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AUD / CAD
Over the last few days, USD/CAD has settled in a 1.2280-1.2390 range with investors keen to get a sense of how the NAFTA uncertainties might be resolved. Having reached a high around 1.2375 around the end of the Asia session, USD/CAD then fell around half a cent during the European morning on Tuesday before settling around 1.2320.
There has been little incentive or desire to push the Canadian Dollar one way or another until at least we see what tone President Trump will strike in his State of The Union address. At Davos last week he was in generally conciliatory mood, with a speech generally summed up as “America First but Not Alone”. However, we saw on his Asia trip last year that what he says and how he says it can vary from one audience to the next and he might decide that a more aggressive tone on trade might strike a chord with blue-collar voters in America. Ahead of all this, trade in the CAD has been very quiet.
Once Trump’s speech has been analysed ad nauseum, investors can look forward to the monthly GDP and industrial production numbers later on Wednesday and the manufacturing PMI survey on Thursday. It should impress an Antipodean audience waiting for quarterly CPI figures that Canada can even produce GDP figures every month, let alone inflation numbers! The Canadian Dollar opens in Asia this morning at USD/CAD1.2325, AUD/CAD0.9965and NZD/CAD0.9040.
AUD / NZD
In the wake of last Wednesday’s soft quarterly CPI numbers, the NZD fell around 1¼ cents against the US Dollar, whilst the AUD/NZD cross on Monday hit 110.70; its highest level since December 5th. All the major currencies have experienced high volatility over the past 18 hours and the NZD has been no exception to this trend. As European traders arrived at their desks, NZD/USD fell to 0.7285 but subsequently recovered 70 pips before settling around USD0.7330. Sometimes a good check on NZD performance is to look instead across the Tasman Sea. The AUD/NZD cross is down more than half a cent from its recent high at 110.20; the Kiwi has indeed done quite well.
New Zealand’s monthly trade balance in December 2017 was +$640 million. The surplus was the largest ever in a December month, and the largest in any month since March 2015. According to the official statisticians, exports of milk powder, butter, and cheese lifted total exports to a record $5.6bn in December 2017. Monthly exports were $1.1bn higher than in the same month a year earlier. The previous highest values for both dairy exports and total exports were recorded in the 2013/14 dairy export season, when dairy prices were at a high level. Looking by destination, the largest increase in exports amongst was to China, up $343m (28 percent), led by dairy products (up $230m).
Later this week, on Thursday we have the ANZ job advertising figures and at the end of the week, the always fascinating numbers on net migration and visitor arrivals. The New Zealand Dollar opens this morning in Asia at USD0.7335 and AUD/NZD1.1020.
In the 24-hour period from lunchtime in Sydney on Monday to the same time on Tuesday, AUD/USD was trapped in just a 25 pip range from 0.8078 to 0.8103. Over the past 18 hours, though, it has been much livelier. A break to the downside early in the European morning took AUD/USD down to 0.8045 but six hours later it was up at 0.8110. Barely two hours after that, the AUD had given up half the gains made earlier in the day. The moves followed those in EUR/USD, rather than being driven by any fresh views or insights on the Aussie Dollar itself.
Yesterday brought the monthly NAB Business Survey. Their business confidence index bounced 4pts to +11, the highest level since July 2017 whilst business conditions were unchanged at +13 which is above the long-run trend of +5. We’ve been pointing out recently that the RBA’s monetary policy stance will likely be determined more by growth in wages and household consumption than what’s happening to business conditions. In this respect there was perhaps a bit of disappointment that labour costs rose at an implied quarterly rate of 0.8%; down from 1.2% in the previous month’s survey.
For today, the big news will be the quarterly inflation numbers. To an outsider it always seems a very strange use of professional resources to not produce monthly data but then to produce a whole range of different quarterly measures. There’ll be headline CPI, the core trimmed mean and the core weighted mean for statistics geeks to pore over. The market consensus is for the headline rate to rise 0.7% q/q with an annual rate of 2.0%. The Australian Dollar opens in Asia today at USD0.8085, with AUD/NZD at 1.1020 and GBP/AUD1.7505.
AUD / USD
After a rare top spot on our one-day performance table on Monday, the USD very marginally extended its gains early in Europe on Tuesday with its index reaching a high of 89.28; its best level since last Wednesday. As the EUR found bids after some solid Q4 growth numbers, however, the USD index quickly shed nearly three-quarters of a point to 88.60 before then rallying up to 88.95 on the Treasury Secretary’s latest currency comments.
Treasury Secretary Mnuchin told the Senate Banking Committee that he "absolutely supports a strong dollar over the long term… I strongly support we have a free currency market that we don’t intervene in." He also said also said that his comments on the dollar in Davos "were blown out of proportion by the media and were in no way intended to talk down dollar." The latest figures on US consumer confidence also helped support the Dollar. The confidence index rose to a higher than expected 125.4 from an upwardly revised 123.1 in December and though the p resent conditions measure decreased to 155.3 from 156.5, the future expectations gauge increased to 105.5 from 100.8. The Conference Board statement said, “Consumers remain quite confident that the solid pace of growth seen in late 2017 will continue into 2018.”
The big event of the day will be President Trump’s State of the Union address at 9pm EST. The speech is titled, “Building a safe, strong and proud America”. A senior administration official told reporters earlier this week that Mr Trump will be laying out future plans and reflecting on his first year in office, “speaking from the heart” to discuss jobs and the economy, infrastructure, immigration, trade and national security. With US 10-year bond yields up at a fresh cycle high of 2.73% despite a sharp fall on the stock market, the USD index opens in Asia today at 88.90.
AUD / EUR
The EUR did not escape the volatility which was the feature of all the major currencies on Tuesday in the Northern Hemisphere. Early in the European morning, it very briefly broke below Monday’s 1.2345 low and just as it looked as though the market was set for a technically-driven drop, the pair reversed to be 110 pips higher at 1.2450 by lunchtime. During the afternoon it was then down and back on to a 1.23 handle before finally stabilizing in New York around 1.2405.
