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By Nick Parsons

US Dollar ended last week at a 3-year low. AUD/USD hit 79 cents for first time in almost 4 months. Aussie labour data are out on Thursday.


Australian Dollar

AUD

Expected Range

It was a pretty wild week for nearly all the world’s major currencies, the one exception to this being the Australian Dollar. Indeed, AUD/USD remained on the same 78 cents ‘big figure’ for all but the very last two hours of trading on Friday evening. Its range for the past week was from a low of USD0.7807 on Tuesday to a high of 0.7922 just before the close in New York on Friday evening.<br><br> Aside from the general weakness of the US Dollar after the ECB’s pre-announcement of a change of forward guidance later in the year, the main drivers of the Australian Dollar were continued strength in gold prices and a very good set of November retail sales numbers. The yellow metal began the week at $1318 per ounce and after dipping to $1309 on Wednesday, it then rose persistently and virtually without correction up to a high of $1337 on Friday; the highest since September 10th 2017, whilst silver, platinum and aluminium all registered weekly gains.<br><br> For the week ahead as people drift back to work after the holidays, the big number to watch will be Thursday’s employment report. Consensus expectations are for a 15,000 increase in December employment after a huge 61,600 increase in November. Last time around, full-time employment increased 41,900 to 8,501,900 and part-time employment increased 19,700 to 3,901,100 although the unemployment rate remained steady at 5.4%. It is generally estimated that, over time, around 14-15k new jobs per month are enough to keep pace with demographic change and leave the unemployment rate steady though this doesn’t always hold for every individual month’s data. Ahead of this, we’ll get to see Westpac’s index of consumer confidence on Wednesday and figures on new motor vehicle sales tomorrow.<br><br> This Monday morning, the AUD opens in Asia at USD0.7915 with AUD/NZD at 1.0895 and GBP/AUD1.7340.

British Pound

GBP / AUD

Expected Range

The Pound’s week was just as dramatic as the rest of the non-Aussie currencies, with an enormous swing from Thursday’s low to Friday’s close and one of the biggest daily rallies in recent memory. By late morning on Thursday, GBP/USD was at a fresh 2018 low of 1.3462 with GBP/AUD down at 1.7110. As the ECB dropped the bombshell about changing its language around forward guidance, the EUR surged and the USD tumbled, with GBP/USD moving higher in its wake. Having ended Thursday at 1.3550, Friday saw a surge of almost 2 cents with no domestic UK news of any kind: neither economic nor political. Instead, as the USD fell back, the co-called ‘cable’ rate breached the post-referendum high of USD1.3590 seen on September 15th 2017 and triggered a huge wave of buy orders which took the pound up to a high of USD1.3740, GBP/AUD1.7345 and GBP/NZD1.8920.<br><br> For the week ahead, the first point of interest will be to see if the annual rate of inflation might have peaked. The Consumer Prices Index (CPI) 12-month rate was 3.1% in November 2017, up from 3.0% in October 2017; it was last higher in March 2012. The consensus for December is that the annual rate might slip back a tenth to 3.0% as seasonal promotions and discounting at Christmas offset a continued increase in petrol prices. On Friday, we’ll find out what impact rising prices may have had on the volume of goods sold. Retail sales are expected to have fallen around -0.6% m/m after a +1.1% m/m surge in November helped by promotions such as Black Friday.<br><br> For today, the British Pound opens in Asia this morning at USD1.3725, AUD1.71340 and NZD1.8620.

