USD steadies with stocks at all-time highs, GBP extends gains
Wednesday 29 November, 2017
Daily Currency UpdateThe US Dollar index stood at a 2-month low of 92.21 at the beginning of the week but by Tuesday evening had rallied to a best level of 92.98. Overnight it slipped to 92.74 as the pound extended its gains and the EUR turned modestly higher and it opens in North America this morning around 92.90. Higher house prices, record highs for US stock markets and consumer confidence at a 17-year high make for a generally supportive background for the US Dollar, notwithstanding investor concerns over whether inflation is actually going to pick up to the Fed’s medium-term target level around 2%. As long as Fed actions are consistent with its forecasts, a shortfall on current PCE is unlikely to harm the dollar too much, especially if asset markets continue to perform strongly. In his prepared remarks to Senate yesterday, Jerome Powell made exactly the noises the stock market loves to hear: “We must be prepared to respond decisively and with appropriate force to new and unexpected threats to our nation’s financial stability and economic prosperity.” Coming up this morning, Janet Yellen is up before the Joint Economic Committee of Congress. She’s at the point now of having at least one eye on posterity and her legacy. Some analysts have speculated she might loosen her tongue as her term ends but this would be a very uncharacteristic move. We expect few fresh monetary policy clues beyond ensuring a smooth transition to the Powell Fed in 2018. Fresh stock market highs, meantime, should help limit the Dollar’s downside.
Key MoversThe Canadian Dollar spent most of Tuesday dragged down by falling oil prices and the same pattern of trading has continued overnight. NYMEX Crude reached a 2017 high of $58.82 last Friday, fell Monday to $58.15, Tuesday to $57.54 and after a bounce in yesterday afternoon’s session, is this morning back testing the lows. USD/CAD has risen (weaker CAD) to a four-week high of 1.2846 and on the day the Canadian Dollar is the weakest of all the major currencies we follow here. Ahead of the OPEC meeting, it is reported that Saudi Arabia and Russia (which is not an OPEC member) are trying to reach agreement on extending production cuts into 2018. An agreement first struck a year ago and set to expire in March was aimed at reducing a global oversupply of oil caused in part by US producers and it is said the Saudis want to extend this until the end of next year. Moscow, however, might prefer a shorter agreement which would allow it to increase output if prices rise, rather than see all the benefits go to North American shale producers. The Saudi oil minister is quoted on newswires saying it was “too early to talk about a disagreement” and said “a solution” will be reached during talks Wednesday and Thursday in Vienna, where OPEC is based. With few, if any, monetary policy clues in Tuesday’s FSR and with the week’s main economic data in Canada (GDP and the employment report) not out until Friday, the CAD will most likely once again be driven by oil prices and headlines from Vienna.
The EUR had a very poor day Tuesday without ever being the centre of FX market attention. By close of business in New York, it had fallen against every major currency with EUR/USD at 1.1845 and EUR/CAD at 1.5180. Overnight, the EUR did somewhat better, largely due to confusion around the release of German CPI figures scheduled for 2pm local time in Frankfurt today. Germany publishes individual States’ CPI figures separately and earlier in the day than the national ones. These sometimes offer a big clue but are not decisive as methodologies can differ and not all the States data are published. Whatever the case, Bloomberg this morning printed +0.3% m/m and +1.8% y/y for the national numbers; around one-tenth higher than consensus expectations. It subsequently removed the post, and debate has focused on whether it erroneously published the North-Rhine Westphalia numbers or whether it was a true leak of the actual number. We’ll find out pretty soon, but talk of higher CPI – along with yet another very strong survey of EU consumer and business sentiment – helped the EUR off to a good start in European trading. It has subsequently given back its early gains to open in North America at USD1.1840 and CAD1.5195. This evening we might hear whether Bundesbank President Jens Weidmann believes this robust growth should be reflected in higher ECB interest rates.