In economic news, real GDP in the Eurozone rose 0.6% q/q in Q4, slowing slightly from an upwardly-revised 0.7% in Q3, in line with the consensus. As it’s the preliminary report, there was no detailed breakdown of the various components: consumption, investment, government spending and net trade. It was the 19th consecutive quarter of growth in GDP and put the euro region’s 2017 expansion at 2.5%. That’s better than had been anticipated by the European Central Bank, and it’s a pace the region hasn’t seen since before the financial crisis in 2008. A separate release showed Eurozone economic confidence remained close to a 17-year high in January, dipping slightly to 114.7 in January from 115.3. Industrial sentiment held at a record at the start of the year. Confidence slipped among services providers and increased among consumers and construction firms.
Today we’ll see the CPI figures for the whole Eurozone area. These come after Tuesday’s surprisingly soft German numbers where a -1.0% m/m fall in January took the annual rate down from 1.6% to just 1.4%. Lower energy inflation made the largest contribution to the weaker headline figure while food inflation picked up. Expectations for Eurozone CPI are for the annual rate to dip to 1.3% from 1.4%. The EUR opens in Asia this morning at USD1.2405, AUD/EUR0.6515 and NZD/EUR0.5910.
GBP / AUD
Monday saw the first ‘down day’ for GBP/USD for the first time in 11 trading days, and at one stage early in the European morning on Tuesday, the pair dipped below 1.40 for the first time in a week. On a day which saw some large intra-day swings in both directions for all the major currencies, the GBP was the most volatile of all. GBP/USD fell 85 pips then rose 175 to be back where it opened on Monday morning in Asia around 1.4150.
Bank of England Governor Mark Carney appeared Tuesday afternoon before the House of Lords Select Committee on the economy. He refused to comment on the confidential government analysis of the economic impact of Brexit which was reported to have been shown to Cabinet Ministers over the weekend. These had suggested growth would be between 2-8 percent lower over the next 15 years. Instead, he repeated his view that the 2016 Brexit vote had, so far, effectively knocked 1 per cent of GDP off the UK, relative to where it would otherwise have been, through weaker corporate investment and damage to household consumption due to higher inflation. He also hinted that the Bank is actually preparing to upgrade its forecasts at its Inflation Report next month. “I would expect that in 2019 we will see a pick-up in this economy all things being equal – strong global growth, greater certainty... A disorderly Brexit, not a likely scenario at all, is less likely than at the time we did the assessment in the fall.”
After Mr Carney’s remarks, a strong rebound in the GBP took it to the top of our one-day performance table; up against all the major currencies we follow closely here, not just the US Dollar.
With no top-tier UK economic statistics on Wednesday, the Pound opens in Asia this morning at USD1.4150, GBP/AUD1.7505 and GBP/NZD1.9290.
USD/CAD has settled in the lower part of a 1.2280-1.25 range. The CAD has been helped by continued strength in oil prices (WTI crude was back above $66 yesterday morning) and a sense that negotiations around NAFTA seemed to be proceeding well; albeit behind closed doors.
Trade ministers from Canada, Mexico and the United States ended the sixth round of NAFTA negotiations in Montreal on Monday, agreeing some progress was made but acknowledging that tough challenges still lie ahead to strike a new deal. US Trade Representative Robert Lighthizer said while some progress was made, he hoped it would accelerate and achieve major breakthroughs. "This round was a step forward, but we are progressing very slowly," he said. This was because trilateral negotiations are more "complicated and contentious" than bilateral talks. Nevertheless, in his closing remarks, Lighthizer said, “Some real headway was made here today… We're committed to moving forward."
After the relief that NAFTA talks haven’t completely collapsed despite plenty of outstanding differences between the three negotiating teams, investors can now focus on upcoming economic data releases. We get the monthly GDP and industrial production numbers on Wednesday and the manufacturing PMI survey on Thursday. The Canadian Dollar opens in Asia this morning at USD/CAD1.2325, AUD/CAD0.9980 and NZD/CAD0.9025.
The British Pound’s remarkable 11-day sequence in which it never tested the previous day’s low against the US Dollar was good while it lasted, but has now come to an end. At one point, GBP/USD was almost 9 cents higher than its starting point around 1.3460 on January 11th having reached a best level last Thursday around 1.4330. Yesterday it didn’t just break below Friday’s low of 1.4145, but traded all the way down to 1.4035; the first ‘down day’ for the GBP in 2½ weeks.
The first few weeks of the new year have been mercifully free of Brexit news, but it is a subject which is now set to return with a vengeance; with just under 14 months left until the UK formally exits the European Union on March 29th 2019. Though the legislation has passed the House of Commons, this week it goes for debate to the House of Lords whose constitution committee has already said that the bill as it currently stands risked “undermining legal certainty” and should be substantially changed. The chair of the committee today said yesterday, “We acknowledge the scale, challenge and unprecedented nature of the task of converting existing EU law into UK law, but as it stands, this bill is constitutionally unacceptable.”
In what will be a relatively quiet week for UK economic data, Bank of England Governor Mark Carney is due to give evidence to the House of Lords Economic Affairs Committee on Tuesday afternoon. During his Q+A session at Davos last week, he attempted to quantify the loss of GDP which resulted from the EU referendum result 18 months ago and might well come in for some tough questioning over this. The GBP opens lower in Asia this morning at USD1.4075, GBP/AUD1.7375 and GBP/NZD1.9225.
The Aussie Dollar joined in the holiday mood last Friday on Australia Day, rising to a high of USD0.8135; its best level since January 2015. But, just as everyone heads back to work and the holiday memories fade, so too the AUD has come back down to earth. It’s still pretty elevated by standards of the last year and it’s spent less than 20 of the last 250 trading days at 80 cents or above but is now down almost half a cent from Friday evening’s high.
