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By Nick Parsons

USD strengthens again as 10-year bond yields break 2.50%. NZD outperforms AUD once more.


Australian Dollar

AUD

Expected Range

The Australian Dollar didn’t have a great day on Tuesday though it did manage a 10th consecutive day on a US 78 cents ‘big figure’. The high point of USD0.7863 came during the Asian session after publication of the November building approvals data (see below) but it then lost around half a cent in London before a rally around midday which was subsequently reversed in New York trading. It ended the day in the middle of the FX majors pack: gaining against the EUR, GBP and CAD but losing ground against both the USD and NZD.<br><br> Building approval generally marks the first stage of any construction project. The number of dwellings approved rose a seasonally adjusted 11.9% in November 2017 and has risen for 10 months, according to the Australian Bureau of Statistics (ABS). Dwelling approvals have continued to rise in recent months, which has been driven by renewed strength in approvals for apartments. Approvals for private sector houses have remained stable, with just under 10,000 houses approved in November 2017. The value of total building approved rose 1.5%in November, in trend terms, and has risen for 11 months. The value of residential building rose 2.3 % while non-residential building rose 0.2%.<br><br> We said at the very beginning of trading on Monday that the AUD “may now need better domestic data, continued support from higher commodity prices or a further collapse of the USD if it is to build on recent gains.” Building approvals managed to tick the first of these boxes, even if the other two weren’t forthcoming. It may be too early to raise a warning flag but note that gold on Tuesday fell $8 to 1311; its lowest point since last Thursday.<br><br> The AUD opens in Asia this morning at USD0.7825 with AUD/NZD at 1.0900 and GBP/AUD 1.7295.

British Pound

GBP / AUD

Expected Range

After a mixed week in which it raced up to a high of USD1.3608, then came back down equally rapidly to 1.3500 before finishing on Friday evening at USD1.3565, the GBP is back down again today; the second weakest of the major currencies after the European euro.<br><br> The initial market reaction to Prime Minister May’s Cabinet reshuffle on Monday had been broadly positive, mostly because it reduced the scope for mutiny amongst Government members (talk about setting the bar low!) On Tuesday, however, the consensus amongst serious political analysts was that it exposed the weakness of the Prime Minister and laid bare the few options open to her. Amongst the UK newspapers, The Guardian predictably headlined “May reshuffle disarray. The Times notes, “An event that could have been used to clarify the direction of the government after a difficult few months served only to highlight the incoherence at Number Ten” whilst the Daily Telegraph, calling it the night of the blunt stiletto, says “Theresa May’s hopes of asserting her authority with a Cabinet revamp fell flat after senior ministers derailed her reshuffle by refusing to budge from their jobs”.<br><br> There is plenty of UK economic data to look forward to on Wednesday with manufacturing and industrial production figures, the November trade balance and the NIESR’s estimate of GDP over the previous three months. Ahead of all that, the pound opens in Asia this morning at USD1.3530, AUD1.7295 and NZD1.8870.

Canadian Dollar

AUD / CAD

Expected Range

The Canadian Dollar had a great start to the New Year 2018. USD/CAD tumbled at one point on Friday to 1.2372; the lowest since September 27th. On Monday it mostly consolidated these gains in a range 1.2385-1.2435 but on Tuesday in the face of a generally stronger US Dollar, investors were beginning to have second thoughts about pushing the Canadian Dollar much higher. USD/CAD touched 1.2475 before settling in New York around 1.2460.<br><br> After Friday’s Canadian employment report, the market-derived probability of a rate hike at the Bank of Canada’s next meeting on January 17th surged to 70%, from 40% earlier in the week. On Monday, those rate hike odds hit 86% after the Bank of Canada published its Q4 Business Outlook Survey; the last real chance for the Central Bank to communicate something dovish ahead of next Wednesday’s monetary policy meeting. Indeed, five of the six major Canadian banks are forecasting a 25bp hike.<br><br> The first point to make, therefore, is that a rate move is almost fully discounted. We then need to look at risks. There’s realistically a zero probability of a 50bp hike, so the risk is BoC does nothing. A risk, of course, is not the same as a prediction though BoC Governor Poloz has previously spoken about the benefits of surprising financial markets rather than flagging its plans well in advance. <br><br> We’ll get to see data on Canadian building permits and new house prices later this week. Ahead of that, the Canadian Dollar opens in Asia this morning at USD1.2455, GBP/CAD01.6855 and AUD/CAD0.9745.

