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The Aussie Dollar certainly had a volatile session in the Northern Hemisphere on Wednesday. It first got caught up in the USD spike lower late in the Sydney morning, touching a high of USD0.7993; the highest since September 20th. There were no news headlines whatsoever to trigger this move and, given the changed regulatory environment these days in wholesale FX markets, no chat around what client flows may have triggered it. By the London opening it was down to 0.7945 but then was bought steadily and persistently through the European day and in the New York afternoon had regained all its prior losses and more to be back on US 80 cents for the first time since September and on to an intra-day high of 0.8021.<br><br>
Unusually, the AUD rise came despite further weakness in commodity prices. Gold and silver were both down on the day, as too were copper, zinc and nickel, though iron ore was pretty flat as was aluminium. Along with more general USD weakness, perhaps it was the proximity of the 2018 high at 0.7993, a change of big figure to 80 cents and hopes for an upside surprise in this morning’s Australian labour market report which all contributed to the AUD/USD surge.<br><br>
To recap, consensus expectations today 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.<br><br>
Ahead of the data, the AUD opens in Asia at USD0.8005 with AUD/NZD at 1.0960 and GBP/AUD1.7330.
GBP / AUD
There is plenty of intra-day volatility across the major currencies at the moment; a development from which the GBP is by no means immune. Yesterday in Asia, the GBP was caught up in the USD spike lower and reached a fresh high for 2018 of USD1.3825 before slipping back in early European trading to USD1.3760. As with both the Aussie and Kiwi Dollars, however, this proved to be the low point of the Northern Hemisphere day and from then on the GBP was chased up to another fresh 2018 peak of 1.3837 just before London traders headed for home. By the time they got to their front doors, GBP/USD had added another cent to a post-referendum high of 1.3930. Perhaps we’ll have to rename it the British Bitcoin!<br><br>
There was nothing new at all on Wednesday’s UK economic calendar. At midnight local time (11am Sydney) the Royal Institution of Chartered Surveyors will release its excellent monthly report on the UK residential property market but then there’s nothing scheduled until Friday’s December retail sales numbers.<br><br>
In the latest Brexit developments, European Commission President Jean-Claude Juncker has again been stirring the pot. He told MEP’s in Brussels yesterday, “Our hand remains outstretched... We are not throwing the British out. We would like the British to stay. And if they so wish, they should be allowed to do so.. Even if the British leave according to article 50, then article 49 would allow them to accede again. And I would be happy to facilitate that. I would not want to push anyone into a corner.” It is an offer of help which is unlikely to be well received in Downing Street.<br><br>
The British Pound opens in Asia this morning at USD1.3870, AUD1.7330 and NZD1.9000.
AUD / CAD
It’s been a long wait but the Bank of Canada finally put the market out of its misery yesterday. In line with the majority expectation, it raised rates 25bp to 1.25%. The initial reaction in FX markets was the usual mix of algorithm-driven stop-loss and stop-entry orders as the headlines flashed across the screens. Your author was watching a tick-chart of prices and in the space of less than 20 seconds, USD/CAD moved up from 1.2420 to 1.2540, down to 1.2375 and back to 1.2500.<br><br>
The main points from the BoC Statement were that, “Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity. However, uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA) is clouding the economic outlook.” On the domestic economy, “Consumption and residential investment have been stronger than anticipated, reflecting strong employment growth. Business investment has been increasing at a solid pace, and investment intentions remain positive. Exports have been weaker than expected although, apart from cross-border shifts in automotive production, there have been positive signs in most other categories”.<br><br>
Looking forward, “consumption and residential investment are expected to contribute less to growth, given higher interest rates and new mortgage guidelines, while business investment and exports are expected to contribute more. The Bank's outlook takes into account a small benefit to Canada's economy from stronger US demand arising from recent tax changes. However, as uncertainty about the future of NAFTA is weighing increasingly on the outlook, the Bank has incorporated into its projection additional negative judgement on business investment and trade.”<br><br>
The two mentions of NAFTA in the Statement and the sentence that “some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential” mean we should probably characterize the BoC move as a ‘dovish hike’; hence the volatility as the headlines were released.<br><br>
After it all settled down, the CAD opens in Asia this morning at USD1.2410, AUD/CAD0.9930 and NZD/CAD0.9065.
