USD tumbles through key support on dovish Fed Minutes
Thursday 23 November, 2017
Daily Currency UpdateTo our readers in the United States – Happy Thanksgiving Day. Celebrated on the fourth Thursday of November in the US and the second Monday of October in Canada, it began as a celebration to bless the harvest. Nowadays it’s a day of rest before the serious business of shopping begins in earnest on ‘Black Friday’; the day when it used to be said storekeepers finally moved out of the red to make some profits before year-end. The USD most certainly did not enter the holidays in a celebratory mood. It tumbled on Wednesday and has stayed lower throughout the Asian session and into the European morning. The Dollar’s index against a basket of major currencies fell through technical support at 93.30 even before the release of a pretty dovish set of FOMC Minutes. These revealed, “A number of participants were worried that a decline in longer-term inflation expectations would make it more challenging for the Committee to promote a return of inflation to 2 percent over the medium term. These participants’ concerns were sharpened by the apparently weak responsiveness of inflation to resource utilization and the low level of the neutral interest rate, and such considerations suggested that the removal of policy accommodation should be quite gradual.” None of this yet changes the outlook for the upcoming December 13 FOMC meeting but it does reveal a clear shift of thinking. Maybe it’s all designed to give incoming Fed Chair Jerome Powell more room for maneuver in the New Year. For the near-term, however, it is likely to keep up the downward pressure on the US Dollar, whose index opens this morning at just 92.7.
Key MoversThe Canadian Dollar had another good day Wednesday, boosted by a further sharp rise in oil prices to their highest level of the year. Ten days ago, NYMEX crude was at $55.19 per barrel. On Tuesday this week it finished around $57.05 and yesterday it traded as high as $58.02 before settling today in the mid-$57.80’s. The rise in oil prices was very timely for the Canadian Dollar as some of the earlier optimism around the ‘NAFTA 2.0’ talks began to be reassessed locally. Indeed, one of the major banks in Canada put out a report saying the CAD could fall as much as 20% if the talks failed in the New Year. They stressed this was not their central scenario (otherwise they might now be looking for a new Head of Research!) but noted, “Despite ongoing threats from President Trump and a more contentious renegotiation process of late, we continue to view NAFTA termination as a tail risk… the risk of significant negative impacts to economic activity and financial volatility, through the channel of policy uncertainty, is non-trivial.” USD/CAD is down at to a 4-week low of 1.2780 at this morning’s North American open whilst AUD/CAD is at 0.9675.
The EUR is the strongest currency of all this morning, not because of any great change in the German political situation – though it is rumoured that the leader of the SPD, Martin Schulz, may resign later today – but on the back of a stunning set of ‘flash’ PMI numbers in France, Germany and the Eurozone. The Eurozone manufacturing index of 60.0 was the strongest in 211 months, the services index was at a 6-month high of 56.2 whilst the composite index was at a 79-month high of 57.5. Markit’s Press Release noted, “The eurozone economy is showing signs of picking up momentum in the fourth quarter, with multi-year highs seen for all main indicators of output, demand, employment and inflation in November. Business activity and prices rose at the steepest rates for over six years, while the largest accumulation of uncompleted work for over a decade encouraged firms to take on staff at a rate not seen for 17 years…. Inflows of new orders showed the largest gain since February 2011. The biggest increase in factory new orders since April 2000 helped offset a slight moderation in the service sector. Goods exports increased at a survey record pace”. EUR/USD has extended Wednesday gains to reach a high of 1.1840 where it opens in North America this morning. EUR/CAD hasn’t quite kept pace but has held on to a 1.50 handle for the whole of the past 18 hours, opening today around 1.5015.
The pound had a pretty mixed day on Wednesday – up against the USD and AUD but down slightly against the EUR, CAD and NZD – after UK Chancellor Philip Hammond delivered his annual Budget speech to the House of Commons. The economic numbers he presented from the independent Office for Budget Responsibility (OBR) made for pretty grim reading. After growing just 1.5% in 2017, UK GDP is then expected to grow over the next five years by 1.4, 1.3, 1.3, 1.5 and 1.6 percentage points. Never in modern history has a UK Chancellor stood up to forecast growth below 2% in every one of the next five years. Even the initially positive news headlines might not stand up to much scrutiny when it’s realized that cutting transaction taxes on residential property merely pushes up prices with the benefits accruing to existing owners, not new homebuyers. It is often said that a Budget should be judged after 5 weeks, not 5 minutes and if the early smiles on Government faces begin to evaporate, then so too will the recent enthusiasm for the GBP. It opens this Thanksgiving Day down 20 pips at USD1.3305; with GBP/CAD half a cent off its overnight high to 1.6874.
With all the economic news already out of the way, Australians can focus instead on the most important event of the week; the first Ashes Test cricket game against England. There’s no point explaining the details to a North American audience who can’t believe any game can go on for five days and still end in a draw! No overtime, no sudden-death, no penalty shoot-out and quite possibly no result. More than 30,000 spectators will be in the packed ground in the Brisbane suburb of Woolloongabba for the 8 hours of play each day and the vast majority will be stunned at anything other than a comprehensive Australian victory. England have a notoriously poor record at ‘The Gabba’, and have only won two Test matches at the ground since the end of the Second World War. The only consolation for the England supporters at the game is that the British Pound stands at its highest level against the Aussie Dollar (1.75) in more than 6 months, though it’s almost exactly where it was during the last test Ashes series in Australia in 2013. Against the USD, the AUD opens this morning at 0.7632 whilst the AUD/CAD cross is at 0.9675.
For the first two days of this week, you’d have been forgiven for thinking that New Zealand had a fixed exchange rate against the Australian Dollar; it barely budged from 1.1080. By the end of the New York session Wednesday the pair was showing some modest sign of life, having traded down to a low of 1.1061 and it opens around that level in North America this morning. Against the very weak USD, the Kiwi Dollar has rallied to 69 cents with NZD/CAD at 0.8745. Earlier this week, Statistics New Zealand published detailed data on overseas visitor numbers. Today we got to see how deeply those tourists and NZ residents dug into their pockets to spend some money. Overall sales volumes rose 0.2% in the three months ended September 30, following a 2% increase in the June quarter. Eight of the 15 industries surveyed posted higher sales volumes in the quarter, though comparisons with Q2 can be a little misleading. For example, the food and beverage sector - which includes cafes, restaurants, bars, takeaways, and catering services - saw a record fall in both value and volumes in the quarter (down -2.2% and -3.1%). This came after a record gains in Q2. The explanation, of course is those hungry and thirsty supporters of the World Masters Games and the British Lions rugby tour in that earlier period. Lots of foreign visitors and lots of spending: hopefully they’ve learned not to hand over wads of cash at the foreign exchange bureau in the arrivals lounge. There’s an app for that!!
- USD/CAD: 1.2720 - 1.2790 ▼
- EUR/USD: 1.1715 - 1.1790 ▼
- GBP/USD: 1.3190 - 1.3265 ▼
- AUD/USD: 0.7530 - 0.7590 ▼
- NZD/USD: 0.6800 - 0.6850 ▼