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By Nick Parsons

AUD rises but NZD surges after strong China PMI data. USD index hovers near 14-week lows whilst EUR/USD hits fresh 3-year high.


Australian Dollar

AUD

Expected Range

What drives currencies one day sometimes doesn’t matter the next. New things come along, fresh economic and political developments, previously ignored pieces of information or newly-found correlations which purport to explain FX fluctuations. We always think of currency drivers in the same way that a 24-hour news cycle operates: a story develops over time, it then becomes headline news and great resources are expended covering its every angle and implication. Then, as soon as it emerged, it disappears from sight and often from memory; replaced by the next big story.<br><br> Why do we mention this now? Because for the last two or three weeks the AUD has been all about industrial commodities and precious metals. Yesterday and today they didn’t seem to matter. Instead, it’s the China growth story which has been the latest reason to push the AUD higher to a best level of USD0.7865.<br><br> We said here earlier this week that, “the Aussie Dollar still remains sensitive to Chinese numbers. These are important for Australia as China is 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”. The Caixin China Composite PMI data released on Thursday (which covers both manufacturing and services) signaled a solid upturn in Chinese business activity at the end of 2017. At 53.0, the Composite Output Index picked up from 51.6 in November to indicate the fastest rate of activity growth for a year.<br><br> Steep increases in activity were registered across both the manufacturing and service sectors during December. Notably, services companies recorded the quickest expansion in activity since August 2014. Meanwhile, manufacturing output increased at a pace that, though modest, was the strongest seen for three months. Business confidence in the 12-month outlook for activity improved across both the manufacturing and service sectors at the end of the year. Services companies expressed the greatest degree of optimism since June, while sentiment at manufacturers picked up from November’s joint-record low.<br><br> The next important local economic data are the November trade figures out this morning. Ahead of their release, the AUD opens in Sydney this morning at USD0.7860 with AUD/NZD at 1.0985 and AUD/CAD0.9825.

British Pound

GBP / AUD

Expected Range

After a strong start to the New Year, the GBP has rather lost traction. On Wednesday morning it reached USD1.3608; its highest since the day after the EU referendum back in June 2016. From that point on, however, it was downhill all the way and the pair tumbled more than a full cent with the pound losing ground against every one of the major currencies we track here. On Thursday it regained around half its losses after a better than expected set of PMI services numbers but still found it difficult to make progress up through USD1.3550.<br><br> The UK Services PMI Business Activity Index registered 54.2 in December, up from 53.8 in the previous month, to signal the second-fastest upturn in service sector output since April 2017. Higher levels of business activity have now been recorded for seventeen months running, supported by the resilient economic backdrop and rising consumer spending. However, service providers noted that Brexit-related uncertainty continued to hold back clients’ willingness to spend at the end of 2017. New business volumes increased at a solid pace in December, but the latest upturn was the slowest recorded since August 2016. Reports from survey respondents suggested that subdued business investment and cost consciousness among clients were factors that had weighed on sales growth in December.<br><br> On Friday in London we’ll get to see new car registration data which will likely be poor once again. Ahead of that, the pound opens in Asia this morning at USD1.3550, AUD1.7235 and NZD1.8930.