Canadian Dollar

AUD / CAD

Expected Range

The Canadian Dollar had a pretty poor week. Having opened last Monday morning at 1.2400, it then rose steadily as investors started to question whether a lot of good news was already ‘in the price’ and whether a rate hike at this Wednesday’s BoC monetary policy meeting really was a done deal after all.<br><br> A report on Wednesday afternoon, citing two government sources, said that Canada is increasingly convinced that President Donald Trump will soon announce the United States intends to pull out of NAFTA. President Trump has long called the 1994 treaty a bad deal that hurts American workers and during the presidential campaign, called it the "worst trade deal in the history of the country." USD/CAD jumped to a high of 1.2575.<br><br> Even after the weekend, investors are still none the wiser as to what the US’s true intentions are and what economic impact it may have either side of the Canada-US border. Officials are due to hold a sixth and penultimate round of negotiations in Montreal from January 23-28th and it is now widely expected that Mr Trump might deliver a letter giving 6-months’ notice of an intention to withdraw from the agreement. The only official comment from the White House is that, “there has been no change in the president’s position on NAFTA” and Mr Trump’s attention has instead been focused on damage repair after some intemperate comments about other foreign countries.<br><br> Whilst USD/CAD fell almost a full cent to close at 1.2460 on Friday, this was entirely due to the weakness of the US Dollar rather than to any new-found enthusiasm for its Canadian counterpart. A 25bp rate hike to 1.5% at Wednesday’s is largely discounted but there’s still plenty of scope for volatility depending on whether it is indeed delivered and what is in the language of the accompanying Statement.<br><br> The CAD opens in Asia this morning at USD1.3640, AUD/CAD0.9865 and NZD/CAD0.9030.

Euro

AUD / EUR

Expected Range

If ever there was a week of two halves, then the last seven days have been just that. On Tuesday morning the euro was down to a 2018 low just below USD1.1920 after 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. By Thursday morning the EUR still stood at USD1.1940; trapped between the opposing forces of strong economic news and political uncertainty.<br><br> It was then that the ECB dropped its bombshell on financial markets about the need to change its language on forward guidance of monetary policy. The interest rate market was not fully pricing an ECB rate hike until early 2019. But, as the ECB said it will need to alter its guidance, then the FX and interest rate markets jumped to the logical conclusion that this is the precursor to a shift in ECB interest rate policy. Hence, the EUR jumped from USD1.1940 to a high of 1.2050. With none of the usual push-back from anonymous ‘sources’ on Friday, the EUR further surged to a high of 1.2155; the highest in more than 3 years.<br><br> On Wednesday this week we’ll see the Eurozone’s final December CPI figures whilst ECB Council Member and Bundesbank President Jens Weidmann is speaking along with his colleague Benoit Coeure at an IMF conference on Thursday.<br><br> After last week’s dramas, the EUR opens in Asia this morning at USD1.2200, AUD/EUR0.6490 and NZD/EUR0.5950.

New Zealand Dollar

AUD / NZD

Expected Range

This last week saw a quite remarkable performance from the New Zealand Dollar. By the close of business in New York on Thursday, the flightless bird had been the strongest performer of the day for five of the previous six trading days. On Friday, it plunged to bottom spot, falling a huge 260 pips against the GBP, 65 pips against the EUR and even losing 20 pips against a very weak US Dollar. We warned a week ago about a pick-up in volatility for the NZD but this was almost off the scale.<br><br> Perhaps the most surprising feature of the Kiwi’s performance was that it came in the almost total absence of any fresh economic or political news. As the peak holiday season now begins to wind down, though, we’ll this week start to see some fresh incoming data. The main number to watch this week is probably the Quarterly Survey of Business Optimism. The New Zealand Institute of Economic Research (NZIER) has conducted a comprehensive quarterly survey of business opinion — known as the QSBO — since 1961. This survey asks respondent businesses a range of questions about their output, costs and prices, and employment and investment intentions. It also measures their perceptions of general business conditions. The survey data are widely used as indicators for assessing various aspects of New Zealand’s macro-economy.<br><br> Apart from the QSBO, this Monday morning brings the monthly gauge of food prices and Tuesday we’ll see data on credit card transactions for December which will then allow analysts locally to firm up their estimates for Q4 consumer spending.<br><br> The NZD opens in Asia this morning at USD0.7255 with AUD/NZD at 1.0890.