AUD / EUR
The EUR underperformed the USD for much of the day on Wednesday and after a yo-yo session in New York it finished in bottom spot in our one-day performance table. As the GBP, AUD and NZD recovered in the European morning, the EUR fell further to hit 1.2203 by lunchtime. It recovered to USD1.2275 in New York before losing half a cent to 1.2225.<br><br>
We’ve been highlighting for the last few days, the lack of any push-back from ‘ECB sources’. Yesterday we finally got it. According to a Reuters story, “three sources on or close to the ECB’s policy-making Governing Council said any fundamental change to the guidance was likely to come only later, with the March meeting, when policymakers get updated economic forecasts, seen as a more likely option. ‘We need more thorough analysis before making any change,’ one of the sources said”.<br><br>
In an interview with Italy’s La Repubblica newspaper, ECB Vice President Vitor Constancio said “I am concerned about sudden movements which don’t reflect changes in fundamentals… Looking at fundamentals, inflation declined slightly in December.” The next ECB Governing Council meeting is on January 25th and Constancio signaled little prospect of a change in the guidance on policy at that gathering, saying officials should be careful not “choke off growth too soon.”<br><br>
As if to reinforce the message, ECB council member Francois Villeroy de Galhau said, “The only question is how long it will take to meet our inflation target. On this issue, the recent evolution of the exchange rate is a source of uncertainty which requires monitoring with regard to its possible downward effects on imported prices.”<br><br>
All these ECB comments, whether anonymous or on the record, have had some effect. The EUR opens in Asia at USD1.2225, AUD/EUR0.6545 and NZD/EUR0.5970.
New Zealand Dollar
AUD / NZD
Top of the pile Monday, back at the bottom Tuesday, and back up to second place on Wednesday – just a normal pattern for the Kiwi Dollar! NZD/USD traded from a high of 0.7283 in Sydney (on the USD spike down) to a low of 0.7237 at the start of business in London. It subsequently regained all its losses and by early afternoon in New York broke US 73 cents once more, on its way to a fresh 2018 high of USD0.7330.<br><br>
In local economic news yesterday, New Zealand commodity prices dropped again in December. The ANZ commodity price index fell 2.2% and was up just 3% year-on-year. In New Zealand Dollar terms, however, the index fell a punchy 3.3% m/m as the Kiwi’s trade-weighted index rose 2.7% during the month. ANZ noted that, “this was the largest fall in world and local prices since the current upward cycle in commodity prices began in early 2016”.<br><br>
The latest Global Dairy Trade (GDT) auction showed a 4.9% gain but this comes after ANZ’s survey showed very large falls in December as an upswing in global milk supply placed downward pressure on all product prices. Cheese prices fell 11% in the month, butter was down 10% while whole milk powder fell 2.2%.<br><br>
The NZD opens in Asia this morning at USD0.7300 with AUD/NZD at 1.0960.
United States Dollar
AUD / USD
Wednesday was a day of three halves for the US Dollar! Its index against a basket of major currencies tumbled to a 2018 low in Sydney of 89.93, recovered by lunchtime in Europe to 90.43 then lost half a point to another fresh low of 0.8990 in the New York afternoon before rallying 40 pips to 90.30.<br><br>
The volatility in FX was replicated across asset classes. A 367 point intra-day plunge in the DJIA on Tuesday was partially reversed by the close and on Wednesday the futures market added another 300 points to be back on a 26k handle and a fresh all-time record high.<br><br>
All these wild price swings have come against a background where the US economy continues to perform very well. After last week’s higher core inflation and retail sales numbers, industrial production surged +0.9% in December as unseasonably cold weather at the end of the month boosted demand for heating. For all of 2017, industrial output rose 1.8% the first and therefore the largest increase since 2014.<br><br>
According to the Federal Reserve Beige Book released at 2pm in Washington, the US economy and inflation expanded at a modest-to-moderate pace from late November through the end of 2017, while wages continued to push higher. “Most districts said that wages increased at a modest pace… A few districts observed that firms were raising wages in a broader range of industries and positions since the previous report… Firms in some districts noted an ability to increase selling prices. Retailers in some districts reported modest price increases and there were reports of rising home prices across the country,”<br><br>
The US Dollar index opens in Asia at 90.30 whilst US 10-year bonds are 2bp higher in yield at 2.56%.