Euro

AUD / EUR

Expected Range

The EUR had a poor day on Monday, slumping to the bottom of the one-day performance table despite further upbeat survey indicators. On Tuesday, also, it shrugged off a very solid set of German industrial numbers as markets continue to fret about the political situation in Germany. EUR/USD has slipped to a 2018 low of USD1.1919; its lowest since December 28th.<br><br> Aside from the political concerns which we’ve been flagging up over the past few days, the interest rate differential between core European bonds and their US equivalents is now beginning to weigh on the Single European Currency. As mentioned above, 10-year US Treasuries hit a 10-month high of 2.54% yesterday but their German equivalents were up only 2.5bp to 0.45%. For sure this is still well above the December lows of 0.30% but the differential with the United States is back over 200bp at the 10-year maturity.<br><br> For the moment, annual CPI inflation in the euro zone remains stubbornly low at 1.4%, or just 1.1% when volatile food and energy prices are stripped out. This is well below the ECB’s target of an inflation rate of close to but just under 2 percent. Though ECB Council member Ewald Nowotny said in an interview published on January 2nd that QE could end in 2018 if the euro zone economy continues to grow strongly and on Sunday, the Bundesbank’s Jens Weidmann said the ECB should set a date to end QE, the market is still not fully pricing a rate hike until early 2019. Strong economic data are certainly helping the EUR but the yield differential is now creating quite a headwind for the exchange rate against the US Dollar.<br><br> The EUR opens in Asia this Tuesday morning at USD1.1930, AUD/EUR0.6560 and NZD/EUR0.6015.

New Zealand Dollar

AUD / NZD

Expected Range

It’s done it again! Once more, the New Zealand Dollar was top of the one-day performance table on Tuesday, though on this occasion it had to share the honours with the US Dollar. It has now topped the table for three of the past four trading days even though, once again, there was no domestic economic or political news to drive the currency. The flightless bird couldn’t quite make it on to a US 72 cents big figure but did reach an intra-day high of 0.7187; its highest since October 17th.<br><br> On the basis that ‘if there’s nothing to say, then don’t say it’, our NZD commentary will necessarily be somewhat shorter today. After extensive research using a popular internet search engine, we could reveal the most rejected baby names in New Zealand in 2017 (spoiler alert: Royal and Prince) or what New Zealanders complain most about but these are literally the top stories in the news. Other than that, absolutely nothing of interest.<br><br> There’s no economic news scheduled for release locally on Wednesday, with the first private sector numbers of the year the QV house price data and ANZ job advertisements on Thursday. The official statisticians told us last night that there are an estimated 1,734,800 households in New Zealand and 1.855,500 private dwellings but there are no market-moving data until well into next week.<br><br> For today, the Kiwi Dollar opens in Asia this Wednesday morning at USD0.7170 with AUD/NZD at a near 4-week low of 1.0900.

