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A fortnight ago, the Australian Dollar stood on the sidelines as the rest of the non-US currency world partied, but last week it finally joined in, hitting 80 US cents for the first time since September and falling just 20 pips short of what would have been its best level in 32 months. Friday’s high was USD0.8035 whilst the high back on September 12th last year was 0.8052. It ended in New York on Friday around 0.7985.<br><br>
World commodity prices have certainly helped lift the AUD, as too has the very low level of volatility across asset classes which makes the currency’s yield advantage more attractive. In the one-month period to the middle of the week, gold had risen almost $100 per ounce to $1,242 per ounce; an increase of almost 9%. Over the same period, aluminium was up 13% and platinum was 12% higher. Coal has been steady recently but was still up more than 30% from last Summer.<br><br>
The week ahead kicks off slowly then gets even slower with the Australia day holiday on Friday January 26th; the day the commander of the First Fleet, Captain Arthur Phillip, rowed ashore at Sydney Cove, raised the Union Jack and proclaimed British sovereignty over part of the continent in 1788. Whatever the rights and wrongs of an increasingly controversial holiday, it is sure to be celebrated in some style as it conveniently starts a long, warm Summer weekend.<br><br>
There are no top-tier economic data releases locally this week, with nothing at all today then the ANZ Roy Morgan weekly consumer confidence numbers on Tuesday and the Westpac leading index and skilled vacancies numbers on Wednesday. The first RBA meeting of the new year is still more than a fortnight away and the currency is more likely to be moved by news from the US and Davos, Switzerland than by anything at home.<br><br>
The AUD opens in Asia this Monday morning at USD0.7990 with AUD/NZD at 1.0975 and GBP/AUD1.7350.
GBP / AUD
The Pound had a very good week, even though incoming economic data was generally soft and there has been no progress at all in Brexit negotiations. It opened on Monday morning in Sydney around USD1.3730 and made a whole series of fresh 2018 highs during the week. In the immediate aftermath of the EU referendum back on June 23rd 2016, GBP had fallen from 1.48 to 1.32 so there is no obvious point of technical resistance to cap the current up-move. Chart specialists will point to the February 2016 low around 1.3850 and the low in April that year of 1.4080 as possible hurdles but investors have been piling in to a currency which looks fundamentally inexpensive and has plenty of positive momentum.<br><br>
The week ahead begins very quietly in terms of market-moving economic releases though Prime Minister Theresa May will be in at the World Economic Forum in Davos, Switzerland where she is scheduled to meet with US President Donald Trump. A Downing Street spokesman said the "bilateral meeting" would take place "in the margins" of the forum.<br><br>
On Wednesday we get the latest month unemployment and average earnings numbers and on Friday it’s the Q4 GDP numbers where consensus looks for a +0.4% q/q increase compared to the +0.5% rise which the Bank of England appears to have penciled in.<br><br>
The British Pound opens in Asia this morning at USD1.3855, AUD1.7350 and NZD1.9040.
AUD / CAD
Last week’s trading in the Canadian Dollar was completely dominated by Wednesday’s first Bank of Canada monetary policy meeting of the year. In line with the majority expectation, BoC 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. After the dust settled, USD/CAD spent the next 48 hours firmly bounded by the immediate post-BoC range of 1.2385-1.2470 but in the very last hour of trading in New York on Friday moved up to end the week at 1.2500.<br><br>
The sixth round of talks on renegotiating the North American Free Trade Agreement, or NAFTA, is due to take place in Montreal from January 23-29th. In its Statement announcing the rate hike, BoC said the future of NAFTA was the most significant downside risk the economy faced. Canada sends about 75 percent of its exports to the United States.<br><br>
As well as the progress of the talks, currency traders will also be awaiting Thursday’s November retail sales data and Friday’s CPI numbers. They’ll be keeping an eye also on energy prices after WTI crude last week hit a fresh 3-year high of $64.75 before ending the week atound $63.50 per barrel.<br><br>
The CAD opens in Asia this morning at USD/CAD1.2500, AUD/CAD0.9980 and NZD/CAD0.9090.