It is now more than 24 hours since the Aussie Dollar made a fresh cycle high; hardly a crisis, but a sign perhaps that a more two-way market is now being seen. For the first half of January, all news was good news and AUD/USD rose to levels not seen in almost 4 months. In the Northern Hemisphere on Tuesday, there were the first tentative signs that investors might now be taking a fresh look. AUD/USD slipped to USD0.7940 in the New York morning before recovering around 25 pips into the close.<br><br>
Certainly, some of the gloss has been taken off precious metals and other industrial commodities. As we write, gold is less than $10 off its recent $1343 peak but silver yesterday was down 1.3% and palladium lost just over 3%. Elsewhere, base metals were all lower with losses extended to as much as 2.9% for nickel. Copper dropped 2.2% to $7,054 on the London Metal Exchange Tuesday; the biggest drop since December 5th. The metal rose 7.2% in December, capping the biggest annual gain in eight years, but prices are down 2.6% so far in 2018.<br><br>
In a week which will be dominated locally by the December employment report on Thursday, there’s still plenty of second and even third tier data to keep the statistics enthusiasts occupied. yesterday we saw monthly motor vehicle sales; the final time the Australian Bureau of Statistics publishes this series. In December there were a seasonally-adjusted 36,339 passenger vehicles registered, 42,240 SUV’s and 25,164 ‘other vehicles’ to give a total of 103,743. This was a 0.2% increase m/m and a 4.5% rise y/y.<br><br>
The ABS also released figures on dwelling approvals. These showed 21,055 units were approved; an 11.7% monthly increase and a 17.1% y/y gain. This was driven largely by high-rise apartments in Victoria which jumped 38% after a 21% rise in October, while the rest of Australia was relatively flat, down 2.0% in the month following October’s 8.3% drop.<br><br>
This Wednesday morning, the AUD opens in Asia at USD0.7960 with AUD/NZD at 1.0940 and GBP/AUD1.7330.
After its breathless rally since last Thursday lunchtime, the GBP paused for breath yesterday. Whether this is just a pause before the next leg higher of course remains to be seen. For now, it has failed to hold on to the USD 1.38 big figure and though it is up half a cent against a weaker NZ Dollar, it is little changed against the AUD. Having dipped to a low of USD1.3747, the GBP rallied in the New York afternoon to close around 1.3790.<br><br>
We mentioned yesterday the collapse of one of the UK’s largest construction companies, Carillion, which employs around 43,000 people and has been working on a host of government-funded infrastructure projects as well as many contracts for hospitals, schools, prisons and the Army. We said, “this is a story which is sure to get bigger over the coming days”. We’re now hearing about the second-round impacts on a host of subcontractors and small business, many of whom are now unsecured creditors and likely to lose huge amounts of money. It is an added uncertainty the UK economy could do without right now.<br><br>
As for the Brexit negotiations which are set to resume soon, a report in today’s Guardian newspaper claims that, according to senior diplomatic sources, “repeated representations have been made to EU officials by Oslo over their fears that an overly generous offer to the UK will fuel calls in Norway to renegotiate its ties with the bloc”. Norway makes larger financial contributions to the EU per capita than the UK and accepts free movement of people in order to have access to the single market. But it has no decision-making role in Brussels’ institutions. A senior official said: “The Norwegians are following this very closely to make sure that we are not giving the UK a much more favourable deal.”<br><br>
UK CPI figures this morning showed the first fall in the annual rate since June last year. The Office for National Statistics said the fall in inflation from 3.1% to 3.0% came mainly from air fares, along with a fall in the prices of a range of recreational goods, particularly games and toys. These were partially offset by an increase in tobacco prices, reflecting duty increases that came into effect following the Autumn Budget, along with an increase in petrol and diesel price. It’s only a tiny fall in inflation, but the figures do at least give some hope that the peak in CPI might now have been seen.<br><br>
The British Pound opens in Asia this morning at USD1.3790, AUD1.7330 and NZD1.8965.
Having gone from being the strongest currency in the first week of the New Year 2018 to the weakest in the second week, the Canadian Dollar has been very steady over the first two days of this third week. Indeed, for the last 24 hours USD/CAD has traded sideways in a 45 pip range from just 1.2405 to 1.2550.<br><br>
In a Reuters poll on Monday, just eight of 31 analysts surveyed said they expect the BoC to hold rates steady on Wednesday as it waits for inflation to pick up and to see how the next round of NAFTA negotiations later this month proceed. The median forecast in the Reuters poll is for one rate increase apiece in the third and fourth quarters, bringing the benchmark to 1.75 percent by the end of 2018. Analysts predict another hike in the first quarter of 2019. Economic growth is expected to average 2.2 percent this year, slightly higher than the 2.1 percent forecast in the previous poll in October. Expectations for 2019 were unchanged at 1.8 percent.<br><br>
Over the past 25 years, Canada’s main policy rate has been on average around 25bp higher than the US rate. At the moment it’s 0.375 percentage points below, so there could be some catching up to do. The Bank of Canada estimates its so-called neutral rate - which allows the economy to run neither too hot nor too cold - at about 3%. The Federal Reserve sees its neutral rate at 2.75%, according to the median estimate in their most recent projections in December.<br><br>
As the long wait to Wednesday’s meeting continues, the CAD opens in Asia this morning at USD1.2435, AUD/CAD0.9895 and NZD/CAD0.9045.