United States Dollar

AUD / USD

Expected Range

We have been expressing our puzzlement at the Dollar’s decline in late December and early in the New Year given the strength of the US stock market, the rise in yields across all parts of the maturity spectrum, the passage of a historic tax reform bill and the prospects for upward revisions to growth forecasts in 2018. <br><br> Perhaps, we might be allowed to set humility to one side and repeat what we said here last Wednesday: “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”.<br><br> We repeat these comments because having noted that January 3rd 2017 marked the turning point for the USD last year, the same date in 2018 has so far marked the low point for the USD after its latest sell-off. Its index against a basket of major currencies reached a 14-week low of 91.44 last Wednesday Jan 3rd. Friday’s low was 91.50, Monday’s was 91.56 and from that point it has moved steadily higher to make it back on to a 92 ‘big figure’ for the first time in more than a week. On Tuesday morning in New York it reached 92.27 and though it is too early to say with confidence that a decisive turning point has been made, the USD bulls are winning the argument in the near-term.<br><br> US 10-year Treasuries now yield more than 2.50% for the first time since March last year, rising 6bp yesterday to 2.54%. The yield curve from two to 10 years steepened by 5.4 basis points, the most in over a year, to 57.4bp. For the moment, stock markets have shrugged off this development but don’t be surprised to hear it as an explanation the next time that equity indices end lower. And on that subject, a fascinating study from BoA Merril Lynch shows that, “Since March 16, 2016, the S&P 500 has gone for 386 trading sessions without a 5% drawdown. If the trend persists, in just 10 more days this will be the longest stretch without such a drawdown in history.” Wow…<br><br> The US Dollar index opens in Asia this morning around 92.20.

By Nick Parsons

USD nudges gradually higher as German politics weigh on EUR. NZD was Monday’s top performer.


Australian Dollar

AUD

Expected Range

The Australian Dollar hasn’t been able to extend last week’s gains. Though it is still on a US 78 cents ‘big figure’, on Monday it slipped steadily lower and at one point was more than 40 pips below Friday’s peak of 0.7874, which was its highest since October 20th. Overall, it ended the first day of this week the second-weakest of all the major currencies we follow closely here.<br><br> The Australian Government’s Department of Industry, Innovation and Science said in a report published yesterday that it expects iron ore prices to average $51.50 a tonne this year, down 20% from 2017, because of rising global supply and moderating demand from top importer China as its steel sector shrinks. The forecast price decline will continue into 2019, when the steelmaking raw material will average only $49 a tonne, the Department said. Today, the price of iron ore is around $75 per tonne and it hasn’t been below the $52 forecast since June 2017. The report warned, “The iron ore price is expected to experience some ongoing volatility in early 2018, as the market responds to uncertainty regarding the impact of winter production restrictions on iron ore demand.”<br><br> We said at the very beginning of trading on Monday that the AUD “may now need better domestic data, continued support from higher commodity prices or a further collapse of the USD if it is to build on recent gains.” None of these materialised yesterday and the DIIS report weighed down on the Australian Dollar throughout the day.<br><br> The AUD opens in Sydney this morning at USD0.7840 with AUD/NZD at 1.0920 and GBP/AUD 1.7300.

British Pound

GBP / AUD

Expected Range

After a mixed week in which the British Pound raced up to a high of USD1.3608, then back down equally rapidly to 1.3500 before finishing on Friday evening at USD1.3565 and AUD1.7255, the GBP had another up and down day on Monday.<br><br> Talk of an imminent Cabinet reshuffle by Prime Minister Theresa May and some weak numbers on the UK residential property market pulled the rug from under the pound during the European morning and GBP/USD reached a low of 1.3528. Figures from Halifax Bank showed UK house prices fell by 0.6% in December. It’s the first monthly decline since last June, and the latest signal that Britain’s property market is weakening. Halifax also reports that prices only rose by 2.7% during 2017. The average price of £225,021 at the end of the year compares with £219,741 back in January 2017.<br><br> As for the Government reshuffle, it proved to be much less far reaching than most commentators had either hoped or feared. There were no changes in any of the three big jobs - Chancellor of the Exchequer, Foreign Secretary or Home Secretary – but plenty of movement lower down the pecking order; the immediate impact of which was not particularly obvious. But, to the extent that it doesn’t increase the chancellors of rebellion or mutiny, investors nerves were somewhat soothed by the lack of major changes. The pound regained its morning losses by the end of the European afternoon and stood where it had begun at 1.3560.<br><br> Ahead of Tuesday’s data from the British Retail Consortium (embargoed until midnight local time), the pound opens in Asia this morning at USD1.3560, AUD1.7300 and NZD1.8895.