Canadian Dollar

AUD / CAD

Expected Range

After Wednesday’s pause which saw USD/CAD spent most of the day grinding higher in a 1.2505-1.2540 range, yesterday it was a story of renewed strength for the Canadian Dollar, even if it couldn’t quite crack the 1.25 mark.<br><br> The first economic data release of the new year showed Canadian producer prices increased in November at their fastest pace in nearly three years due to higher costs related to energy and petroleum. Industrial product prices (which measure the price manufacturers receive once their goods leave the plant) advanced 1.4% in November. The last time the index rose at a faster pace on a month-over-month basis was in February 2015. Meanwhile, the country's raw-materials price index also rose at an elevated pace, jumping 5.5% in November, following a 3.8% increase in October. This pushed the annual increase up to 14.2% in November, after 6.6% y/y the previous month. The increase in the RMPI was mainly due to higher prices for crude energy products (+25.4%), particularly conventional crude oil (+26.7%). Year over year, the RMPI excluding crude energy products rose 6.5%.<br><br> As our Aussie and Kiwi clients enjoy the Summer sunshine, a quick look at the weather forecast shows the temperature in Toronto is not expected to rise above minus 10 degrees centigrade at any point over the next three days with lows of minus 25 degrees forecast on Friday. Rather than venturing outside, however, currency traders will be warmed by the heat from their computers as they await Friday’s labour force survey. Remember it was the November employment numbers which first lit a fire under the CAD with a 79,500 monthly increase in jobs.<br><br> The Canadian Dollar opens in Asia this morning at USD1.2505 with AUD/CAD at 0.9830 and NZD/CAD at 0.8945.

Euro

AUD / EUR

Expected Range

The euro was Thursday’s second-strongest currency after the New Zealand Dollar. Having reached a more than 3-year high of USD1.2077 on Tuesday, then slipped steadily on Wednesday, yesterday it rallied to a fresh cycle high of 1.2082 after publication of the Eurozone aggregate and individual countries’ PMI services reports.<br><br> The final Eurozone PMI Composite Index posted 58.1 in December, up from 57.5 in November, to register its highest reading since February 2011. The headline index has signalled growth for 54 successive months, with the average level during quarter four the best since the opening quarter of 2011. The trend in new business also strengthened in December. Manufacturers saw the steepest increase since April 2000, underpinned by improved domestic demand and near-record growth in new export orders. Service providers, meanwhile, registered the fastest increase in new work for over a decade.<br><br> The positive economic environment led to improved business confidence in the euro area. Optimism rose to its best since September, after strengthening to a joint-record high in Germany and three-month highs in France, Spain and Ireland. We said yesterday that “whilst the German data are very impressive, they have rather lost their power to surprise on the upside, given that expectations are already so elevated.” Nonetheless, the Markit Press Release was remarkably upbeat, saying, “A stellar end to 2017 for the eurozone rounded off the best year for over a decade, continuing to confound widely-held fears that rising political uncertainty would curb economic growth… Manufacturing is enjoying its best growth spell since data were first collected over two decades ago while the service sector closed off its best year since 2007.” The language is enough to melt the heart of even a hardened trader!!<br><br> The EUR opens in Asia this Thursday morning at USD1.2070, AUD/EUR0.6515 and NZD/EUR0.5930.

New Zealand Dollar

AUD / NZD

Expected Range

The New Zealand Dollar is beginning to show some of the day-to-day volatility which characterized it in early December when it would regularly swing from being the day’s strongest currency to the very worst. On Wednesday, it showed some signs of under-performance with the AUD/NZD cross moving up to a 1-month high of 1.1050 and the NZD/USD pair struggling to hold on to a US 71 cents big figure. Yesterday, however, it surged to the top of the FX pile with AUD/NZD down to 1.0985 and NZD/USD back up to 0.7160.<br><br> As with the Australian Dollar, the lift to the Kiwi came not from domestic economic data, but the strength of the Chinese PMI numbers. Buried beyond the headlines, the report noted, “Average input costs faced by services companies in China increased at a solid and accelerated rate in December. Furthermore, the rate of inflation was the joint-quickest since February 2013 (on par with March 2017). Raw materials, transportation and salaries were all cited as having gone up in price in the latest survey period.” One country’s input costs are, of course, another country’s exports and both NZ and Australia send a large portion of their goods in to China; industrial metals for Australia, dairy and lumber for New Zealand.<br><br> The Kiwi Dollar opens in Asia this morning at USD0.7160 with AUD/NZD at 1.0985.