This morning locally, we have the latest NAB monthly business survey. Last time around, the business conditions index fell 9 points to +12 index points – albeit still well above the long-run average (+5). Meanwhile, business confidence was in line with long-run average levels, at +6 (down from +9 in October), although there had been a notable downward trend in the series since around the middle of the year. NAB commented at the time that, “there was nothing in this month’s Survey that would prompt us to alter our view of the Australian economy. We remain cautiously optimistic that Australia will see temporarily above trend economic growth in coming quarters”.
The next RBA Board meeting is on Tuesday February 6th and its members will have both the NAB Survey and quarterly CPI numbers to discuss in some depth. That said, it’s probably still the case that monetary policy in 2018 will be determined more by growth in wages and household consumption than what’s happening to business conditions. The Australian Dollar opens in Asia today at USD0.8095, with AUD/NZD at 1.1065 and GBP/AUD1.7375.
It seems a long time ago that the NZD/USD hit a high around 0.7430; the first time it had been on a US 74 cents ‘big figure’ since early-August 2017. In fact, it was only last Wednesday but the Kiwi Dollar has been hit hard in the wake of the quarterly CPI numbers. It has fallen around 1¼ cents against the US Dollar: whilst the AUD/NZD cross yesterday hit 110.70; its highest level since December 5th.
The main economic numbers locally today are the December merchandise trade report. The previous month brought an unexpectedly large deficit of $1,193; the first deficit for a November month since 2005 and compared to an average November deficit of $447 over the past five years. Even if the erratic ‘aircraft import’ was stripped out, the November deficit was still $930m. Analysts locally are looking for a very small surplus in December.
Later this week, on Thursday we have the ANZ job advertising figures and at the end of the week, the always fascinating numbers on net migration and visitor arrivals. The New Zealand Dollar opens this morning in Asia at USD0.7315 and AUD/NZD1.1060.
EUR/USD hit a 3-year high of 1.2530 during the ECB Press Conference last Thursday before then falling one and a half cents to 1.2375 on President Trump’s comments to CNBC about wanting a stronger Dollar over the longer-term. On Friday it couldn’t regain the highs and in the early evening in New York yesterday fell to a low of 1.2345.
Speaking in Brussels on Monday, The ECB’s chief economist Peter Praet said the European Central Bank will only stop pumping cash into the euro zone economy when it is confident that inflation is heading towards its target without its extra help. Praet is one of the key supporters of the ECB’s €2.55 trillion bond-buying programme and was responding to calls by officials – notably in Germany and the Netherlands – to stop the scheme later this year. Despite these dovish remarks, German 5-year bond yields yesterday moved back into positive territory for the first time since late-2015 whilst 10-year bunds were up 6bp to 0.69%.
Today in the Eurozone brings Q4 GDP figures where consensus estimates are for a +0.6% quarterly increase. We’ll also get German CPI figures which will then see analysts firming up their forecasts for the Eurozone CPI numbers on Wednesday. The EUR opens in Asia this morning at USD1.2385, AUD/EUR0.6535 and NZD/EUR0.5910.
Hold the front page - the US Dollar didn’t fall yesterday! The USD index reached a low point on Thursday last week of 88.20 before rallying into the NY close and then holding around half of its gains on Friday. It opened on Monday morning in Sydney around 88.75 and at one point during the European afternoon managed to break on to an 89 ‘big figure’ for the first time in four days. Its gains we’re broad-based and saw the USD rise against every major currency to take a rare top spot on our one-day performance table.
US economic data on Monday were pretty much in line with consensus expectations. They may be a bit obscure for some of our readers, but the personal consumption and spending figures are very important to the Fed for two reasons: First, they feed directly into estimates of GDP and second, they are accompanied by so-called a PCE deflator which is the measure of inflation the Fed is targeting. Whereas the RBA in Australia and the RBNZ in New Zealand have CPI targets, the US Fed has a PCE target. The headline measure of PCE inflation was 1.7% with the core ex-food & energy number as expected at 15%.
After the US numbers were published, the Atlanta Fed updated its GDPNow model. It had overstated the Q4 numbers last week but its first estimate of Q1 2018 is a very punchy 4.2% which would more than make up for any disappointments last Friday. Its’ next update will come on Thursday after the ISM survey and official numbers on construction spending. For Tuesday, consumer confidence is the main data point but the big event of the day will be President Trump’s State of the Union address at 9pm EST. The speech is titled, “Building a safe, strong and proud America”. With US 10-year bond yields up at a fresh cycle high of 2.71%, the USD index opens in Asia today at 89.00.
The US Dollar had a dramatic week which saw it fall a net 1.7% against a basket of major currencies. Its index opened last Monday morning around 90.25 but by Tuesday evening, had fallen all the way to a fresh 37-month low of 89.77. On Wednesday things got worse as the US Trade and Treasury Secretaries unleashed their own particular brand of Alpine diplomacy at the WEF in Davos. Though Treasury Secretary Steve Mnuchin initially stuck to a familiar script that, “longer term the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency," he went on to say that, “Obviously a weaker dollar is good for us as it relates to trade and opportunities.” Less than 12 hours later, the USD index was on an 88 ‘big figure’ and on Thursday hit at a fresh low of 88.20; its lowest since early-December 2014.
Late in the New York afternoon on Thursday, in an interview with CNBC, President Donald Trump said, "the dollar is going to get stronger and stronger and ultimately, I want to see a strong dollar,", further adding that Treasury Secretary Steven Mnuchin's comments were taken out of context. After he then delivered his “America First but not Alone” speech to a packed conference hall in Davos on Friday, the USD steadied somewhat to end a very dramatic week at 88.70.