United States Dollar

AUD / USD

Expected Range

The US Dollar had a very poor time last week. Though it began in low key fashion and was then buffeted by the ‘news’ – later described as ‘fake’ – that China would be halting purchases of US Treasury bonds, the USD came under heavy and sustained selling pressure from Thursday lunchtime onwards. It’s index against a basket of major currencies was pushed down through two very important technical levels. Not only did it make a fresh low for 2018, but it broke below last year’s September 7th low of 91.00; taking the index down to its lowest level in more than 3 years at 90.50. We have to go right back to December 2014 to see the last time the Dollar Index was below 91.0.<br><br> Perhaps the only thing we can be sure of today is that the US cash equity market will not make another fresh high. This isn’t a prediction based on investor sentiment, corporate news or economic data. Rather, it’s just because the US stock and bond markets are closed for the observance of Martin Luther King Day.<br><br> A cynic might note that incoming economic data have had such little effect on the US equity market or the US Dollar recently that index futures and currency markets will simply not notice the absence of either fresh economic data or the underlying cash equity market. Certainly, there was nothing in Friday’s numbers – core CPI greater than expected and a stronger than consensus retail sales report – that would have knocked the Fed off its tightening bias or suggested that growth expectations needed to be revised lower.<br><br> Later in the week we’ll see manufacturing and industrial production on Wednesday, and a number of regional reports such as the Empire State survey on Tuesday and the Philly Fed survey on Thursday. Sandwiched between these is the latest Federal Reserve Beige Book on Wednesday afternoon New York time. <br><br> For this Monday morning, the US Dollar index opens in Asia around 90.50.

By Nick Parsons

EUR soars as ECB Minutes signal change of language on forward guidance. USD dumps, NZD and AUD make fresh 2018 highs.


Australian Dollar

AUD

Expected Range

AUD/USD rose more than 40 pips on Thursday but could still only make it to third place on the one-day performance table behind the NZD (yet again!) and the EUR. After an early boost locally from retail sales figures (see below) which took it from USD0.7840 to 0.7875, it then traded pretty much sideways until late in the New York afternoon when it reached a fresh 14-week high of 0.7895; the best since late September.<br><br> Australian retail turnover rose 1.2% in November 2017 after a 0.5 per cent rise the previous month. This was way ahead of consensus expectations for a more modest +0.4% m/m gain. The Australian Bureau of Statistics noted, “rises were led by the household goods (4.5%) and other retailing industries (2.2%). Seasonally adjusted sales in both these industries are influenced by the release of the iPhone X and the increasing popularity of promotions in November, including Black Friday sales." There were also rises for clothing, footwear and personal accessory retailing (1.6%) and cafes, restaurants and takeaways (0.4%) Department stores fell (-1.1%) whilst food was unchanged in the month.<br><br> After news earlier this week of higher job vacancies and strong recent readings on employment, we’d wondered if it was time for consumers to dip into their pockets and actually spend some cash. They certainly did so in November and the detailed figures show they did so from their computers or smartphones: Online retail turnover contributed 5.5% to total retail turnover in original terms. This was the largest contribution from online sales in the history of the online series.<br><br> As well as the strength of local economic data, the AUD was also given a boost from higher gold prices as the USD came under more general selling pressure. The yellow metal rose another $5 per once to $1322; the highest since October 13th 2017, whilst silver, platinum and aluminium all registered gains. AUD/USD hasn’t been on a US 80 cents big figure since September 20th but given the foreign exchange market’s love of round numbers, this is the level which will be increasingly talked about now.<br><br> This morning, the AUD opens in Asia at USD0.7893 with AUD/NZD at 1.0880 and GBP/AUD1.7150.