Canadian Dollar

AUD / CAD

Expected Range

The Canadian Dollar had a very good start to the new year 2018, finishing way at the top of the performance table after further gains in energy prices and a second consecutive labour market report which was considerably stronger than consensus expectations. USD/CAD tumbled at one point on Friday to 1.2372; the lowest since September 27th. Yesterday, it stabilised in a range 1.2385-1.2435.<br><br> The yield on 2-year Canada bonds jumped 6bp to 1.77% on Friday, close to a seven-year high whilst the market-derived probability of a rate hike at the Bank of Canada’s next meeting on January 17th surged to 70%, from 40% earlier in the week. Yesterday, that rate hike odds hit 86% after the Bank of Canada published its Q4 Business Outlook Survey; the last real chance for the Central Bank to communicate something dovish ahead of next Wednesday’s monetary policy meeting.<br><br> The Business Outlook Survey indicator rebounded almost to its summer peak, consistent with widespread positive sentiment. “Firms plan to expand operations to accommodate sustained demand, which is evident in a rebound of investment and employment intentions since the autumn survey. Reflecting strong demand and tightening labour markets, indicators of capacity pressures and labour shortages picked up. Survey results suggest that economic slack is now largely limited to the energy-producing regions. Firms expect growth of input prices to rise, owing to gains in commodity prices. Pass-through of input costs and emerging wage pressures to output prices remains limited due to competitive forces. Inflation expectations are modest and unchanged from the third quarter”.<br><br> The Canadian Dollar opens in Asia this morning at USD1.2415, AUD/CAD0.9735 and NZD/CAD0.8915.

Euro

AUD / EUR

Expected Range

The EUR had a poor day on Monday, slumping to the bottom of the one-day performance table despite further upbeat survey indicators. The morning brought a better than expected consumer confidence index of 116 (f/c 114.8) industrial sentiment of 9.1 (f/c 8.4) and business climate of 1.7 (f/c 1.51). For good measure, retail sales in the Eurozone rose 1.5% m/m in November, above the consensus estimate of a 1.3% monthly increase. We mentioned here yesterday the growing concerns about the political situation in Germany and that this was likely to weigh down on the EUR. This is precisely what happened as EUR/USD slipped to a 2018 low of USD1.1962.<br><br> The German chancellor Angela Merkel said it would be “an enormous challenge” to bridge political divisions within her own Christian Democrats and with the left-wing SPD in order to re- create the coalition that ran the country from 2013 to 2017. A failure by Mrs Merkel to agree a Große Koalition, or “Groko”, will trigger new elections at a time when her own conservative alliance with the Bavarian Christian Social Union (CSU) is under strain and losing support to right-wing nationalists who took third place in September’s federal election with 5.8 million votes.<br><br> The leaders of both the SDP and CSU have said that their political careers would be over if coalition negotiations failed and Germany were once again plunged into divisive elections. Talks are scheduled to continue until Thursday and the longer they go on, the more nervous will foreign exchange markets become. The EUR opens in Asia this Tuesday morning at USD1.1965, AUD/EUR0.6550 and NZD/EUR0.6000.