The week ahead brings plenty of news on the US economy as well as Jerome ‘Jay’ Powell’s first meeting as Chairman of the Federal Reserve Bank. Market-derived probability estimates show just a 3% chance of a 25bp hike in rates, with the overwhelming view being this will not come until the March 21st FOMC meeting. On Tuesday we get the latest reading on consumer confidence, Wednesday it’s the Chicago NAPM then on Thursday the ISM manufacturing survey. The first Friday of the new month, as usual, is the labour market report where consensus estimates are for non-farm payrolls to have increased about 180k with the unemployment rate steady at 4.1%. Ahead of all this, the USD index stands at 88.70.
The British Pound ended last week after an 11-day sequence of rallying without testing the previous day’s low. From the day the ECB talked about changing the language around forward guidance on monetary policy on January 11th, (ironically in an attempt to smooth market volatility) GBP/USD has risen more than 7 cents and at one point was almost 9 cents higher having reached a best level on Thursday around 1.4330. The GBP’s gains came against a background of improving survey evidence and a solid set of labour market numbers which continue to confound the pessimists who have called for a UK recession ever since the EU referendum 18 months ago in June 2016.
Friday’s Q4 GDP numbers were a touch stronger than consensus forecasts but exactly in line with the +0.5% rise which the Bank of England expected in its November Quarterly Bulletin. The reaction has so far been fairly predictable: “Leave” supporters claim proof the UK can survive post-Brexit whilst the “Remain” camp argue it could all have been so much better. The weekend Press in the UK has focused on what the GDP numbers might mean for monetary policy, with some analysts now bringing forward their forecasts for the next hike in interest rates. HSBC, for example, said that along with increasing numbers of people in work, the figures “support our view that the Monetary Policy Committee will raise Bank Rate again in May.”
In what will be a relatively quiet week for UK economic data – with Thursday’s manufacturing PMI probably the highlight – there’ll be plenty of time to focus on politics and Brexit. Most newspapers reported that Prime Minister Theresa May has cancelled plans to give another high-profile speech such as the one she gave in Florence last year. The reason for this is not just because, allegedly, she does not know what she wants herself, but that anything she says is likely to worsen divisions amongst her own Cabinet and backbenchers. An opinion poll by ICM in The Guardian on Saturday said that voters support the idea of holding a second EU referendum by a 16-point margin. 47% of people would favour having a final say on Brexit once the terms of the UK’s departure are known, while 34% oppose reopening the question. Amidst the political intrigue, the GBP begins the new week having closed in New York on Friday at USD1.4165, GBP/AUD1.7460 and GBP/NZD1.9245.
All last week’s economic news in the Eurozone was without exception positive. Indeed, Germany’s ZEW Survey noted, “The latest survey results reveal an optimistic outlook for the German economy in the first six months of 2018. With 95.2 out of 100 points, this is the most positive assessment of the current economic situation since the introduction of the survey in December 1991.” For the foreign exchange market, however, none of this was ‘new news’ and the EUR was little changed for the first couple of days around USD1.2250 as investors awaited Thursday’s ECB Council Meeting. Just ahead of that, of course, came US Treasury Secretary Steve Mnuchin’s dramatic intervention which sent the EUR up a couple of cents to 1.2455.
The big issue was whether Draghi would change forward guidance on interest rates (he didn’t), try to talk the EUR lower (he didn’t) or sound in any way concerned about the impact of a strong EUR on growth and inflation forecasts (he didn’t). The standard practice amongst Central Bankers when asked to speak about the actions of another is a diplomatic “no comment”. Instead, Mr Draghi entered a war of words with unnamed (but clearly American) officials for manipulating the currency, saying “someone else’s FX talk doesn’t comply with agreed terms...” EUR/USD hit a high of 1.2530 during the ECB Press Conference before falling one and a half cents on President Trump’s comments about wanting a stronger Dollar. Thursday was a very dramatic and volatile day in the world of foreign exchange.
The week ahead brings Q4 GDP figures on Tuesday where consensus estimates are for a +0.6% quarterly increase. If it is, instead, 0.7%, then the Eurozone will have grown more rapidly than the United States in the final quarter of the year. Also on Tuesday we’ll get German CPI figures which will then see analysts firming up their forecasts for the Eurozone CPI numbers on Wednesday. Thursday brings the final Markit PMI numbers across Europe, whilst investors need to be prepared at any time for the usual post-ECB briefings and clarifications. The EUR ended last week at USD1.2430, AUD/EUR0.6525 and NZD/EUR0.5915 and all eyes this week will be on who can declare victory in the first currency battle after Davos.
All of the drama for the Canadian Dollar came two weeks ago as it became the first G7 Central Bank to raise rates in 2018. Last Monday’s opening level of USD/CAD1.2490 proved to be the high of the week as the USD slid, WTI crude rose steadily to a high around $66.50 per barrel and negotiations around NAFTA seemed to proceeding well, albeit behind closed doors. Much of Prime Minister Justin Trudeau’s speech to the World Economic Forum in Davos focussed on gender inequality and the benefits to be derived from hiring, promoting & retaining women. On more immediately market-sensitive issues, he said, “We’re working very hard to make sure that our neighbour to the south recognizes how good NAFTA is and that it has benefited not just our economy but his economy and the world economy.” He also said the new Trans-Pacific trade deal would create “well-paying middle class jobs for decades to come” even though it did not involve the United States.
Also in Davos, Bank of Canada Governor Stephen Poloz said he did not know what potential there may be for further interest rate hikes this year, reiterating that policymakers remained both data dependent and alert to developments with NAFTA. "We've explained to people that there are a number of important issues that force us to not be mechanical or to use a rule or to plan ahead in that way. We've said we are totally data dependent." Asked if the BoC was also "NAFTA dependent," Poloz said: "Oh yes, very." But he said it was impossible to do the arithmetic ahead of time to know what policy response may be needed if the trade deal is terminated or significantly altered. "If the economy began to slow as a result, then we'd be able to put those pieces together, then it would go into the mix, the inflation target would be at risk, and we'd be cutting rates into that. But a lot of things could move at the time.”