British Pound

GBP / AUD

Expected Range

The GBP had a day of two halves on Thursday; weak in the morning after the publication of the BoE Credit Conditions Survey (see below) but then rallying hard against the USD – but not the AUD, NZD or EUR - during the London afternoon. The pound hit a fresh 2018 low of 1.3461 just before the ECB lit a fire under the EUR but by the close of business in Europe it had gained more than three quarters of a cent to a high of 1.3547. <br><br> The Bank of England Quarterly Survey of Credit Conditions for Q4 2017 was perhaps more encouraging from a regulatory perspective than in terms of the economic outlook as it shows some behavioural changes on the part of both borrowers and lenders. Lenders reported that the availability of secured credit to households was unchanged in the three months to mid-December 2017 and expected no change over the next three months to mid-March 2018. The availability of unsecured credit to households was reported to have decreased again in Q4, such that reductions were reported in all four quarters of 2017. Lenders expected a significant decrease in Q1. Credit scoring criteria for granting total unsecured loan applications tightened again in Q4, and lenders expected them to tighten significantly further in Q1.<br><br> On the demand side, lenders reported that household demand for secured lending for remortgaging increased significantly in Q4. At +49, the net percentage balance suggested the largest quarter-on-quarter change in demand for this type of lending since the falls reported in early 2009. While demand for credit card lending was reported to be broadly unchanged in Q4, demand for other unsecured lending was reported to have fallen significantly. This is the first material reported fall in demand for either component of unsecured lending since the fourth quarter of 2015.<br><br> Good news, then, from a financial stability perspective, but maybe not so good in terms of driving the UK economy forward into 2018. There are no UK economic statistics on Friday and the British Pound opens in Asia this morning at USD1.3535, AUD1.7145 and NZD1.8645.

Canadian Dollar

AUD / CAD

Expected Range

The Canadian Dollar has had a very poor week so far week as investors start to question whether a lot of good news is already ‘in the price’ and whether a rate hike at next week’s BoC monetary policy meeting really is a done deal. USD/CAD touched a low of 1.2375 last Friday but surged late in the New York afternoon to a high of 1.2578 and up to 1.2585 on Thursday. The catalyst for this latest sell-off was concern over the renegotiation of the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico.<br><br> A report by the Reuters news agency on Wednesday afternoon, citing two government sources, and picked up immediately by all the Canadian newspapers and TV channels said that Canada is increasingly convinced that President Donald Trump will soon announce the United States intends to pull out of NAFTA. President Trump has long called the 1994 treaty a bad deal that hurts American workers. <br><br> According to the Reuters report, “the US negotiating team has set proposals that have alarmed their Canadian and Mexican counterparts. Among the most divisive are plans to establish rules of origin for NAFTA goods that would set minimum levels of U.S. content for autos, a sunset clause that would terminate the trade deal if it is not renegotiated every five years, and ending the so-called Chapter 19 dispute mechanism”. A White House spokesman said “there has been no change in the president’s position on NAFTA”. Officials are due to hold a sixth and penultimate round of negotiations in Montreal from January 23-28.<br><br> In a new world of media engagement and direct communications with an audience, it is increasingly difficult to separate fact from fiction, and to determine what is real and what is fake news. This story’s sources are no doubt genuine, but their motives are unknown. Was it intended merely to extract further concessions or a genuine warning about future progress? A NAFTA 6-month termination letter from President Trump could just be an elaborate luff to gain negotiation leverage. We simply don’t know.<br><br> Whatever the case, the CAD opens in Asia this morning at USD/CAD1.2520, AUD/CAD0.9885 and NZD/CAD0.9085.

Euro

AUD / EUR

Expected Range

The euro was quietly trading in the USD1.1940’s in the European morning on Thursday, caught between the usual opposing forces of very strong economic data and worries about German politics. Then, at lunchtime, the ECB released its usually bland account of the last monetary policy meeting of the Governing Council. Buried deep in the report, the ECB dropped a bombshell on to financial markets. Bear with us here please as it’s a bit technical…<br><br> “The language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in the coming year. In particular, as progress was made towards a sustained adjustment in the path of inflation, the relative importance of the forward guidance on policy rates would increase, as suggested by Mr Praet in his introduction. From this perspective, the Governing Council’s forward guidance framework would evolve naturally, in line with the established sequencing between the APP and interest rate guidance. It was suggested that the Governing Council’s communication should be adjusted gradually over time to avoid sudden and unwarranted movements in financial conditions.”<br><br> In plain English, the ECB had previously stuck with a public view that there is no need to change forward guidance for some considerable time and that a change in interest rates would not come until well after the end of QE (or the Asset Purchase Programme as it calls it). Indeed, the interest rate market was still not fully pricing an ECB rate hike until early 2019. But, if it is now saying it will need to alter its guidance, then the FX and interest rate markets jumped to the logical conclusion that this is the precursor to a shift in ECB interest rate policy. Hence, the EUR jumped from 1.1940 to a high of 1.2050 and to joint top of the one-day leader board with the NZD.<br><br> It will be interesting to see if they now follow through with the usual tactic of sending out “ECB sources” to try to row back on these new market expectations… For now, the EUR opens in Asia this morning at USD1.2035, AUD/EUR0.6555 and NZD/EUR0.6020.