The EUR ended Tuesday a touch higher against the USD, even though it had been lower than Monday’s close for all but the last hour of trading in New York. It touched a session low in the European afternoon of USD1.2205 before rallying around 70 pips into the close.<br><br>
In an interview with the Börsen-Zeitung in Germany, ECB Governing Council member Ardo Hansson – the Head of the Central Bank of Estonia – said the ECB’s bond-buying program should be ended after September 2018 if there were no nasty surprises: "If growth and inflation are more or less in line with the projections, it would certainly be conceivable and appropriate to end the purchases after September. Why not?... The last step to zero is not a big deal anymore. You do not have to do a lot of fine-tuning. I think we can go to zero in one step without any problems.” As for the euro, the appreciation of the single currency “is not a threat to the inflation outlook up to now, and one shouldn’t overdramatize it.”<br><br>
According to an interview to be published Wednesday, ECB Council Member and Bundesbank President Jens Weidmann told the Frankfurter Allgemeine Zeitung “I would hold that appropriate from today’s point of view.” <br><br>
We’ve been highlighting for the last few days, the lack of any push-back from ‘ECB sources’ after the bombshell dropped last Thursday. Yesterday evening, we finally got it. According to a Reuters story, “three sources on or close to the ECB’s policy-making Governing Council said any fundamental change to the guidance was likely to come only later, with the March meeting, when policymakers get updated economic forecasts, seen as a more likely option. ‘We need more thorough analysis before making any change,’ one of the sources said”.<br><br>
Ahead of today’s final Eurozone CPI figures, the EUR opens in Asia at USD1.2270, AUD/EUR0.6485 and NZD/EUR0.5925.
Given its recent volatility, it should come as little surprise that having been in joint top spot with the Aussie Dollar on Monday, the NZD ended Tuesday back at the bottom of the performance table. Having reached the dizzy heights of US 73 cents, it slipped back at one point almost 50 pips from Monday’s 0.7313 high. This drop came after a pretty downbeat Quarterly Survey of Business Optimism published by the New Zealand Institute of Economic Research (NZIER) which has conducted a comprehensive quarterly survey of business opinion ever since 1961.<br><br>
This latest QSBO shows a sharp drop in business confidence following the General Election, with a net 11 percent of businesses expecting economic conditions to deteriorate over the first half of 2018. Business confidence had fallen in the previous quarter ahead of the General Election, and it appears uncertainty over new Government policies have made businesses even more downbeat. The decline is more modest when it comes to businesses’ own demand. A net 10 percent of businesses reported a lift in own trading activity in the December 2017 quarter, an easing from the net 13 percent in the previous quarter. As the NZIER puts it, “Businesses may be worried about the outlook for the New Zealand economy under the new Labour-led Government, but for now this is not reflected in demand in their own business”.<br><br>
The decline in business confidence was broad-based across the sectors, with retailers and manufacturers particularly downbeat. However, the pessimism was not reflected in activity indicators. Domestic sales remain solid in the retail and manufacturing sector. The building sector also reported solid output and new orders. Across the regions, the pessimism was evident in the urban regions including Auckland, Wellington and Canterbury. In particular, a net 33 percent of Wellington businesses expected a worsening in economic conditions over the coming months.<br><br>
The NZD opens in Asia this morning at USD0.7270 with AUD/NZD at 1.0940.