For the week ahead, we get the monthly GDP and industrial production numbers on Wednesday and the manufacturing PMI survey on Thursday. Officials from the United States, Canada and Mexico will wrap up the sixth of seven planned rounds of talks on the North American Free Trade Agreement in Montreal on Monday, with little sign yet of agreement on US proposals to overhaul the $1.2 trillion pact. On Sunday, Mr Trudeau told a televised meeting of Liberal legislators in Ottawa that the government was working hard to get a better NAFTA deal, although it was a day of rest for the three Chief NAFTA negotiators who had the day off. Officials say if the three conclude the process should continue, an additional round of talks will start in Mexico on February 26th. The Canadian Dollar ended last week at USD/CAD1.2315, AUD/CAD0.9990 and GBP/CAD1.7445.
The New Zealand Dollar outperformed its Aussie cousin in the first part of last week before reversing all the gains and more in the final two days. AUD/NZD started around 1.0980 but fell all the way to 1.0860 on a combination of poor Australian consumer confidence numbers and a decent performance of services index locally. On Wednesday, as the USD slide accelerated and deepened after the Mnuchin comments in Davos, NZD/USD hit a high around 0.7430; the first time it had been on a US 74 cents ‘big figure’ since early-August 2017. After a much weaker than expected set of CPI numbers, however, the NZD went into reverse. NZD/USD immediately tumbled a full cent to around 0.7325 and then on to a low Thursday around 0.7290 with AUD/NZD back up to 1.09 then 1.10.
The median published estimates were for a quarterly increase in CPI of 0.4% which would have left the annual rate at 1.9%. Instead, StatsNZ reported that prices rose just 0.1% in the December 2017 quarter to take the annual rate down to 1.6% as higher petrol prices, air fares, and housing-related costs were offset by lower prices for vegetables, new cars, and a range of household goods. Analysts were quick to revise down their interest rate expectations. ANZ said the data have pushed its expectations for the Reserve Bank of New Zealand to hike the official cash rate back from November 2018 to mid-2019. ASB said, “it reinforces that there is no need for the Reserve Bank to raise interest rates anytime soon," whilst amongst the offshore banks Morgan Stanley noted “the weakness seen in 4Q inflation should see the RBNZ on-hold over 1H18, possibly with an added emphasis on the need for a weaker currency”.
There’s plenty of data to be released locally this coming week. December trade figures on Tuesday should rebound from a very poor performance in November whilst on the housing market, today brings residential lending data and Friday we get the building consents numbers. On Thursday we get the ANZ job advertising figures and at the end of the week, the always fascinating numbers on net migration and visitor arrivals. It’s a holiday in Auckland today which might keep activity low but the FX market is open locally and through the rest of the Asia time zone. The New Zealand Dollar opens this Monday morning having closed in New York on Friday at USD0.7360 and AUD/NZD1.1025.
The Aussie Dollar began last Monday just below US 80 cents, having broken above this psychological level a couple of time the previous week, but on both occasions having failed to hold there. By the end of last week, a combination of decent local economic news (the Westpac leading index) and US Treasury Secretary Mnuchin’s words on the benefits of a weaker dollar helped cement the AUD onto this new ‘big figure’. Indeed, from Wednesday afternoon local time the Aussie Dollar never looked back and it went on to reach a high on Friday of USD just below 0.8135; its best level since January 2015 when it was around three-quarters of the way through its multi-year decline from an all-time high around USD1.10 to just 70 cents.
As Australians head back to work at the end of the Summer holidays and a long weekend, so too economic news flow begins to pick up. On Tuesday its the monthly NAB Business Survey but more important will be Wednesday’s quarterly CPI numbers. It is a constant source of wonder – though probably linked to internal politics around funding – that the official statisticians don’t produce monthly inflation numbers. It means the government and central bank have to rely on private sector estimates for a timely read on price pressures, then have a whole series of official numbers (headline, trimmed mean, weighted median etc) which can sometimes be difficult to interpret. Anyhow, the general consensus is that headline CPI will rise around 0.7% q/q to take the annual rate up to 2.%.
The RBA doesn’t have a Board meeting in January so its meeting on Tuesday February 6th will be its first chance for two months to publicly review all the incoming data. Too great a focus on the AUD/USD exchange rate would be misleading as it’s more of a story around the US Dollar, whilst the AUD/NZD cross rate is pretty much unchanged from the day of the last RBA meeting back in early December. As for its other pairs, the AUD is around one cent firmer against both the GBP and EUR than it was when the RBA last met to decide official interest rates. Whilst any comment they make on exchange rates will be seized on by analysts, it’s probably still the case that monetary policy in 2018 will be determined more by growth in wages than by what’s happening to the external value of the Aussie Dollar. The Australian Dollar starts this new week having closed on Friday at USD0.8105, with AUD/NZD at 1.1025 and GBP/AUD1.7460.
USD/CAD continued to move a bit lower, albeit the Canadian Dollar has lagged other major currencies after some slightly softer than expected local economic data. The low point for USD/CAD came just before lunchtime in North America at 1.2287 before a rally back on to 1.2380 after President Trump’s comments on the USD.
Retail sales increased for the third consecutive month in November, rising 0.2% to $50.1 billion. Sales were up in 6 of 11 subsectors, representing 37% of total retail trade. Higher sales at gasoline stations, electronics and appliance stores and general merchandise stores offset lower receipts at new car dealers. Excluding motor vehicle and parts dealers, retail sales rose 1.6%. The headline number was below consensus, the ‘core’ number quite a bit higher so it was a pretty volatile 10-15 minutes as the pre-programmed algorithms tried and failed to make sense of it all.<br><br>
Speaking in Davos, Bank of Canada Governor Stephen Poloz said he did not know what potential there may be for further interest rate hikes this year, reiterating that policymakers remained both data dependent and alert to developments with NAFTA. "We've explained to people that there are a number of important issues that force us to not be mechanical or to use a rule or to plan ahead in that way. We've said we are totally data dependent."