New Zealand Dollar

AUD / NZD

Expected Range

We have been warning for a few days that the New Zealand Dollar was becoming more volatile, exhibiting some of the price action which characterised it in early December when it would regularly swing from being the day’s strongest currency to the very worst. For two of the last three trading days it has been top of the performance table even though there has been a complete absence of domestic economic or political news to drive the currency. Yesterday, NZD/USD extended recent gains to a 12-week high of 0.7182 whist AUD/NZD at one point fell to 1.0918; its lowest since December 18th.<br><br> We didn’t get any fresh economic news on Monday, but did get the usual detailed and always fascinating annual summary of the past 12 months and 3-month weather outlook from New Zealand’s National Institute of Water and Atmospheric Research. Obviously for an economy so dependent on farming, forestry and agriculture the weather forecast is massively important. NIWA reported that 2017 was “a year of extremes” with New Zealand recording its fifth warmest year in more than a century. Annual rainfall was above normal across the country and for some regions including Auckland, Waikato and coastal Canterbury, as much as 149% higher.<br><br> Only the years 2016, 2013, 1999, and 1998 were warmer than 2017, whilst the nationwide average temperature was 13.1°C or 0.5°C warmer than average. The ‘Tasman Tempest’ in March and cyclones Debbie and Cook in April contributed to record or near-record rainfall yet by the end of 2017, 11 out of New Zealand's 16 geographical regions were experiencing meteorological drought and it was the second warmest December on record. For the 3 months January - March 2018, temperatures are forecast to be above average, with high confidence for all regions of New Zealand. Rainfall totals are most likely to be in the above normal range in the North Island and about equally likely to be near normal or above normal in the South Island.<br><br> If only it were possible to be as mathematically precise about the outlook for the currency… The Kiwi Dollar opens in Asia this morning at USD0.7180 with AUD/NZD at 1.0920.

United States Dollar

AUD / USD

Expected Range

There are two ways of looking at the Dollar’s performance last week: the bearish view is that with all the good news on the economy, the stock market and a rising trend of yields across the maturity spectrum, it still couldn’t rally and made a fresh 14-week low of 91.44 on its index against a basket of major currencies. The bullish view is that for all the growing political storm around President Trump, a disappointing labour market report and a stream of negative forecasts for it from major financial institutions, it finished off the lows with some late positive momentum.<br><br> It will obviously take some time to see which of these views proves correct though, in the very short-term at least, the bulls can take some comfort from Monday’s price action. At 91.56, the low of the Sydney session was above Friday’s 91.50 low and from that point it moved steadily higher to make it back on to a 92 ‘big figure’ for the first time in more than a week.<br><br> The Dollar’s rise on Monday came despite a generally very dovish speech on the US economy from Federal Reserve Bank of Atlanta President Raphael Bostic. He urged his colleagues to be patient in raising interest rates, citing some indications that the public’s expectations on inflation could slip below the central bank’s 2 percent target. He said, “I am comfortable continuing with a slow removal of policy accommodation. However, I would caution that that doesn’t necessarily mean as many as three or four moves per year.”<br><br> After a very busy first week of 2018, all eyes now will be on Friday’s CPI to see whether or not the strength in economy and labour market is at last feeding through into higher prices. The US Dollar index opens in Asia this morning around 92.00.

By Nick Parsons

US CPI figures will be this week’s economic highlight. Watch, too Thursday’s retail sales numbers for the AUD.


Australian Dollar

AUD

Expected Range

The Australian Dollar remained on a US 78 cents big figure for all but a few minutes of the first week of the new year 2018. The trend was solidly upwards, though, and from a starting point of exactly USD0.7800, it moved steadily higher to reach a best level on Friday of 0.7874; its highest since October 20th. Overall, the AUD ended the week higher against the USD, GBP and EUR but down against the NZD and CAD.<br><br> There were two main drivers of the Aussie Dollar: commodity prices and the Chinese economy. The Bloomberg Commodity Index, which tracks returns on 22 raw materials, posted an unprecedented 14 days of gains to Wednesday, closing at the highest since February last year. On Thursday it was flat and on Friday it finally closed lower; breaking a remarkable streak which had not seen a down day since the Fed hiked rates in December.<br><br> As for China, which is Australia’s number one export destination, the 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> There’s no doubt that the latest trade figures released on Friday were disappointing. We have not seen back-to-back monthly deficits in Australia since October 2016 and unless there is a substantial pick-up in December (which is still possible given what happened to commodity prices during the month), then net trade could be an overall drag on Q4 GDP.<br><br> For the week ahead, the most important numbers for the AUD are probably Thursday’s November retail sales. After three very poor months (-0.1% in October and 0.0% in both September and August), it should be time for some pick-up in consumer spending, especially as the latest allegedly must-have smartphones finally went on sale.<br><br> With AUD/USD now less than 2 cents away from the 2017 high, it may now need better domestic data, continued support from higher commodity prices or a further collapse of the USD if it is to build on recent gains. The AUD opens in Sydney this morning at USD0.7860 with AUD/NZD at 1.0965 and AUD/CAD0.9760.