Tuesday was on track to be first day in a week that the US Dollar actually managed to rally. On Monday it tumbled to an intra-day low of 89.98 - the lowest since December 19th 2014 – and though it steadied a little into the close, it was still down around half a point on the day and more than 2 points below last Thursday’s high. Yesterday, its index against a basket of major currencies held on to a 90 ‘big’ figure across all three time-zones but lost around 25 pips in the last couple of hours to end on its lows around 90.0.<br><br>
As US cash equity markets played catch-up to futures after their holiday closure on Monday, so the 26,000 milestone for the DJIA was duly passed in the New York morning; just 8 trading days after it first reached 25,000. What is interesting in the price action, however, is that the index failed to hold on to 26k and from 10.40am Eastern Time in the US, it moved back on to a 25k handle and then erased all its prior gains. Moreover, the VIX measure of equity market volatility jumped to a 5-week high of 12.1 even as a research note from Morgan Stanley observed that, “over the last two weeks investors have bought the 2nd largest amount of S&P 500 futures since at least 2010, while at the same time net holdings of S&P 500 calls are the highest and the net holdings of S&P 500 puts are the lowest since at least 2010”. <br><br>
There’s not much economic data scheduled today but plenty of Fed-speak, both written and verbal. The Federal Reserve releases its Beige Book summary of economic conditions whilst Evans and Mester are talking on the economy, monetary policy and communication.<br><br>
Ahead of all that, the US Dollar index opens in Asia at 90.00 whilst US 10-year bonds are unchanged in yield at 2.54%.
The Australian Dollar managed to extend its recent gains in Monday’s Northern Hemisphere trading and ended up joint strongest of the major currencies we track here, along with the NZD. More than half its rise against the US Dollar had already taken place before London arrived at work. AUD/USD had risen from around 0.7910 at the Sydney open to 0.7950 by the time the first Europeans got to their desks. As the rising EUR continued to pressure the USD index, so the AUD rose to an intra-day high in New York of 0.7975; the highest since September 21st.<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 driver of the Australian Dollar was continued strength in the gold price. The yellow metal began last 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. Yesterday, gold added another $5 to $1342 to be up $33 in just four trading sessions.<br><br>
In a week which will be dominated locally by the December employment report on Thursday, there’s still plenty of second and even third tier data to keep the statistics enthusiasts occupied. Today we’ll see monthly motor vehicle sales. The Australian Bureau of Statistics doesn’t usually provide the level of colour, interest and general wackiness of its counterpart in New Zealand. It drily defines passenger cars, for example, as “vehicles designed primarily for the carriage of people, such as cars, station wagons and people movers. Also includes four-wheel drive passenger vehicles not classified as SUVs.” In November there were a seasonally-adjusted 36,565 passenger vehicles registered, 39,106 SUV’s and 23,384 ‘other vehicles’ to give a total of 99,055. This was a 0.1% increase m/m and a 2.1% rise y/y. There are no consensus forecasts for the December numbers.<br><br>
This Tuesday morning, the AUD opens in Asia at USD0.7970 with AUD/NZD at 1.0910 and GBP/AUD1.7315.
Another day, another big figure… On Friday the British Pound traded at USD1.35, 1.36 and 1.37. Yesterday it moved on to 1.38 around the middle of the European morning but after a quick half a cent pullback, then went on to a best level in New York around 1.3815.<br><br>
The GBP’s gains came despite news of the collapse of one of the UK’s largest construction companies which employs around 43,000 people and has been working on a host of government-funded projects such as the high-speed rail link between London and Birmingham as well as many contracts for hospitals, schools, prisons and the Army. In total, Carillion has around 450 contracts with the UK government, equivalent to 38% of its 2016 revenue. In a statement to the House of Commons, the government announced emergency moves to underwrite the cost of the collapsed construction company’s public-sector contracts to ensure that “vital” services continue but insisted that the move was not a “bailout” for the company. We’ll have to wait to see how much political capital the Opposition parties can gain from the affair.<br><br>
For this Tuesday in the UK, the main economic data are the inflation numbers. The annual rate of CPI inflation was 3.1% in November 2017, up from 3.0% in October; 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. If it doesn’t fall back, BoE Governor Carney will be having to sharpen his quill pen to write his letter to the Chancellor explaining why the CPI has overshot the upper band of its 1-3% target.<br><br>
The British Pound opens in Asia this morning at USD1.3795, AUD1.7310 and NZD1.8890.