United States Dollar

AUD / USD

Expected Range

The good news for the US Dollar is that it didn’t make a fresh low yesterday! On Tuesday its index against a basket of major currencies hit a low of just 91.44 but then on Wednesday following strong ISM data and after the FOMC Minutes were published, it managed to reach 91.92. On Thursday in Asia it began to turn lower once more and in the London afternoon it slipped back to a low of just 91.49.<br><br> The big story of the day in the United States was further strength in the economic numbers and yet another record high for stock markets. The Dow Jones Industrial Average jumped past 25,000 for the first time on Thursday morning, on track to make the fastest run ever to a fresh 1000-point milestone. If the DJIA closes above 25,000, the jump from 24,000 would have taken 23 trading days, ahead of the 24-day spans that took the index to 11,000 in 1999 and 21,000 in March last year.<br><br> On the economy, the latest ADP employment report was much stronger than consensus expectations, showing 250,000 jobs were created in December against forecasts of a more modest, but still impressive, 190,000 gain. ADP’s Press released noted, “Throughout the year there was significant growth in services except for an overall loss of jobs in the shrinking information sector. Looking at company size, small businesses finished out 2017 on a high note adding more than double their monthly average for the past six months. The job market ended the year strongly. Robust Christmas sales prompted retailers and delivery services to add to their payrolls. The tight labor market will get even tighter, raising the specter that it will overheat.”<br><br> Today brings the official labour market report as well as the ISM services index and November’s trade balance. The US Dollar index opens in Asia this morning at 91.50; still perilously close to Tuesday’s 91.44 low.

By Nick Parsons

US Dollar ekes out modest gains on strong data and FOMC Minutes, AUD outperforms NZD


Australian Dollar

AUD

Expected Range

With gold hitting its highest level since September 15th at $1320 per ounce in Asia yesterday, the AUD has continued to meet with solid investor demand in these first few trading days of 2018. AUD/USD reached a high in the London morning on Tuesday of 0.7842; its highest since October 20th. On Wednesday, after an overnight sell-off it to 0.7807, it got back to 0.7840 and has been on a US 78 cents big figure for all but a few minutes of this first week of the New Year.<br><br> The big question now is whether yesterday’s US Dollar bounce can be extended and if so, what might it mean for the performance of industrial and precious metals which have recently drawn lots of investor attention? Gold futures rose for 12 of the last 13 days up until Wednesday and were up for the last 9 in a row; the longest winning streak in more than 6 years. This run came to an end after the latest FOMC Minutes were published, with the yellow metal down almost $10 per ounce.<br><br> Taking a longer perspective, gold has risen in January for 9 of the last 12 years with an average gain of just over 4%. The spot price is now above all of its 20, 50,100 and 200 day moving averages and with President Trump having taken to Twitter to boast about the size of his big red nuclear button, traders who have been watching the meteoric rise of Bitcoin over the last few months were said to be turning to a safe haven which at least they feel they understand and have access to in their regular dealing accounts.<br><br> Whilst this explains the recent rise in commodities, it leaves unanswered the question of whether it can continue. If not, and in the absence of any improving domestic fundamental news in Australia, it might leave AUD/USD vulnerable to a spell of profit-taking which hasn’t been seen at all thus far during its rise from 0.7505 back on December 8th.<br><br> The next local economic data to be released are the performance of services index this morning and the more important November trade figures on Friday. The AUD opens in Sydney this morning at USD0.7825 with AUD/NZD at 1.1040 and AUD/CAD0.9825.

