bp more than their US equivalents and 3-month rates are only 11bp higher. And, with higher commodities now arguably ‘in the price’ of the Australian Dollar, it’s a struggle to see where the next positive surprise might come from.
The AUD opens in Asia this morning at USD0.7775 with AUD/NZD at 1.0995 and GBP/AUD1.7230.
The GBP had a day of two halves on Wednesday in the Northern Hemisphere. The overnight session in Asia had been pretty quiet, but in London trading the GBP moved sharply higher once stops were hit around last Friday’s intra-day high of 1.3390. GBP/USD reached a best level of 1.3425 before giving back almost all of the gains in the North American time zone.<br><br>
For many people in the UK, the best part of the festive break between Christmas and New Year is the absence of Brexit negotiations. The seemingly interminable rows between Government and Opposition parties have been temporarily suspended, whilst talks between the EU and European Union don’t restart for several weeks. That said, the Chancellor is being pressed to publish documents after he told the Treasury select committee earlier this month that the government had “modelled and analysed a wide range of potential alternative structures between the European Union and the United Kingdom”.
It is to be hoped any documents are more informative than the so-called sectoral studies which the Minister for Exiting the European Union published just before Christmas. As economic analysis, they were utterly useless. For comedy value, they were wonderful. On fishing, for example, we learned that, “As an island nation, the UK has been dependent on the sea for its trade and defence throughout history, and strong traditions of seafaring can be traced back hundreds of years… There is a concentration of activity in coastal towns.”
We’ll leave our readers to reflect upon this insight, and to wonder where else, other than coastal towns, a fishing industry might be based…<br><br>
The GBP opens in Asia this morning at USD1.3395 with GBP/AUD at 1.7225 and GBP/NZD1.8970.
The Canadian Dollar continues to do well. We noted here yesterday how resilient the CAD had been in the face of somewhat weaker than expected GDP figures last Friday and it has subsequently received more support from higher oil prices. NYMEX crude rose $1.50 dollars per barrel to a 2 ½-year high of $59.92 on Tuesday on reports of an explosion on a crude pipeline in Libya and voluntary OPEC-led supply cuts. It slipped a little to $59.55 yesterday but it is still a dollar higher than at the time of the OPEC meeting at the end of November.
We are now at a very important pivot point for the Canadian Dollar. On both November 9th and December 4th, USD/CAD closed in the 1.2670’s before bouncing higher. Yesterday in North America, it broke below this level and closed below it, making the technical picture far more bullish for the CAD. As markets begin to thin for the New Year there’ll be an obvious reluctance to commit fresh investment capital just yet and some of the ‘fast money’ traders will doubtless be wary of getting hurt just as they were 10 days ago on the break up through USD1.2905. Nonetheless, the CAD does appear to be in much better shape now and it will be a currency to keep a close eye on in the first few days of 2018.
For this Thursday morning, the Canadian Dollar opens in Asia this morning at USD1.2640 with AUD/CAD at 0.9830 and NZD/CAD at 0.8930.
The EUR finished higher against a generally weak US Dollar on Wednesday but did no better than hold its own against the GBP whilst falling against the Australian, New Zealand and Canadian Dollars. It had remained on a USD1.18 big figure ever since 6am local time on Tuesday December 19th until mid-afternoon yesterday when it rose to a best level of 1.1907 before again settling back to the high USD1.18’s.
The Single European Currency still seems a favourite pick for 2018 for a wide range of FX strategists and analysts but one of the main questions in the near-term is the extent to which this is already reflected in investor positioning. A very interesting Bloomberg analysis of the EUR/USD options market yesterday reflected a 75% probability that the pair will reach 1.2170 by end-2018, a 67% probability of 1.2290 and a 50% probability of 1.2560.
The ECB publishes its monthly Economic Bulletin today and it will be interesting to see how much weight, if any, it places on recent economic developments in Spain. Thousands of businesses, including major banks and energy firms, have moved their headquarters out of Catalonia and, as it accounts for around 19% of Spanish GDP, the economic uncertainty is weighing down on activity. The OECD, for example, now forecasts GDP growth of just 2.3% in 2018 after 3.0% in 2017. The country accounts for around 11% of Eurozone GDP and is the fourth largest country after Germany, France and Italy.
The euro opens in Asia this morning at USD1.1895, with AUD/EUR at 0.6535 and NZD/EUR at 0.5935.
We’ve now had fully 48 hours of post-Christmas trading in the New Zealand Dollar and it has largely kept pace with the strength in its Aussie cousin with the AUD/NZD cross in a 1.0970-1.1000 range since Friday last week. NZD/USD reached a best level of 0.7040 on Tuesday and yesterday in Europe extended its gains to 0.7075; its highest since October 19th.