British Pound

GBP / AUD

Expected Range

The British Pound had a mixed week and finished just above the mid-point of its range against the US Dollar. GBP/USD began the new year at 1.3515 and amidst a general sense of optimism around the prospects for a Brexit trade deal and with many banks recommending long-GBP as their top currency trade for 2018, it raced up to a high early on Wednesday morning of 1.3608. From then on it was a rapid slide back down to 1.3500 on a combination of poor UK construction data and very strong US numbers. On Thursday, the GBP was well-bid as the UK Services PMI Business Activity Index rose in December but Friday brought a very poor - but not unexpected - set of new car registration data and the GBP finished at USD1.3565, AUD1.7265 and NZD1.8920. <br><br> Contrary to popular perceptions about the UK car manufacturing, based on memories of the chaos in the 1970’s and subsequent decline, the automotive industry is one of the economy’s key sectors. It employs more than 800,000 people, 165,000 in manufacturing. The Treasury is dependent on a healthy new car market, relying on £5.5 billion in annual revenues from vehicle excise duty and even more from VAT on sales. The latest figures showed UK car sales declined in 2017 after five years of rapid growth. Total sales for last year were 2.54m new vehicles, a decline of 5.6% on 2016. The Society of Motor Manufacturers and Traders (SMMT), the UK automotive industry’s trade body, has forecast a further 5% to 7% decline in sales in 2018.<br><br> With few top-tier UK economic statistics this week, attention will most likely be on domestic politics. Prime Minister Theresa May is said to be announcing a Cabinet re-shuffle on Monday morning and the media will be consumed with what it may or may not mean for economic policy and Brexit negotiations.<br><br> Ahead of that, the pound opens in Asia this morning at USD1.3565, AUD1.7255 and NZD1.8925.

Canadian Dollar

AUD / CAD

Expected Range

The Canadian Dollar had yet another very good week, finishing way at the top of the performance table after further gains in energy prices and a second consecutive labour market report which was considerably stronger than consensus expectations. Having briefly dropped below USD/CAD1.2500 on Thursday, the pair tumbled to 1.2372 on Friday; the lowest since September 27th. <br><br> As Sydney sweltered on its warmest day since 1939, the cold weather intensified across the US and Canada. Winter Storm Grayson hit the East Coast with heavy snow, intense winds, and record-setting low temperatures. The cold front sent temperatures below freezing in more than 92% of the Continental United States (have a look on YouTube for frozen iguanas in Florida) and on Saturday the temperature in Toronto was MINUS 21 degrees centigrade.<br><br> One month ago, it was the November employment numbers which first lit a fire under the CAD with a 79,500 monthly increase in jobs. On Friday, December’s figures showed the jobless rate fell to 5.7%, the lowest in the current data series that begins in 1976. The number of jobs rose by 78,600, smashing expectations and bringing the full-year employment gain to 422,500, the best annual increase since 2002. Since September, the Canadian economy has added 193,400 jobs; the biggest 3-month gain in over 40 years.<br><br> The yield on 2-year Canada bonds jumped 6bp to 1.77% on Friday, close to a seven-year high whilst the market-derived probability of a rate hike at the Bank of Canada’s next meeting on January 17th surged to 70%, from 40% in the week. It was a very happy New Year for the Loonie which opens in Asia this morning at USD12415, AUD/CAD0.9760 and NZD/CAD0.8895.