Asked if the BoC was also "NAFTA dependent," Poloz said: "Oh yes, very." But he said it was impossible to do the arithmetic ahead of time to know what policy response may be needed if the trade deal is terminated or significantly altered. "If the economy began to slow as a result, then we'd be able to put those pieces together, then it would go into the mix, the inflation target would be at risk, and we'd be cutting rates into that. But a lot of things could move at the time.”
The CAD opens in Asia this morning at USD/CAD1.2380, AUD/CAD0.9920 and NZD/CAD0.9060.
The US Dollar continued to slide Thursday until a fairly emphatic intervention in Davos from President Tump. The USD index against a basket of major currencies had fallen almost 4 per cent; its worst start to any year since 1987 and reached a low point of 88.21; down more than half a percent on the day. Late in the New York afternoon, in an interview with CNBC, President Donald Trump said, "the dollar is going to get stronger and stronger and ultimately I want to see a strong dollar,", further adding that Treasury Secretary Steven Mnuchin's comments were taken out of context. The USD index jumped from 88.40 to 89.25.<br><br>
Earlier in the day, Treasury Secretary Mnuchin played down his comments that a weaker dollar was “good for us as it relates to trade and opportunities”. Mnuchin told reporters, “I thought my comment on the dollar was actually quite clear yesterday. I thought it was actually balanced and consistent with what I’ve said before, which is, we are not concerned with where the dollar is in the short term.” Mnuchin said there were “both advantages and disadvantages of where the dollar is in the short-term” and stressed that the United States wanted fair economic competition. “We want free and fair and reciprocal trade. So, I think it’s very clear. We’re not looking to get into trade wars. On the other hand, we are looking to defend America’s interests.” <br><br>
Amidst all the uncertainty and rising volatility in global equity and foreign exchange markets, the US Dollar index opens in Asia at 89.25.
Two days ago, the EUR rose to USD1.24 for the first time since December 2014. Yesterday, it hit 1.2460 at the end of the Asia session before a bit of position-squaring ahead of a much-anticipated ECB meeting. During President Draghi’s Press Conference which was notable in several respects (see below), it touched a high of 1.2530 before then crashing to 1.2370 after President Trump’s comments on the USD.<br><br>
Whilst the ECB worries about whether EUR strength will hinder progress towards its inflation objective by weighing down on the cost of imported raw materials and forcing exporters into more cost-cutting to remain internationally competitive, it seems to be doing no harm at all to the broader Eurozone economy. The ifo Business Climate Index out this morning rose to 117.6 points in January from 117.2 points in December. This was due to far better assessments of the current business situation, with the sub-indicator hitting a record high. Business expectations for the next six months, by contrast, were slightly scaled back, but remain at a high level. As the ifo puts it, “the German economy made a dynamic start to the year.”
The big issue was whether Draghi would change forward guidance on interest rates (he didn’t), try to talk the EUR lower (he didn’t) or sound in any way concerned about the impact of a strong EUR on growth and inflation forecasts (he didn’t). The standard practice amongst Central Bankers when asked to speak about the actions of another is a diplomatic “no comment”. Instead, he entered a war of words with unnamed (but clearly American) officials for manipulating the currency, saying “someone else’s FX talk doesn’t comply with agreed terms... When I said communication, I didn’t mean ECB communication but other people’s communication. We don’t target the exchange rate.”<br><br>
Instead of throwing stones from inside the ECB’s elegant glass house in Frankfurt, perhaps Mr Dragi should reflect that the ECB did more to push up EUR/USD than anything on US side. Its January 11th account of the December meeting said, "language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in coming year". EUR/USD rose 4.5 cents after that…
The EUR opens in Asia at USD1.2375, AUD/EUR0.6475 and NZD/EUR0.5915.
The NZD on Wednesday rose to a high of USD0.7433; the first time it has been on a US 74 cents ‘big figure’ since early-August 2017. Thursday morning, however, it suffered a very sharp reversal as the long-awaited quarterly inflation numbers fell well short of consensus expectations. NZD/USD immediately tumbled a full cent to around 0.7325 before then recovering just under half these losses.
The median published estimates were for a quarterly increase in CPI of 0.4% which would have left the annual rate at 1.9%. Instead, StatsNZ reported that prices rose just 0.1% in the December 2017 quarter. Higher petrol prices, air fares, and housing-related costs were offset by lower prices for vegetables, new cars, and a range of household goods. The relatively flat result this quarter leaves the CPI inflation rate at 1.6% for the December 2017 year.
In its last published monetary policy assessment back in early November, the RBNZ saw inflation reaching 2 percent in Q2 2018 as opposed to Q1 2019 which they had previously forecast. It also said it no longer sees headline inflation declining. As that forecast now heads to the shredder, analysts have been quick to revise down their interest rate expectations. ANZ, for example, said the data, coupled with their belief the “economy is set to go through somewhat of a near-term growth wobble”, have pushed its expectations for the Reserve Bank of New Zealand to hike the official cash rate back from November 2018 to mid-2019.
There is no economic news scheduled for release locally today and the NZD opens in Asia this morning at USD0.7330 with AUD/NZD at 1.0950.
Our many Australian clients will be celebrating Australia Day today and we wish them all a happy and peaceful day of celebrations with friends and family and a very enjoyable long sunny weekend.
On the eve of the national day, currency markets in the Northern Hemisphere appeared very comfortable with an Australian Dollar at 80 US cents, though this one currency pair undoubtedly overstates the general strength of the AUD. Instead, it’s a US Dollar story which has been largely responsible for pushing the pair higher, along with the associated rise in commodities which nearly always accompanies a weaker USD.