Arguably there is perhaps more substance to the Australian Dollar recovery than to the Kiwi; higher commodity prices have helped the AUD whereas the last Global Dairy Trade (GDT) auction just before Christmas showed prices falling by 3.9%. The average price per tonne on the GDT index was US$2969 (NZ$4247), with the key price indicator whole milk powder (WMP) at US$2755, a drop of 2.5%. This was the fourth drop of at least 2.4% in recent months - with a fall of 2.4% on October 3, 3.5% on November 7 and 3.4% on November 21. The next GDT auction doesn’t come until the New Year and will be keenly watched for any sign of pick-up in prices.
The New Zealand Dollar opens in Asia this morning at 0.7070 with AUD/NZD at 1.0995.
The US Dollar continues to slip gradually lower. Last week its index against a basket of major currencies fell from 93.50 to 92.85 and its fall has continued in this Christmas-thinned week. After a very brief opening rally on Tuesday, the index fell to a 3-week low of 92.73 and yesterday in Europe it traded down to 92.51; the lowest level since December 1st.
The move lower comes as US yields have slipped back across all points on the maturity spectrum. 2-year notes now yield 1.90%, 10-year Treasuries are down from 2.47% to 2.41% and the 30-year long bond is down 6bp at 2.75%. Despite these declines, the spread between 2-year US and German rates of just over 250bp is the widest in almost 20 years.
The performance of the US equity market over the last ten days might explain some of the caution on the US Dollar even if it isn’t yet flashing a red warning light for the currency. If we look at the S+P 500 index futures contract, this hit an intra-day high of 2694 back on Tuesday December 19th. The peaks of last Wednesday and Thursday failed to take the index back to this level and it closed the week 10 points off the high at 2684. Yesterday’s low was 2679 but the big level to watch is last Thursday’s 2678 low. If we see a break and a close below this level, then the technical picture turns much more negative in the short-run and will raise fears of a return to the post-FOMC low around 2650.
There were more US economic statistics released yesterday. The headline Conference Board Consumer Confidence index missed expectations of 128.0; falling instead to 122.1 from 129.5. The 'miss' was driven by a huge drop in "expectations" which tumbled from 113.3 to 99.1; the lowest since November 2016. Indeed, the spread between the present situation (156.6) and expectations (99.1) is now just over 57 points; the widest since the days of the dotcom boom turned to bust.
The US Dollar index opens in Asia this morning at 92.
The Australian Dollar was just edged out of top spot last week by its Canadian counterpart. A solid but unsurprising Mid-Year Economic and Fiscal Outlook earlier in the week was followed by a relatively upbeat set of RBA Board Minutes before they headed off for the Summer holidays. There is now no further meeting scheduled until the first Tuesday in February.<br>
With no Central Bank to worry about and no data to concern investors, the Aussie Dollar opened the first day after Christmas in as good a shape as its cricket team. Plenty of runs on the board before lunch, a dour afternoon session and a late flourish saw AUD/USD hit a high of 0.7730; its best level since October 25th.<br>
Although the AUD certainly begins this 2017/18 holiday season in much better shape than might have seemed likely just a few weeks ago, it remains to be seen whether it can sustain its recent strength. Against the US Dollar, it is up over 2 cents in a fortnight whilst against the British Pound it has gained more than 6 cents over the past three weeks. The price action seems to reflect a squeeze on short positions in the institutional and hedge fund community rather than any fundamental reappraisal of the currency. For any locals planning an overseas vacation, this might represent a very good opportunity to load up on some cheaper spending money.<br>
The AUD opens in Asia this morning at USD0.7728 with AUD/NZD at 1.0985 and GBP/AUD1.7305.
The British Pound didn’t have a great end to last week but after testing the lows around USD1.3350 at the start of Tuesday’s New York session, it subsequently rallied around 30 pips in generally thin liquidity conditions.<br>
The latest revisions to the whole of the UK GDP data series last week served only to polarise opinion about the state of the economy. Upward revisions to Q4 2016 meant that in the calendar year which included the EU referendum, the UK economy was the joint fastest-growing in G7; its 1.9% rate was the same as Germany, above the US & Canada (both 1.5%) and well ahead of France’s 1.1%. The revised numbers also meant that the latest y/y growth of 1.7% in the year to September 2017 was better than the 1.5% which had been expected. Unfortunately, the revisions also raise the starting point for the next set of quarterly data, meaning we could see a sharp slowdown in the annual rate of growth when the Q4 numbers are published at the end of January.<br>
In the shouty echo chambers of social media, both sides in the Remain/Leave argument sought vindication in the GDP numbers. In the eyes of the foreign exchange market, the figures supported the view that the best of the UK’s post-referendum performance might now lie behind it and the early part of 2018 could well be more challenging.