Euro

AUD / EUR

Expected Range

The EUR had a very mixed week; at one point reaching a fresh 3-year high against the US Dollar but then slipping back on Friday to be below the mid-point of its weekly trading range. Indeed, for all the optimism around the Eurozone economy, the EUR rose only against the USD and was down against all the other major currencies we follow here. Having reached a more than 3-year high of USD1.2077 on Tuesday and slipped steadily on Wednesday, on Thursday it rallied to a fresh cycle high of 1.2082 after publication of the Eurozone aggregate and individual countries’ PMI services reports. It ended the week at USD1.2031, AUD/EUR0.6535 and NZD/EUR0.5960.<br><br> For the week ahead, the calendar is quite busy with a string of second-tier economic releases but a growing concern for currency traders might be the progress – or otherwise – of talks to form a coalition government in Germany. According to Press reports, two-thirds of Germans believe her best days are behind her, according to the Deutschland trend survey for ARD television, while satisfaction with her slipped to 52%, down from 63% in October. Ms Merkel’s husband, Joachim Sauer, retired from his professorship in October, and she is said to have thought long and hard about running for a fourth term.<br><br> Chancellor Angela Merkel has been the dominant figure on the European political scene for the last decade and uncertainty about her future is likely to weigh down on the EUR despite the solid economic news. The EUR opens in Asia this Thursday morning at USD1.2030, AUD/EUR0.6535 and NZD/EUR0.5960.

New Zealand Dollar

AUD / NZD

Expected Range

The New Zealand Dollar is again showing some of the day-to-day volatility which characterised it in early December when it would regularly swing from being the day’s strongest currency to the very worst. Last Wednesday, it under-performed 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. On Thursday, 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. Friday saw it extend gains against both the AUD and the USD to end the week the second-best performer after the Canadian Dollar.<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> There’s very little economic data scheduled for release in New Zealand this week and the currency will likely be driven by offshore events and news flow. The day-to-day volatility we have seen for almost a month now is unlikely to subside and clients may find it useful to leave firm orders in advance to benefit from any large swings in their favour, rather than using up precious intellectual capital by following choppy markets in real-time.<br><br> The Kiwi Dollar opens in Asia this morning at USD0.7170 with AUD/NZD at 1.0965.

United States Dollar

AUD / USD

Expected Range

The first week of the New Year wasn’t short of news for the US Dollar, though its index against a basket of major currencies ended only a couple of tenths lower around the mid-point of its weekly trading range. On Tuesday the Dollar index fell to a 14-week low of 91.44, Wednesday it rallied back up to 91.92 and on Thursday it was back down to 91.50 before ending the week at 91.66.<br><br> Away from the Fire and Fury of US politics, the big story of the week in financial markets was yet another record high for major equity indices. The Dow Jones Industrial Average jumped past 25,000 for the first time on Thursday morning, and by the close of business it had made the fastest run ever to a fresh 1000-point milestone. The jump from 24,000 took just 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> Friday’s labour market report was generally viewed as a disappointment. Non-farm payrolls rose just 148,000, compared with the 190,000 consensus estimate. The jobless rate was at 4.1% for a third month, while average hourly earnings increased by 2.5% from a year earlier, after a 2.4% gain in November that was revised downwards. The December numbers, while below forecast, brought the 2017 total to 2.06 million jobs; below 2016 but slightly more than analysts had been expecting at the start of Donald Trump’s first year as president.<br><br> After a very busy first week of 2018, all eyes now will be on Friday’s CPI to see whether or not the strength in economy and labour market is at last feeding through into higher prices. The US Dollar index opens in Asia this morning around 91.65.

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.

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