The pound has had a wild ride over the past 24 hours. We’ll try to summarize it here: GBP fell sharply against every major currency for 18 hours Tuesday then regained all its losses and more in the space of just 20-30 minutes on headlines that “Britain and EU Agree Divorce Bill”. Overnight, the GBP has further extended its gains, reaching a 2-month high against the US Dollar of 1.3420 and a 5-month high against the Canadian Dollar of 1.7220. The two sticking points in Brexit negotiations thus far have been the size of the payments the UK will make to leave the European Union and the price it will pay to do so. The UK had initially suggested €20bn whilst the EU demanded €60bn. According to news reports this morning, the final figure will be €45-55bn though it will not be confirmed in writing and will not be settled as an upfront bill. According to one EU negotiator quoted in The Times, “All we need is four extra words.... At Florence Mrs. May said, ‘the UK will honour commitments we have made during the period of our membership’. All we need is the phrase, ‘when they fall due’, added to the end of the sentence. That’s it. No numbers, just those words.” Financial markets were beginning to fear that failing to agree the Divorce Bill would increase the risk of a disorderly Brexit with no trade deal. The overnight news greatly eases these concerns, though the problem of the Irish border still remains unsolved. There are no UK economic data released today so the GBP will be driven almost entirely by the broader political response to the secret divorce deal.
The Australian Dollar continues to trade lower and against the USD has now given back all of its gains of the past week. It now stands at just 0.7575 having spent the whole of the last 12 hours back on a 75 US cents big figure. Against the Canadian Dollar it is a similar, though much less dramatic picture. AUD/CAD at 0.9723 is around 20 pips lower than last night’s New York close, though of course the weakness of the CAD itself is limiting the downside for this pair which is still up around half a cent from Monday’s Sydney open. The OECD report on Australia was generally pretty upbeat: “The economy will continue growing at a robust pace. Business investment outside the housing and mining sectors will pick up, with exports boosted as new resource-sector capacity comes on stream. The strengthening labor market and household incomes will sustain private consumption, and inflation and wages will pick up gradually”. That said, their analysis also reflecting the concerns we outlined here yesterday about the housing market: “The prolonged period of low interest rates has fueled high house prices in large metropolitan areas. Substantial mortgage borrowing has resulted in households being highly indebted. To contain risks associated with potential large house-price corrections and financial stress, macro-prudential measures should be maintained. Australia is also vulnerable to “too big to fail” risks, due to its highly concentrated banking sector”. Tomorrow’s Q3 capex numbers are going to have to be pretty robust if the prevailing negative sentiment around the AUD is to be reversed.
Having soared on Monday, the NZD extended its gains even further on Tuesday before finding the air a little thin after its rapid ascent. Its’ best levels against the currencies we follow closely here were NZD/USD0.6944, NZD/EUR0.5841, AUD/NZD1.0964, NZD/CAD0.8877 and GBP/NZD1.9118 and it opens in North America down from all these points. NZD/USD is at 0.6908 having at one point overnight touched 0.6882 whilst NZD/CAD is at 0.8861. In presenting its own Financial Stability Review, the RBNZ said it will ease some of the so-called ‘macro-prudential’ regulations it had imposed on mortgage lending in an attempt to cool the residential property market without raising interest rates. Governor Grant Spencer said in the past six months, pressures on the housing market had continued to moderate due to further tightening of LVRs, a firming of bank lending and an increase in mortgage rates. “These policies have helped improve banking system resilience by substantially reducing the share of high-LVR loans." Currently no more than 10% of loans can go to owner occupiers with a deposit of less than 20%. This cap will rise to 15%. There’s not much of a read-across to monetary policy from these measures, though some might argue that if macroprudential policies were introduced instead of raising interest rates, easing them might open the door a tiny bit to a rate hike. This doesn’t seem a persuasive argument, however. The AUD/NZD cross is back below 1.10 mostly due to weakness in the AUD, not because of NZD rate hike concerns.
- USD/CAD: 1.2760 - 1.2890 ▼
- EUR/USD: 1.1800 - 1.1890 ▼
- GBP/USD: 1.3330 - 1.3450 ▼
- AUD/USD: 0.7540 - 0.7620 ▼
- NZD/USD: 0.6860 - 0.6930 ▼