The GBP opens this Wednesday morning in Asia at USD1.3375 with GBP/AUD at 1.7305 and GBP/NZD at 1.9010.
The Canadian Dollar was the best of all the major currencies last week. As well as the strong performance immediately after Thursday’s CPI and retail sales numbers, it’s worth pointing out how resilient the CAD was after a relatively soft set of GDP figures on Friday. USD/CAD spiked immediately from 1.2705 to 1.2885 yet by close of business had regained around three-quarters of its losses to finish the week at 1.2720.<br>
Unlike its American cousin, the Canadian stock market remained closed yesterday though the currency was well supported both by the general weakness of the US Dollar and by rising oil prices. NYMEX crude rose $1.50 dollars per barrel to a 2 ½-year high of $59.80 on reports of an explosion on a crude pipeline in Libya and voluntary OPEC-led supply cuts.<br>
The Canadian Dollar is even stronger in Asia this morning than at the end of last week. It opens at a 3-wek low (CAD stronger) of USD1.2693 with AUD/CAD at 0.9805 and NZD/CAD at 0.8925.
Five days have passed since the elections in Catalonia and it is still not clear who will form a regional coalition there, let alone what relations will be with the rest of the country. Although Spanish Prime Minister Rajoy's conservative Popular Party (PP) had a disastrous election, winning just three of the 135 seats, he will for the moment keep control of the region, because he imposed direct rule in October, invoking Article 155 of the constitution. That extraordinary measure was a first in post-Franco Spain and though it was said to be “temporary”, no end date has yet been announced for the current situation.<br>
The European Union has treated the matter as an internal affair for Spain to resolve and is highly unlikely to change its stance. Meantime, the Catalan economy has suffered. Thousands of businesses, including major banks and energy firms, have moved their headquarters out of the region and, as it accounts for around 19% of Spanish GDP, the economic uncertainty is weighing down on activity. The OECD, for example, now forecasts GDP growth of just 2.3% in 2018 after 3.0% in 2017.<br>
The ECB publishes its monthly Economic Bulletin on Thursday and it will be interesting to see how much weight, if any, it places on developments in Spain. The country accounts for only 11% of Eurozone GDP and is the fourth largest country after Germany, France and Italy.<br>
Having swung between USD1.1816 and 1.1877 yesterday in North America, the euro opens in Asia this morning at USD1.1862, with AUD/EUR at 0.6515 and NZD/EUR at 0.5930.
The New Zealand Dollar had a pretty symmetrical week before the Christmas break; falling for the first half and regaining pretty much all its losses in the second. Business confidence didn’t bounce back in December as many analysts had anticipated though the Q3 GDP numbers beat consensus estimates thanks to some upward revisions to back data. Having fallen from 0.7027 last Monday to 0.6960 on Wednesday, NZD/USD recovered to 0.7027 at Friday’s close.<br>
Overnight there are reports of a 4.2 magnitude earthquake which was felt in Marlborough and the Wellington region. This follows a 3.8 magnitude quake at 7.17pm on Tuesday around 10km south-west of Wellington that was felt by more than 4,000 people. Mercifully, both of these were light by recent standards and no injuries to people or severe damage to property have thus far been reported.<br>
Yesterday in the Northern Hemisphere, the NZD extended its gains to a near 10-week high of USD0.7038 before slipping back just a few pips to open in Asia this morning at 0.7035 with AUD/NZD at 1.0985.
The Dollar had a poor pre-Christmas week despite further record highs for the stock market, a rise in market interest rates at all points of the maturity spectrum and generally solid incoming economic data. Its index against a basket of major currencies opened on Monday morning at 93.50 which proved to be the high of the week; it subsequently fell almost without interruption to end on Friday around 92.85.<br>
Financial markets remained open in the world’s non-Christian centres on December 25th, with Tokyo and Shanghai the two stand-out markets, albeit volumes were not high. In China the renminbi jumped to USD/CNY6.5514; the strongest since mid-September though the US Dollar was little changed against other major currencies. Yesterday, as the United States returned to work, the US Dollar index opened around 92.80 and rose to 92.92 before then trading down to a 3-week low of 92.73.<br>
There were some US economic statistics released yesterday. The 20-city house price numbers published by S&P/CoreLogic showed the annual rate of growth around 6.2%, though 16 of 20 major U.S. cities experienced home price growth of 5% or higher: double the pace of average wage growth. Seattle prices rose almost 12.5% in the year to October whilst Las Vegas grew 10.2%. Later in the week, we’ll have consumer confidence on Wednesday, then the advance goods trade balance, weekly jobless claims and Chicago NAPM on Thursday.<br>
The US Dollar index opens in Asia this morning at 92.78.
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