AUD / EUR
The euro ended the week just 20 pips higher than its starting point on Monday of USD1.2200. On Wednesday morning in Sydney the USD had a very quick spike lower which lifted the EUR to 1.2302; a fresh high for 2018 which was entirely unexplained by any news story or headline. Given the changed regulatory environment these days in wholesale FX markets, there was no chat around what client flows may have triggered it. It is as much of a mystery now as it was at the time. By the end of the week, after some fairly blunt verbal intervention from ECB Council members, EUR/USD was back down at 1.2220.<br><br>
The main event of the week ahead is of course Thursday’s ECB Council Meeting. After a totally unexpected shift in language in its summary of the last meeting, the big question is whether President Draghi will attempt to dial back market expectations around an actual shift in interest rate policy. He has form on this: at a meeting in Sintra, Portugal on June 27th last year, he spoke of a strengthening and broadening recovery in the Eurozone but then spent the last 2 months up to the Jackson Hole gathering in late August trying to undo the impact of his words on the euro exchange rate.<br><br>
Ahead of the ECB meeting, we have the German ZEW survey on Tuesday and then the preliminary Eurozone ‘flash’ PMI surveys on Wednesday and the ifo survey on Thursday morning.<br><br>
The EUR opens in Asia at USD1.2220, AUD/EUR0.6535 and NZD/EUR0.5955.
New Zealand Dollar
AUD / NZD
The volatility in the New Zealand Dollar shows no sign of abating. Of the six major currencies we follow closely here, its position on the one-day performance charts over the past week has been first, last, second, first equal and last equal. On Monday, NZD/USD got back on a US 73 cents big figure for the first time since the day after the General Election back in late September and was up over 5 cents from the November 8th low. On Wednesday it hit a best level for the week just under USD.7330 and closed in New York on Friday at 0.7275.<br><br>
Today is a partial holiday in New Zealand. Wellington Anniversary Day is celebrated on the Monday nearest to January 22nd and commemorates the arrival of the first settler ship to New Zealand in 1840. The settlers named the town they founded Wellington, in honour of the first Duke of Wellington, who had been victorious at Waterloo some 25 years earlier. Auckland has its own holiday next Monday, January 29th.<br><br>
After last Friday’s disappointment of the manufacturing PMI survey, Tuesday brings the performance of services index. The main focus of the week, though, will be Thursday’s quarterly CPI numbers which consensus estimates will be around +0.4% q/q and 1.9% y/y. The RBNZ’s published forecast is one-tenth lower on both measures.<br><br>
The NZD opens in Asia this morning at USD0.7275 with AUD/NZD at 1.0975.
United States Dollar
AUD / USD
The hard numbers show that the USD index against a basket of major currencies fell only 0.2% over the course of the week, even though it felt much worse than that. The pattern of trade was such that the USD made four fresh lows on four different days at 89.99, 89.96, 89.92 and 89.89 which all gave rise to a flurry of Press headlines about the drop. But, just reading through the actual index levels, we can see that only one-tenth of a point separated all four. Sometimes it’s important to look at the scale on the charts rather than to rely on the headlines alone.<br><br>
The dollar decline again came despite yet another good set of economic numbers. The previous week had seen higher core inflation and retail sales numbers. Last week, industrial production surged +0.9% in December as very cold weather at the end of the month boosted demand for heating. Thursday, we learned that weekly jobless claims decreased by 41k to 220k; their lowest level since February 1973 and the biggest weekly biggest drop since April 2009.<br><br>
At midnight on Friday, the US government began to shut down; the first time ever that a party which controls the White House, Senate and House of Representatives has overseen a government shutdown. It is the 19th such occasion in the last 40 years. Four of these 19 have lasted just one day with the longest in 1995 lasting 21 days. During the last government shutdown in October 2013, 850,000 federal workers were furloughed, equal to nearly 40% of the government workforce. The shutdown lasted for 16 days, triggered by a disagreement over Obamacare. According to Standard & Poor’s, it cost the economy $24 billion.<br><br>
Amidst this latest cause for uncertainty, the US Dollar index opens in Asia at 90.35.