British Pound

GBP / AUD

Expected Range

The pound got off to a very good start to the New Year 2018 on Tuesday and by the London opening on Wednesday it extended its gains further to reach USD1.3608; its highest since the day after the EU referendum back in June 2016. From that point on, however, it was downhill all the way and the pair tumbled more than a full cent, with the pound losing ground against every one of the major currencies we track here.<br><br> The latest UK PMI construction numbers were certainly disappointing, and the year finished in a downbeat fashion. The headline index fell to 52.2 in December from 53.1 as a robust rise in residential building contrasted with falling work on commercial projects and stagnating civil engineering output. Survey respondents indicated that house building remained a key engine of growth, with residential work expanding for the sixteenth consecutive month in December. In contrast, latest data indicated a moderate fall in commercial construction, thereby continuing the downward trend seen since July. Civil engineering work stabilised during the latest survey period, which ended a three-month period of decline.<br><br> As Markit noted in their Press Release, “construction firms indicated that longer term business confidence is still relatively subdued, largely reflecting concerns about the domestic economic outlook. 37% of the survey panel forecast a rise in construction activity over the course of 2018, while around 11% anticipate a reduction. As a result, the balance of UK construction companies expecting growth in the year ahead remains among the weakest recorded by the survey since mid-2013”.<br><br> Ahead of the PMI service sector index on Thursday, the pound opens in Asia this morning at USD1.3510, AUD1.7255 and CAD1.6955.

Canadian Dollar

AUD / CAD

Expected Range

Having USD1.2500 (or 80 US cents when quoted the other way round) for the first time since October 20th on Tuesday, the Canadian Dollar paused yesterday even as oil prices extended recent gains. USD/CAD spent most of the day in a 1.2505-1.2540 range.<br><br> Both Brent crude oil and US benchmark West Texas Intermediate rallied yesterday as the political unrest in Iran (the third largest OPEC producer which pumps around 3.8m barrels per day) came into focus. Brent crude reached $67.62 – up more than 1.5% on the day before easing slightly. WTI rose 1.8% to $61.52, a level not seen since June 2015.<br><br> Meantime, the cold weather intensifies across North America. Winter Storm Grayson, a very large and powerful weather system is threatening the East Coast of the United States with heavy snow, intense winds, and record-setting low temperatures. The cold front has sent temperatures below freezing in more than 92% of the Continental United States. Winter storm watches and warnings have been issued for many coastal regions in north Florida to Maine from Wednesday into late Thursday. Hurricane-force wind warnings, meantime, have been posted off the coast of North Carolina where ships could encounter winds of 80 miles an hour and waves as high as 26 feet on Thursday.<br><br> The really big test for the CAD will come with December’s employment report on Friday. Before then, the Canadian Dollar opens in Asia this morning at USD1.2540 with AUD/CAD at 0.9825 and NZD/CAD at 0.8900.

Euro

AUD / EUR

Expected Range

After a year in which the euro was the best performing of all the major currencies, it got off to a flying start in 2018; with a high on Tuesday morning of 1.2077; the highest in over 3 years. It couldn’t sustain its very positive momentum throughout the day and finished in New York around 30 pips below its best level. On Wednesday the pullback continued, with a day’s low in the European afternoon of just 1.2006.<br><br> The modest pullback in the EUR comes despite a very good set of German labour market data. The seasonally adjusted jobless total dropped by 29,000 to 2.442 million; more than double the 12,000 consensus forecast. December's unemployment rate was 5.%, the same as a revised reading for November and the lowest level since German reunification in 1990, the office said. In 2017 as a whole, the rate fell to 5.7% from 6.1% the previous year. The detailed numbers showed Germany's workforce expanded last year to a record 44.3 million, whilst the Labour Office said there were 761,000 job vacancies in December, suggesting companies are struggling to find skilled workers quickly.<br><br> Of course, whilst the German data are very impressive, they have rather lost their power to surprise on the upside, given that expectations are already so elevated. Ahead of Eurozone aggregate and individual countries’ PMI services reports, the EUR opens in Asia this Thursday morning at USD1.2020, AUD/EUR0.6515 and NZD/EUR0.5905.