New Zealand Dollar

AUD / NZD

Expected Range

At the risk of repeating ourselves once more, the New Zealand Dollar was again top of the one-day performance table on Thursday and has now occupied this spot for five of the past six trading days. This time, however, it had to share the honours with the euro. The Kiwi reached a high in the New York afternoon of USD0.7255; the highest since September 26th when it was just beginning its post-Election slide all the way down to 0.6800 in late November.<br><br> Given that the remarkable rally in the NZD has come without the support of any fresh incoming economic news (apart from Wednesday’s QV house prices), it hardly seems relevant to highlight November building permits data later this morning. But, with investors lucky or smart enough to have been long of Kiwi during the recent run, the approach of the weekend and the publication of official statistics might be the excuse for a bit of profit-taking. <br><br> Statistics New Zealand always provide a fascinating amount of detail in their economic releases and they are an endless source of information and entertainment for your author. We know that not only did October’s numbers show a 9.6% m/m drop after 2.5% decline in September, but that within the total of 2,549 new dwellings there were 1,806 houses, 445 townhouses, flats, and units, 220 retirement village units and 78 apartments. And that, Ladies and Gentlemen is nationally, not just in the capital city!<br><br> It would be a wild exaggeration to say the market is awaiting these figures with any great interest and the Kiwi Dollar opens in Asia this Friday morning at USD0.7255 with AUD/NZD at 1.0885.

United States Dollar

AUD / USD

Expected Range

‘Fake news’ from China meant a very lively 24 hours for the US Dollar even before the ECB’s bombshell (see below) hit the foreign exchange market and sent the USD tumbling once more. On Wednesday, recall, it was slammed lower in the European morning after reported comments that officials who are reviewing China's FX holdings have recommended slowing or halting buying of US Treasuries. Yesterday morning, China’s State Administration of Foreign Exchange (SAFE) put out a statement saying, “We are also aware of the news through some media reports. We think the report might have cited wrong sources or may be fake news…”<br><br> Having recovered from 91.60 to a high in London of 92.17, the US Dollar Index against a basket of major currencies fell sharply throughout the New York session, not helped by a very soft set of US PPI figures. The Labor Department said its producer price index for final demand slipped 0.1% last month. That was the first drop in the PPI since August 2016 and followed two straight monthly increases of 0.4%. In the 12 months through December, PPI rose 2.6% after accelerating to 3.1% in November. There isn’t a perfect – or even a very good – correlation between PPI and CPI on a monthly basis. Indeed, if there was, there’d be no need to publish CPI figures separately or for markets ever to worry about them: all the fresh information value would be in the PPI!<br><br> We’ve said before that the FX market reaction is often to shoot first and ask questions later so it would have been a brave analyst who stood up in the middle of a busy dealing room to announce that these figures don’t matter. The market has passed its verdict that soft PPI means expectations for CPI on Friday should be lowered. That’s probably a wrong assumption but we’ll see tomorrow.<br><br> For this Friday morning, the US Dollar index opens in Asia this morning around 91.55.

By Nick Parsons

USD sells off on reports Chinese to end buying of US Treasuries but then regains most of its losses. NZD outperforms AUD yet again.