The Canadian Dollar is the only major currency which has fallen against the US Dollar over the past seven days. Having opened last Monday morning at USD/CAD1.2400, and been much higher (CAD weaker) in the meantime as investors began to question whether a rate hike at this Wednesday’s BoC monetary policy meeting really is nailed-on, it sits this morning at USD/CAD1.2425; still 25 pips higher than a week ago. <br><br>
Market expectations about the Bank of Canada have swung quite a bit. Back in December, a January rate hike was only a 50-50 call. After the second strong monthly employment report, the probability of a 25bp hike jumped to 90% but after the uncertainties over what changes to NAFTA might mean, it was back down to just 60%. Yesterday it was back at 85%. In a Reuters poll on Monday, just eight of 31 analysts surveyed said they expect the BoC to hold rates steady on Wednesday as it waits for inflation to pick up and to see how the next round of NAFTA negotiations later this month proceed. <br><br>
The median forecast in the Reuters poll is for one rate increase apiece in the third and fourth quarters, bringing the benchmark to 1.75 percent by the end of 2018. Analysts predict another hike in the first quarter of 2019. Economic growth is expected to average 2.2 percent this year, slightly higher than the 2.1 percent forecast in the previous poll in October. Expectations for 2019 were unchanged at 1.8 percent.<br><br>
The CAD opens in Asia this morning at USD1.2425, AUD/CAD0.9900 and NZD/CAD0.9075.
It is only a week ago that the euro was trading down at a 2018 low of USD1.1918 and here we are up almost 3 ½ cents from that level after a surge beginning on Thursday lunchtime extended into a third day. The EUR opened in London yesterday morning around USD1.2210 then subsequently added another half a cent, largely on the absence of any attempt from monetary officials to express discomfort with its current level or pace of appreciation.<br><br>
As we explained last week, after a sharp move in either foreign exchange or currency markets, the ECB sometimes does an off-the-record briefing with select journalists to attempt to halt or even reverse what it might see as an unwelcome development. These are often referred to in the professional market as “ECB sources” stories as they are always anonymous with no names attributed to them. One perhaps surprising feature of this move is that there has been no such push-back. For professional FX traders, this is seen as giving the move the official seal of approval.<br><br>
Of course, the latest Eurozone economic data did no harm. The seasonally adjusted trade surplus rose to €22.5bn in November from €19.0bn in October, largely driven by a 3.4% m/m rise in exports - mostly from Germany - offsetting a 1.4% increase in imports. Tomorrow and Wednesday we’ll get to see December’s final CPI readings in both Germany and the Eurozone and on Friday we’ll see how the trade numbers are contributing to a very healthy current account surplus. Amidst all the data flow, 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 the recent dramas, the EUR opens in Asia this morning at USD1.2265, AUD/EUR0.6495 and NZD/EUR0.5955.
The Kiwi Dollar reached another milestone on Monday; back on a US 73 cents big figure for the first time since the Monday morning after the General Election back in late September. Since the start of 2018, NZD/USD is up over 2 cents to a high of 0.7313, whilst measured from the November 8th low, the gain is over 5 cents.<br><br>
Ahead of today’s Quarterly Survey of Business Optimism, Statistics New Zealand yesterday published its monthly gauge of food prices. These are closely watched because, as in Australia, New Zealand only calculates CPI inflation on a quarterly basis and food makes up almost a fifth of consumer prices index. According to the official statisticians, total food prices were down 0.8% m/m in December – the fourth consecutive monthly drop - as all store-bought food groups fell during the month. Grocery food and seasonally cheaper fruit and vegetables were the main factors in the dip in food costs. Butter (-4.9%), chocolate bars, and wholemeal bread prices all fell. Tomatoes and nectarines were also cheaper, but avocado prices remain almost twice as expensive as they were a year ago. It’s all fascinating stuff!<br><br>
Forty-five minutes after the QSBO, 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. Before all that, the NZD opens in Asia this morning at USD0.7305 with AUD/NZD at 1.0910.
The US Dollar had a very bad week and on Monday morning in Europe it got a whole lot worse. On Friday the USD 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. Having been steady in the Asia session and opened in London around 90.45, the Dollar’s index then tumbled to 89.98; the lowest since December 19th 2014.<br><br>
It is another one of those periods when the dollar is falling because it is falling: momentum itself is one of the biggest drivers of the price. Certainly, there was nothing in last 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. The market-derived probability for a 25bp hike at the March FOMC meeting has gone up from 67% a week ago to 73% now and there’s a tiny chance (2%) of a surprise hike at the January 31st meeting. <br><br>
Cash equity markets were closed yesterday for the Martin Luther King holiday but futures on the S+P 500 index rose around 7 points whilst DJIA futures advanced 150 points or 0.6%. On January 4th, the Dow Jones Industrial Average jumped past 25,000 for the first time ever and by the close of business that day it had made the fastest run ever to a fresh 1000-point milestone. The jump from 24,000 to 25,000 took 23 trading days. The move in the futures market to 25,957 has taken 8 days!<br><br>
Later this week we’ll see manufacturing and industrial production data 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 Tuesday morning, the US Dollar index opens in Asia around 90.00.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
‘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.
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