New Zealand Dollar

AUD / NZD

Expected Range

The New Zealand Dollar has largely kept pace with the Aussie Dollar over the last couple of weeks but is just starting to show some signs of under-performance with the AUD/NZD cross edging up to a near 1-month high of 1.1040 overnight. Having reached a high in the London morning on Tuesday of 0.7125, the NZD/USD pair is also struggling to hold on to a US 71 cents big figure.<br><br> Just as for its Aussie cousin, 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. There’s no domestic economic data scheduled for release until January 9th, however, and if the USD shows any sign of a turnaround, the NZD could be vulnerable to a bout of profit-taking from recently-acquired long positions.<br><br> It’s certainly a long time until the next RBNZ Board meeting on February 8th and they’ve already signaled there’s no hurry to be raising interest rates. The last published forecast doesn’t have a rate hike penciled in until the middle of 2019 and though the new Treasurer has successfully avoided being pinned down on his preferred level for the NZD, it’s hard to imagine with continued subdued core inflation that the Government would prefer anything other than a somewhat weaker exchange rate.<br><br> The New Zealand Dollar opens in Asia this morning at USD0.7090 with AUD/NZD at 1.1040.

United States Dollar

AUD / USD

Expected Range

After almost three weeks of steady but relentless selling which took its index against a basket of major currencies down from 93.80 on December 12th to a low on January 2nd of 91.44, the US Dollar finally found support in the Northern Hemisphere yesterday. It wasn’t just about the economic data (see below) as the USD turned higher before the latest US numbers were released. By the end of the London afternoon, however, the Dollar Index had moved up to a high of 91.88 and after the FOMC Minutes were published, it managed to push a little higher still.<br><br> We noted here yesterday that “the dollar is falling because it is falling.... The technical tail is wagging the fundamental dog.” Yesterday the dog regained the initiative and we’d note, too, that it marked exactly the one-year anniversary of the last major long-term USD turnaround on January 3rd 2017.<br><br> The solid economic news began with the December ISM manufacturing survey which rose to 59.7 from 58.2, above the consensus forecast for an unchanged 58.2. very encouragingly, the New Orders Index registered 69.4; an increase of 5.4 points from the November reading of 64.0. Comments from the panel reflected expanding business conditions, with new orders and production leading gains; employment expanding at a slower rate; order backlogs expanding at a faster rate; and export orders and imports continuing to grow in December.<br><br> Away from manufacturing, November construction spending rose a stronger than expected 0.8% after a +0.9% gain in October and was the fourth consecutive monthly increase. The November rise was led by a solid advance in homebuilding and a 4.8% post-hurricane leap in spending on home improvements. Non-residential construction rebounded 0.9% in November after declining four of the last five months, led by office building, which rose 5.5%.<br><br> Later in the US afternoon, the Minutes of the December FOMC Board Meeting were published. As ever, there’s something for everyone in these and you can always find a wide spread of views expressed. Some members said a faster trajectory of rate hikes may be needed whilst several officials were concerned by low inflation expectations. A couple were concerned by financial stability risks but most backed gradual rate hikes. The main takeaway, though, is that the two dissenters will not be voting members in 2018 and the market-derived probability of a March rate hike has gone up from 56% to 67%.<br><br> The US Dollar index opens in Asia this morning at 91.85; up around 40 pips from its recent low.

By Nick Parsons

US Dollar index falls another half point to fresh 14-week low. AUD/USD and NZD/USD both extend recent gains though CAD is top of the pile.


Australian Dollar

AUD

Expected Range

With the US Dollar remaining under pressure and gold hitting its highest level since September 18th at $1312/oz, the AUD met with reasonable investor demand on the first trading day of 2018. It rose against the USD and NZD, fell a little against the EUR and somewhat more against the CAD and GBP. AUD/USD reached a high in the London morning of 0.7842; its highest since October 20th and taking its gains since the recent low on December 8th to almost 340 pips.<br><br> Fortunately for the AUD, the first Chinese numbers of this new year were pretty good. The so-called Caixin manufacturing PMI jumped from 50.8 in November to 51.5. The latest data highlighted faster growth of output, total new work and export sales. Greater production led to a further rise in buying activity, with the rate of growth quickening to a four-month high. Improved sales and stronger underlying market demand were cited as key sources of growth in December. Furthermore, total new orders expanded at the steepest pace since August, with export sales also rising at a faster pace at the end of the year.<br><br> There are no local economic data released today, with the performance of services index on Thursday and the more important November trade figures on Friday morning. The AUD opens in North America this first morning of 2018 at USD0.7830 with AUD/NZD at 1.1015