Australian Dollar

AUD

Expected Range

The Australian Dollar wasn’t having a great day on Wednesday, languishing in the low 78’s for much of the Asian session and London morning before rallying in line with all the other major currencies on the reported Chinese comments about buying of US Treasury bonds (see below). The Aussie was then able to benefit in two ways: firstly from the weakness of the US Dollar, and second from a rise in gold prices from $1313 to $1318. It hit a high of USD0.7861 late in the London morning before subsequently easing back a little in New York.<br><br> It’s certainly true that the employment situation in Australia looks bright. Job vacancies climbed to their highest on record in the three months to November, a sixth straight quarter of gains. Total job vacancies rose 2.7% to 210,300 in the Sep-Nov quarter, from 204,800 in the previous quarter. That was the highest reading since the series began in 1979 and left vacancies a healthy 16 percent higher than a year earlier. Vacancies in the private sector climbed 3.8% to 192,000, again the highest on record. That was up 17.3% on the previous year. In contrast, public sector vacancies fell back 7.6 % in the November quarter to 18,300.<br><br> This morning we’ll get to see whether these higher job vacancies and strong recent readings on employment have led consumers to dip into their pockets and actually spend some cash. Retail sales rose +0.5% in October after +0.1% in September and a fall of -0.6% in August. Consensus estimates are for a rise of +0.4% in November boosted perhaps by the arrival of shiny new smartphones.<br><br> The AUD opens in Asia this morning at USD0.7835 with AUD/NZD at 1.0895 and GBP/AUD1.7240.

British Pound

GBP / AUD

Expected Range

After a poor day on Tuesday, the GBP was notably weak early on Wednesday, hitting a fresh 2018 low of USD1.3486 before jumping half a cent on the Chinese comments about buying US bonds. It should be noted, though, that even after reaching 1.3555, the pound couldn’t sustain these gains and spent the rest of the day falling back to the low 1.35’s to leave it the worst performing major currency on the day.<br><br> After the poorly-received Government reshuffle, those Ministers who kept their jobs were back at work. Two of them with the highest profiles – the Chancellor of the Exchequer and the Minister for Exiting the EU - were in Germany to make a direct appeal to business leaders to help secure the future of Britain’s financial services within a Brexit deal. They said they were seeking a bespoke deal with the EU described as “the most ambitious in the world that should cover the length and breadth of our economies including the service industries — and financial services”. Good luck with that one…<br><br> In a joint article for the German newspaper Frankfurter Allgemeine, Philip Hammond and David Davis argued that Britain and Germany should use “imagination and ingenuity” to craft a “bespoke solution” to maximise economic co-operation. The EU’s Brexit negotiator Michel Barnier warned the UK last month, however, that “There is no place for financial services. There is not a single trade agreement that is open to financial services. It doesn’t exist.” Yesterday he said that, “Britain’s financial services cannot benefit from a passport in the single market nor from a system of generalised equivalence of standards”. This issue is not just a debating point, it is key to whether the UK can make a success of its post-Brexit status. The Pound’s fortunes should now closely track the progress that either side makes in the negotiations around the inclusion of financial services in a new free trade agreement.<br><br> Thursday will bring the always-interesting Bank of England Credit Conditions Survey. Ahead of that, the pound opens in Asia this morning at USD1.3510, AUD1.7240 and NZD1.8790.

Canadian Dollar

AUD / CAD

Expected Range

After its great start to the New Year 2018, the Canadian Dollar has not done quite so well this week as investors start to question whether a lot of good news is already ‘in the price’ and whether a combination of two very good employment reports and a very upbeat Q4 Business Outlook Survey really does mean that a rate hike at next Wednesday’s BoC monetary policy meeting is a done deal. USD/CAD touched a low of 1.2375 last Friday but after touching a high of 1.2490 in Europe yesterday, it then surged late in the New York afternoon to a high of 1.2575.<br><br> Energy prices are continuing support the Canadian Dollar. WTI crude overnight hit $63.41 as an industry report showed the biggest draw in US crude stockpiles for this time of year since 1999. The American Petroleum Institute reported domestic oil inventories tumbled by 11.2 million barrels last week; nearly triple consensus estimates.<br><br> On the debit side, the latest numbers on the Canadian housing market were pretty disappointing. The value of building permits issued by Canadian municipalities declined 7.7% to $7.7 billion in November, the first decrease in three months. The value of building permits for non-residential structures fell 12.3% to $2.9 billion in November, following two monthly increases. The decline was spread over all three non-residential components (commercial, industrial and institutional).<br><br> Thursday brings data on new house prices. Ahead of that, the Canadian Dollar opens in Asia this morning at USD1.2575, AUD/CAD0.9850 and NZD/CAD0.9040.