We won’t find out for another 11 days what the Reserve Bank of Australia has to say – if anything – about the current mix of exchange rates. Before then, we have the quarterly CPI figures next Wednesday to navigate; a potentially tricky day if yesterday’s experience of New Zealand CPI is any guide.
Although markets locally in Australia are closed today, it is business as usual elsewhere in the APAC region and AUD opens in Asia this morning at USD0.8030 with AUD/NZD at 1.0955 and GBP/AUD1.7595.
The pound’s remarkable run saw GBP/USD rise for 10 consecutive days without breaking the previous day’s low. From the day the ECB dropped its bombshell about possibly changing the language around forward guidance of monetary policy on Thursday January 11th, (ironically in an attempt to smooth market volatility) GBP/USD rose almost 9 cents; its biggest 10-day gain since June 2009. In London trading earlier yesterday morning, the pound moved higher still and hit a best level of 1.4325 before then tumbling almost 2 cents into the US close as President Trump showed he has more clout in global FX markets than ECB President Draghi.
In an interview with Bloomberg Television in Davos, UK Chancellor of the Exchequer Philip Hammond said, “We’re very happy with where the currency is at the moment… Getting the inflation rate down - and a rising pound helps to do that - helps to drive increases in real wages, and that’s good for our economy and good for our society,” he said.
In economic news locally, mortgage approvals by Britain’s banks fell to their lowest level since April 2013 in December, according to trade association UK Finance. Banks approved just 36,115 mortgages for house buying, down from 39,007 in November and 19% lower than a year ago. The RICS survey last week was consistent with even lower levels of activity in this first quarter of 2018. Separately, the CBI’s latest distributive trades survey, showed UK retail sales at a slower pace than anticipated. The survey showed a balance of +12 for January, down from +20 in December. Sales for the time of year were the weakest compared to the norm for more than four years. Orders to suppliers also fell, and looking ahead retailers expect similar growth in sales volumes while orders are forecast to be flat.
Thus far, weaker UK economic numbers haven’t mattered at all to currency traders, though we’ll see if today’s Q4 GDP numbers have any impact. Consensus expectations are for a +0.4% q/q increase compared to the +0.5% rise which the Bank of England expected in its November Quarterly Bulletin.
The British Pound opens in Asia this morning at USD1.4125, AUD1.7590 and NZD1.9270.
Wednesday was a genuinely dramatic day in global FX markets; January 24th 2018 will be remembered as the day in which US Treasury Secretary Steve Mnuchin stated on the record that, “Obviously a weaker dollar is good for us as it relates to trade and opportunities.” It is always easier to talk a currency down than to talk it up – as a host of former finance ministers and central bankers can readily testify – and investors were quick to sell the US Dollar. It already had got off to the worst start to any New Year since 2003 and yesterday was its worst daily drop in 10 months.<br><br>
Against this backdrop, the Aussie Dollar of course moved higher against the US Dollar; as did almost every currency in the world; not just those which we follow most closely here. The weakness of the USD also gave a substantial boost also to commodity prices. Gold was up $11 to $1352 per ounce. Aluminium and zinc rose almost 1%, silver was up 2.2%, copper was 3.3% higher and nickel surged 5.7%. The net impact of this was to push the AUD up to a high of USD0.8080; taking it above last September’s peak and to the best level since January 2015 when it was around three-quarters of the way through its multi-year decline from an all-time high around USD1.10 to just 70 cents.<br><br>
Wednesday’s Westpac leading index was very strong. The six-month annualised growth rate, which indicates the likely pace of economic activity relative to trend three to nine months into the future, jumped from +0.66% in November to +1.41% in December. As Westpac noted, “This is a very strong above trend reading and, following the solid results in October and November, points to solid above trend growth in the early part of 2018.” They also cautioned, however, that “there are still key negatives around housing, household incomes and the consumer which are likely to challenge the sustainability of any upswing in 2018.”<br><br>
As thoughts turn to tomorrow’s Australia Day holiday, the AUD opens in Asia this morning at USD0.8075 with AUD/NZD at 1.0870 and GBP/AUD1.7610.
The pound was rocket-fueled on Wednesday, continuing its remarkable run which has seen GBP/USD rise for 9 consecutive days without once testing or breaking the previous day’s low. From the day the ECB dropped its bombshell about possibly changing the language around forward guidance of monetary policy on January 11th, (ironically in an attempt to smooth market volatility) GBP/USD has risen almost 7 cents.<br><br>
By teatime in London yesterday the pair hit 1.4227; the highest since the EU referendum on June 23rd 2016. The 230 pip (1.6%) rally was the biggest gain seen in GBP/USD since 17 January 2017, 264 trading days earlier. As Context Analysis point out, “the 3.4 cent (2.5%) rally seen in GBP/USD so far this week marks the strongest start to a week in the 83 weeks since June 2016”.<br><br>
The latest economic data from the Office for National Statistics showed that in the three months to November 2017, the number of people in work increased, the number of unemployed people was little changed, and the number of people aged from 16 to 64 not working and not seeking or available to work (economically inactive) decreased. There were 32.21 million people in work, 102,000 more than for the previous 3-month period and 415,000 more than for a year earlier.<br><br>
The unemployment rate was 4.3%, down from 4.8% a year earlier and the joint lowest since 1975, whilst average weekly earnings in nominal terms (that is, not adjusted for price inflation) increased by 2.5% including bonuses and by 2.4% excluding bonuses, compared with a year earlier.<br><br>
There’s a pause on the UK data calendar Thursday then 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 expected in its November Quarterly Bulletin.<br><br>
The British Pound opens in Asia this morning at USD1.4215, AUD1.7610 and NZD1.9140.