British Pound

GBP / AUD

Expected Range

The pound got off to a very good start to the New Year 2018 yesterday, second only to the buoyant Canadian Dollar on the one-day performance table. Against a very weak US Dollar it reached an intra-day high of 1.3594 which matched its high for 2017 reached back in mid-September. <br><br> This impressive price action comes against a backdrop of a slightly softer than expected manufacturing PMI report which printed at 56.3 in December; well down from November’s 51-month high of 58.2. Although December saw rates of expansion in output, new orders and employment slow from November’s highs, growth in all three components remained solid and well above long-run trends. And, despite the uncertainties of Brexit, the headline PMI has now remained above the 50.0 no-change mark for 17 consecutive months. <br><br> On the inflation front – which will be crucial for the Bank of England’s Monetary Policy Committee in 2018 – Markit reported the rate of increase in input costs eased to a 4-month low in December, but remained marked overall. Companies linked higher costs to rising raw material prices, input shortages, suppliers raising their prices and the exchange rate. The cost of chemicals, electrical goods, electronics, metals, paper, plastics, timber and utilities were all reported as higher. Part of the increase in purchase prices was passed on in the form of higher output charges in December. Selling prices rose for the twentieth successive month with companies linking the latest increase in charges to stronger demand.<br><br> Ahead of the construction PMI today and the service sector PMI index on Thursday, the pound opens in Asia this morning at USD1.3590 with GBP/AUD at 1.7360 and GBP/NZD1.9125.

Canadian Dollar

AUD / CAD

Expected Range

The Canadian Dollar continued its recent very strong run yesterday and once again finished at the top of the one-day FX performance table, hitting USD1.2500 (or 80 US cents when quoted the other way round) for the first time since October 20th. <br><br> With continued supply disruptions globally, and a ferocious spell of cold weather over much of Canada and North America, NYMEX crude on Friday hit $60.46; the highest since June 2015. Yesterday morning it was higher still at $60.67. For the next few days and into the weekend, the cold snap will become even more extreme. The highest temperature of the day in Toronto on Thursday is projected at minus 18 degrees centigrade with a low of minus 26. Yes, you may need to read that sentence again – a day’s high of minus 18.<br><br> As well as oil prices, there is some speculation that the bank of Canada might pull the trigger on another interest rate hike at its January 17th meeting. Markets are currently pricing in about a 45% chance Stephen Poloz will increase the benchmark rate to 1.25 per cent at that meeting and the Governor has previously warned that monetary policy needs to have an element of surprise if it is to be most effective.<br><br> The really big test for the CAD will come with December’s employment report on Friday. Before then, the Canadian Dollar opens in Asia this morning at a 10-week low (CAD stronger) of USD1.2510 with AUD/CAD at 0.9790 and NZD/CAD at 0.8890.

Euro

AUD / EUR

Expected Range

After a year in which the euro was the best performing of all the major currencies, it got off to a flying start in 2018; with a high in Europe yesterday morning of 1.2077; the highest in over 3 years. It couldn’t sustain its very positive momentum throughout the day, however, and finished in New York around 30 pips below its best level.<br><br> Certainly, there was nothing wrong with the economic data. Final December PMI’s for Germany, France and the Eurozone were released alongside all the individual countries which don’t produce ‘flash’ PMI’s around 10 days before the end of the month. Strong rates of expansion in output, new orders and employment pushed the final IHS Markit Eurozone Manufacturing PMI® to 60.6 in December, its best level since the survey began in mid-1997. The PMI was up from 60.1 in November and identical to the earlier flash estimate. National data signalled further broad-based growth, with business conditions improving across all of the countries covered. PMI readings were at survey record highs in Austria, Germany and Ireland, and remained close to November’s series peak in the Netherlands. Rates of expansion in France and Greece were the fastest for over 17 and nine years respectively. Growth also remained robust, albeit slower, in Italy and Spain.<br><br> On this second trading day of 2018, the EUR opens in Asia at USD1.2050, AUD/EUR0.6500 and NZD/EUR0.5900.