We said in our North American morning commentary that, “European traders seemed to like the employment report more than their Australian colleagues”. Indeed, by 2.15pm London time, the AUD was back on a US 80 cents big figure having been just below 0.7950 after the figures were released back home. It may be back at 80 cents, but that didn’t make it the best performer on the day; the AUD lost ground to the NZD, GBP and EUR to leave it very much middle of the global FX pack.<br><br>
There were certainly plenty of positive headlines in the labour market report for the offshore market to digest. Employment rose by a seasonally adjusted 34,700, beating consensus expectations of a 15,000 increase. Employment has now increased in each of the past 15 months, which equals the longest consecutive streak on record. One more positive month in January would be the longest uninterrupted period of jobs growth since the survey began in 1978.<br><br>
Full-time employment increased 15,100 to 8,518,900 in December and part-time employment increased 19,500 to 3,921,800. The ABS noted that, "Full-time employment has now increased by around 322,000 persons since December 2016, and makes up the majority of the 393,000 net increase in employment over the period," It was the fastest growth over a calendar year on record, and the second fastest over any 12-month period, only beaten by a 409,300 increase in August 2005.<br><br>
Perhaps it was news that the unemployment rate however rose to 5.5% from 5.4% which had depressed the AUD in Sydney trading yesterday. This was due to much stronger labour-force participation which might indicate some further spare capacity in the labour market and therefore a lack of wage pressure. Unlike the United States or UK, Australia doesn’t publish earnings data at the same time as the jobs numbers so we’ll only have some patchy survey evidence and anecdotal evidence to go on.<br><br>
There are no data locally this Friday and the AUD opens in Asia at USD0.7995 with AUD/NZD at 1.0940 and GBP/AUD1.7375.
The British Pound continues to trade in quite wide ranges against the USD though with a low around 1.3805 it didn’t quite repeat Wednesday’s feat of trading on three different big figures during the day. And, though it did get on to 1.39, it fell short of the previous day’s 2018 peak of 1.3930.<br><br>
The only economic data released Thursday showed the UK housing market in stark contrast to that in either Australia or New Zealand. The Royal Institution of Chartered Surveyors monthly report on residential property market in December showed buyer interest edging lower whilst changes to purchase taxes for first time buyers are having little or no immediate effect.<br><br>
After new buyer enquiries came close to stabilising in November, 15% more respondents noted a decline in demand (as opposed to an increase) in the month of December. Furthermore, when contributors were asked whether they have seen an increase in first time buyer enquiries following changes to Stamp Duty in the Autumn Budget, an overwhelming majority of 86% across the UK said they hadn’t.<br><br>
Agreed transactions also fell at the national level with 13% more respondents reporting a decline in volumes over the month. Significantly, Scotland, Northern Ireland and the North East region were the only areas to suggest stronger transactions, whereas sales trends were either flat or negative across the rest of the UK. It could be a very long Winter for Estate Agents.<br><br>
Today we’ll get the December retail sales figures. There has been a significant shift in buying habits as a result of Black Friday promotions a month before Christmas. Volumes ex-fuel rose +1.2% in November but are expected to show a -0.9% drop in December.<br><br>
The British Pound opens in Asia this morning at USD1.3895, AUD1.7375 and NZD1.9010.
The Canadian market spent so long waiting for the Bank of Canada’s meeting on Wednesday that by the time the interest rate announcement came and the Monetary Report had been analysed, it almost died of exhaustion and indigestion. On Thursday, USD/CAD remained firmly bounded by the immediate post-BoC range of 1.2385-1.2470 and appears not to know quite what to do next.<br><br>
Recall that the median forecast in the Reuters poll earlier in the week was for one rate increase in each of 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 challenge after the BoC Statement and Press Conference is to decide whether the references to uncertainties over NAFTA will be enough of take at least one of these hikes off the table. There doesn’t yet appear to be any consensus amongst the local banks on this so we may have to wait until the next round of weekly and monthly analysts’ notes to see if views have changed.<br><br>
The CAD opens in Asia this morning at USD/CAD1.2435, AUD/CAD0.9945 and NZD/CAD0.9085.
The EUR rallied throughout the day on Thursday, rising from a low of 1.2165 early in the Sydney morning to 1.2260 in the European afternoon.<br><br>
The highlight of the day was Bundesbank President Jens Weidmann and IMF Managing Director Christine Lagarde speaking at a joint conference in Frankfurt. The German central banker defended his country’s record budget and current account surpluses after criticism from the International Monetary Fund that they are hobbling growth in the euro zone and widening global economic imbalances. “Raising public spending in order to reduce Germany’s current account surplus would likely be a futile undertaking”, he said.<br><br>
To give an idea of the scale of the numbers, Germany’s current-account surplus over the 12 months through November totalled 262 billion euros ($320 billion). The budget surplus was 1.2% of gross domestic product last year, the biggest since reunification in 1990 and the fourth in row. German manufacturers and exporters are loving the level of the euro even if members of the ECB’s Governing Council aren’t.<br><br>
This last day of the week brings the Eurozone current account numbers. October’s surplus was €30bn so it doesn’t take much work with a calculator to work out that almost the entirety of it comes from Germany!<br><br>
The EUR opens in Asia at USD1.2240, AUD/EUR0.6535 and NZD/EUR0.5970.