As the USD has come under sustained selling pressure throughout the past 24 hours, so USD/CAD has moved lower. It has broken below the immediate post-BoC low last Wednesday of 1.2375 and fell to an intra-day low of 1.2320 around lunchtime in Europe; its weakest in exactly 4 months. When quoted the ‘other’ way round, then once USD/CAD hit 1.2345 the Canadian Dollar moved on to US 81 cents for the first time since September.<br><br>
Just as all negotiators like to claim victory, there was no shortage of Canadians lining up to take credit for the CPATPP. International Trade Minister François-Philippe Champagne said his country got a better deal than the one the other nations wanted to sign back in November. "When we were in Danang we stood up for Canada. We said for this agreement to work for Canada we need to address specific issues," he said. "You saw that we were forceful in our position and since then we have worked to get agreements with our partners, notably on the cultural sector ... to protect, defend and promote out culture across Canada."<br><br>
With NAFTA representatives already embarked on sixth round of talks in Montreal, they at least know Canada and Mexico are signing free trade deals with large new markets in the Pacific Rim though more immediately important for CAD currency traders – who will be digging out their charts to see that last September’s low was USD/CAD1.2104 – are November retail sales data on Thursday and then Friday’s CPI numbers.<br><br>
The CAD opens in Asia this morning at USD/CAD1.2325, AUD/CAD0.9955 and NZD/CAD0.9155.
The euro couldn’t quite match the strength of the British Pound but it had another strong day on Wednesday, rising to USD1.24 for the first time since December 2014. Whilst the ECB worries about whether EUR strength will hinder progress towards its inflation objective by weighing down on the cost of imported raw materials and forcing exporters into more cost-cutting to remain internationally competitive, it seems to be doing no harm at all to the broader Eurozone economy.<br><br>
Yesterday’s ‘flash’ PMI surveys were remarkably upbeat. The headline Eurozone PMI rose to 58.6 in January, up from 58.1 December and its highest since June 2006. An acceleration of service sector growth to the fastest since August 2007 was partly countered by a slowdown in manufacturing output growth, though the latter remained very buoyant. The latest three months have seen the strongest factory output increase since 2000. The Press Release noted, “The eurozone started 2018 with a further acceleration of growth to a near 12-year high, accompanied by the largest payroll gain since 2000 and the highest price pressures for nearly seven years… Activity was buoyed by a further marked and broad-based increase in new business”.<br><br>
In Davos, meantime, German Chancellor Angela Merkel, French President Emmanuel Macron and Italian Prime Minister Paolo Gentiloni all did the ‘vision thing’, most especially Ms Merkel who reminded delegates that 2018 marks the 100th anniversary of the end of the first world war. The political actors a century ago ‘sleepwalked’ into a crisis, Merkel said. “This generation born after the second world war will have to prove they have learned the lessons of history. That means remaining committed to multilateralism, working together to solve problems”.<br><br>
The EUR opens in Asia at USD1.2405, AUD/EUR0.6510 and NZD/EUR0.5985.
New Zealand Dollar
After Tuesday’s table-topping performance, the NZD only managed second place on Wednesday although against a very weak US Dollar, it did rise to a high of 0.7428; the first time it has been on a US 74 cents ‘big figure’ since early-August 2017.<br><br>
In the latest developments since the Comprehensive and Progressive Agreement for Trans-Pacific Partnership was agreed Tuesday evening, New Zealand’s government said on Wednesday that it has achieved its five objectives in the renewed negotiations. In a statement to the media before heading off to Davos, David Parker, the NZ trade minister said, “Before the agreement is ratified, New Zealanders will be given the opportunity to better understand what it means for them, their families and the country. We are committed to ensuring this is done in a fair and accessible way”.<br><br>
One consequence of the new deal is the government now has more time to reconsider a controversial proposal to shut foreign buyers out of the NZ property market. Legislation had been expected to be in place by March but Mr. Parker said “the Government will now recommend the select committee examining the Overseas Investment Amendment Bill allow more time for consideration”.<br><br>
As well as the clumsily-titled CPATPP (an acronym which hardly rolls off the tongue), the big economic news domestically today will be the quarterly CPI numbers which consensus estimates will be around +0.4% q/q and 1.9% y/y. New Zealand (like Australia) doesn’t publish monthly CPI numbers so they’re always very keenly anticipated for clues to the RBNZ’s interest rate policy.<br><br>
The NZD opens in Asia this morning at USD0.7425 with AUD/NZD at 1.0870.
United States Dollar
In these first 3½ weeks of 2018, the USD index against a basket of major currencies has now fallen over 3 per cent; its worst start to any year since 1987. Wednesday was the worst day in 10 months for the USD which fell against every major currency and most of the world’s minor ones too. It opened at a 37-month low around 89.70 before the US Trade and Treasury Secretaries unleashed their own particular brand of Alpine diplomacy at the WEF in Davos. Less than 12 hours later, the USD index was on an 88 ‘big figure’.<br><br>
Though Treasury Secretary Steve Mnuchin initially stuck to a familiar script that, “longer term the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency," he went on to say that, “Obviously a weaker dollar is good for us as it relates to trade and opportunities.”<br><br>
Speaking alongside the Treasury Secretary, Commerce Secretary Wilbur Ross only inflamed the situation by saying that "Trade wars are fought every single day… a trade war has been in place for quite a little while, the difference is the U.S. troops are now coming to the rampart." This prompted Jack Ma, head of China’s Alibaba to say, “It’s so easy to launch a trade war, but it’s so difficult to stop the disaster of this war. Don’t use trade as a weapon, use trade as a solution to solve problems”. The mood hardly improved when Ross called China’s 2025 technology strategy a “direct threat” and hinted at action against Beijing, stirring fears of a genuine trade war.<br><br>
President Donald Trump himself said last August that, “the dollar is getting too strong” and the currency world will be watching to see if he aligns with or distances himself from this talk of trade war when he gives his Davos speech later this week.<br><br>
Amidst all the uncertainty and rising volatility in global stock markets, the US Dollar index opens in Asia at 88.90.
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