New Zealand Dollar

AUD / NZD

Expected Range

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 1.1015 which signals some modest NZD underperformance but NZD/USD has spent most of the first 24 hours of 2018 on a US 71 cents big figure, reaching a high in the London morning of 0.7125. <br><br> There is a very wide spread of opinion amongst the local and international banks about the prospects for the Kiwi Dollar in 2018. At the bullish end of the spectrum, ING bank looks for a year-end rate of USD 76 cents. Local specialist BNZ forecasts 70 cents whilst JP Morgan picks 64 and Morgan Stanley goes for a very bearish 61 cents. <br><br> Just as with Australia, 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. <br><br> Fortunately for the NZD, the first Global Dairy Trade auction of 2018 saw the overall index rise 2.2%, though this hides some big swings for individual markets. Butter milk powder (BMP) took a sharp decrease by 7.3%, having not been on offer at the previous event whilst whole milk powder (WMP) on the other hand rose by 4.2%. <br><br> The New Zealand Dollar opens in Asia this morning at USD0.7105 with AUD/NZD at 1.1015.

United States Dollar

AUD / USD

Expected Range

The US Dollar remains friendless and after two weeks of near-relentless losses into year-end, it has kicked off 2018 with further losses. Its index against a basket of major currencies opened in Sydney yesterday around 91.90 and fell all the way to 91.44 by mid-morning in Europe before rallying very slightly to close in New York around 91.52. This is barely half a point above the 2017 low back on September 5th.<br><br> Once again, the USD weakness came despite a rally in the stock market which saw the S+P 500 index gain around 14 points to within touching distance of yet another fresh all-time high. It also comes despite higher bond yields at all points along the maturity spectrum and a very solid set of economic data. <br><br> Markit’s version of the manufacturing PMI index rose from 53.9 in November to 55.1 last month. They noted that the latest upturn was supported by faster increases in output and new orders, amid reports of greater client demand. In line with stronger production growth, employment rose further and at the fastest pace since September 2014. Backlogs meanwhile increased at the quickest rate since October 2015 to indicate ongoing capacity pressures. Supply chain delays and increased global demand for inputs pushed costs up further, with the rate of cost inflation remaining sharp overall. The latest index reading was the highest since March 2015 and “signaled a solid improvement in the health of the sector”. <br><br> For the moment, it seems just that the dollar is falling because it is falling. The technical tail is wagging the fundamental dog. When price action itself is such a dominant feature of trading, investors seek confirmation of the prevailing trend by seeking out the bits of news which support a continuation of the move rather than viewing the incoming information more objectively. Of course, we’ve been here before and a year ago it happened in precisely the opposite direction. All the news was interpreted as dollar bullish post the 2016 Presidential elections and it rose until January 3rd last year. Here we are on that same date, with sentiment arguably as bearish today as it was bullish then…. <br><br> The US Dollar index opens in Asia this morning at a 14-week low of 91.50.

By Nick Parsons

After its first annual drop since 2012, USD index opens at 91.90. AUD/USD and NZD/USD both start 2018 around 10-week highs.


Australian Dollar

AUD

Expected Range

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. <br><br> 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.

British Pound

GBP / AUD

Expected Range

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.

Canadian Dollar

AUD / CAD

Expected Range

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. <br><br> 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.

Euro

AUD / EUR

Expected Range

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

Expected Range

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

Expected Range

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…

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