Euro

AUD / EUR

Expected Range

After two poor days on Monday and Tuesday, the EUR rallied on Wednesday following the Chinese comments on purchases of US Treasuries. On Tuesday, EUR/USD had fallen to a 2018 low of USD1.1919; its lowest since December 28th and had barely recovered 20 pips to 1.1935 in Europe yesterday before suddenly jumping almost a full cent on the China news. By the New York afternoon, it had given back around half its gains to USD1.1955.<br><br> It may well be the case that US bonds are unattractive relative to other assets but exactly the same can be said about Eurozone bonds. 10-year US Treasuries may have hit 2.58% today but their German equivalents yield only 0.53%. 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. And, in terms of attracting capital flows at the shorter end of the yield curve, 2-year US notes yield 1.97% compared to a still negative -0.63% in Germany.<br><br> The interest rate market is still not fully pricing an ECB 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, notwithstanding yesterday’s comments by Chinese officials.<br><br> The EUR opens in Asia this Thursday morning at USD1.1955, AUD/EUR0.6555 and NZD/EUR0.6010.

New Zealand Dollar

AUD / NZD

Expected Range

Once again, the New Zealand Dollar was top of the one-day performance table on Wednesday and has topped the table for four of the past five trading days. The flightless bird reached a high in the London morning of USD0.7216; the first time it has been on a US 72 cents big figure since way back on October 1st. Later in the day it was back on 71 cents but had gained against all the major currencies we track here.<br><br> The first NZ private sector numbers of the year of relevance to foreign exchange markets were out overnight. Data from government valuer Quotable Value (QV) on Thursday showed its residential property price index rose 6.6% year-on-year last month, picking up pace from the 6.4% rise in November. The robust growth in the final two months of the year was in stark contrast to a slowdown from the middle of the year as sentiment was dampened by uncertainty over an election in September, which brought in a new Labour-led government. “This was partly due to buyers delaying purchasing until the election result was decided and may also have been in part due to some buyers racing to purchase before the new foreign buyers’ ban,” said QV.<br><br> The new government has vowed to shake up the property market and introduce a ban on foreign homebuyers in the first few months of 2018 although the RBNZ has announced it will ease back its macro-prudential mortgage lending curbs at the start of 2018. House prices in Auckland are up only 0.5% over the past 12 months though the QV index is now 61.6 percent above the market’s previous peak in late 2007.<br><br> For today, the Kiwi Dollar opens in Asia this Thursday morning at USD0.7190 with AUD/NZD at 1.0895.

United States Dollar

AUD / USD

Expected Range

The Dollar hasn’t been able to hold on to Tuesday’s gains which took its index against a basket of major currencies to a high of 92.27; the best since December 28th. Though it held steady yesterday in Asia, it was slammed lower in the European morning after reported comments that officials who are reviewing China's FX holdings have recommended slowing or halting buying of US Treasuries. The USD index was sold down to a low of 91.60 before recovering to 92.00 in the New York afternoon.<br><br> The Chinese comments said that US government bonds are becoming less attractive relative to other assets and that trade tensions with the US may provide a reason to slow or stop buying American debt. The headlines flashing across screens came at a sensitive time for bond markets after the yield on US 10-year Treasuries had already risen 6bp on Tuesday to 2.54%; the highest since March 2017. In yesterday’s trading, US 10-year yields added another five basis points to a high of 2.59%. <br><br> Of course, there is no way of knowing the status of the comments: whether they are a genuine sign of an imminent policy shift or merely a diplomatic response to the US Administration’s talk of tightening restrictions on China’s exports. One of the biggest losers in purely financial terms would be China itself, as it currently the world’s largest holder (ahead of Japan) of US Treasury securities with $1189.2bn as at the end of October 2017.<br><br> There were no immediately market-moving US economic releases on Wednesday, though we did get to see import prices and wholesale inventories, which feed directly into GDP. The Atlanta Fed’s GDPNow model – which is generally the most accurate and up to date predictor of the US economy – has revised up its estimates of GDP growth in fourth quarter of 2017 to an annualized pace of 2.8%, from 2.7% on January 5th. <br><br> The US Dollar index opens in Asia this morning around 92.00.

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.

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