The New Zealand Dollar was again very well bid on Thursday, vying for top spot with the British Pound. During the Asian morning, NZD/USD had fallen below USD0.7250 but from there it was a pretty much uninterrupted journey back on to a US 73 cents handle early in the European afternoon. It didn’t quite breach the 2018 high of USD0.7330 seen on Wednesday, but did get to within almost 10 pips of that peak.<br><br>
According to the REINZ, median house prices across New Zealand rose by 5.8% in 2017 to $550,000; up from $520,000 in December 2016. Median prices for New Zealand excluding Auckland increased by 6.6% to $450,000 whilst Auckland’s median house price increased to $870,000 from $855,000 in December 2016. 13 out of 16 regions saw prices increase in December, with three of those regions experiencing record prices; Waikato, Bay of Plenty and Wellington. As REINZ also noted, “When looking at the Auckland picture, this is the first time that all seven districts have had a median price of in excess of $700,000 highlighting how expensive the city is becoming”.<br><br>
Even more interesting, perhaps, is the Department of Internal Affairs data on baby names. Charlotte and Oliver have topped the list of New Zealand’s most popular baby names for 2017. Charlotte is up from second last year whilst 2017 is the fifth year in a row that Oliver tops the boys’ list. Taking a longer historical view, analysis by stuff.co.nz shows Michael is the most popular name of the past 60 years in New Zealand. More than 40,000 babies have been named Michael since 1954, after which comes David (36,792), James (27,224) and John (26,867). All the names in the Kiwi top 10 are male. The top-ranking girls' name is Sarah, at number 12, which has been given to 19,901 babies in the past 60 years, followed by Karen at number 22 (13,524) and Emma at number 23 (13,245). We might not be able to explain why the NZD is going up or down, but we know the names of those who it affects and what their house is worth!<br><br>
The NZD opens in Asia this morning at USD0.7310 with AUD/NZD at 1.0930.
In what is now becoming a familiar refrain, Thursday was another poor day for the US Dollar. With the EUR and GBP well bid, and the AUD and NZD back within touching distance of their 2018 highs, the Dollar’s index against a basket of major currencies fell from a high in Asia of 90.61 to a low in the New York afternoon of 90.05.<br><br>
Equally as familiar as the dollar’s drop is that it came despite yet another good set of economic numbers. Last week, we saw higher core inflation and retail sales numbers. On Wednesday, industrial production surged +0.9% in December as unseasonably cold weather at the end of the month boosted demand for heating. Yesterday we learned that weekly jobless claims Jobless decreased by 41k to 220k; their lowest level since February 1973 and the biggest weekly biggest drop since April 2009. The figures suggest the unemployment rate of 4.1%, already the lowest since 2000, could be set to fall further. The latest week for claims includes the 12th of the month, which is the reference period for the Labour Department’s monthly employment surveys.<br><br>
Rather than look at the incoming data, the USD is being spooked by headlines that US Senate majority leader Mitch McConnell is making contingency plans for the growing possibility of a government shutdown. Congress is facing a January 19 deadline (today) to pass a spending bill, which helps determine the government’s budget and discretionary spending for the fiscal year. Without it, the government will shut down. This would be truly surreal. It would be the first time ever that a party which controls the White House, Senate and House of Representatives has overseen a government shutdown.<br><br>
During the last government shutdown in October 2013, 850,000 federal workers were furloughed, equal to nearly 40% of the government workforce. The shutdown lasted for 16 days, triggered by a disagreement over Obamacare. According to Standard & Poor’s, it cost the economy $24 billion.<br><br>
The US Dollar index opens in Asia at 90.15 whilst US 10-year bonds are 3bp higher in yield at 2.61%.
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.
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.
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.
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.
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.
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.
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