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USD surged late Friday on tax reform hopes. NZD and AUD were the week’s top two currencies; can they sustain recent gains into the holiday season?

By Nick Parsons

The Australian Dollar opens this morning after its best week for several months; rising for four consecutive days then only finally giving ground to a resurgent US Dollar in the last few hours of trading in New York on Friday. After the very poor performance of the AUD over the previous few weeks and the general softness in many of the incoming economic indicators, there is no doubt that investors were either outright short of the currency or underweight relative to their neutral benchmark weightings. The sharp rise in the Kiwi Dollar last Monday led to some closing of these short AUD positions and by the time of the labour market report on Thursday, there were huge sighs of relief from those investors who had exited their bearish trades.

AUD/USD jumped to 0.7668 immediately after the employment numbers were published on Thursday and then onto a high of 0.7689 on Friday; its best level since November 10th. As it seemed the US tax reform bill would, indeed, finally be passed, US equities had a huge late session rally with the S+P 500 index up almost 1%. This dragged up the USD in its wake to leave the AUD at USD0.7641 at the New York close. Over the course of the whole week, the Australian Dollar was the second-best of all the major currencies we track here; just knocked off top spot by its trans-Tasman cousin.

The focus of attention today will be the Australian Government’s Mid-Year Fiscal and Economic Outlook (MYEFO). Budgets in Australia don’t have the same drama as their British equivalent though they are far less drawn out than in the United States. They are only occasionally market-moving events but they do give the Government a good opportunity to make soothing noises to the international ratings’ agencies about economic growth and debt sustainability.

The AUD opens in Asia this Monday morning at USD0.7653 with AUD/NZD at 1.0934.

The New Zealand Dollar ended a volatile week at the top of the pile; the best performer amongst all the major currencies.

NZD/USD began at 0.6838 and jumped almost a full cent to 0.6930 during the first Asian session of last week on news of a new Governor at the RNBZ. Late in Monday’s US session, the pair broke above the late November high of 0.6943 and the much-improved technical chart picture left it well positioned to capitalise on the USD weakness after the FOMC Statement on Wednesday evening. By the New York close, NZD/USD was on a 70 cents handle for the first time since October 19th.

Thursday saw a reversal lower in the NZD as the Government released its Half-Year Economic & Fiscal Update which was generally seen as being far too optimistic. Whatever the case, the NZD soon rebounded and by lunchtime in London on Friday it reached a fresh high for the week of USD0.7027 before succumbing to the US Dollar’s late surge to finish the week in New York at 0.6990. With the AUD/NZD cross falling very modestly from 1.0975 to 1.0930, this meant the Kiwi Dollar took the prize as the strongest currency of the week. The week ahead is packed with economic data as the official statisticians clear their diaries ahead of the local holiday season. Q3 GDP figures will finally be published on Thursday, whilst Tuesday we’ll get to see if the sharp fall in November business confidence has been at all reversed. Before then, today we get the performance of services index which will be watched to see if it can match the resilience of its counterpart in manufacturing.

NZD/USD opens in Asia this morning at 0.6997 with NZD/EUR at 0.5959 and GBP/NZD at 1.9040.

The British Pound matched the performance of its cricketers last week: a bright start, then collapse and capitulation. It began in the warm afterglow of Prime Minister Theresa May’s Brussels deal on the Irish border though Tuesday’s inflation data then pulled the GBP lower.

Just as investors were digesting the Fed Statement on Wednesday came news that the UK Government had been defeated on one of the night’s four parliamentary votes on Brexit. The implications of this for the British Pound appeared to us somewhat mixed. On the one hand, any defeat for the Prime Minister is something which will weaken her authority and arguably put her in a weaker negotiating position in Brussels. On the other, the substance of the 24-word Bill was to give Parliament a vote on the final terms of the Brexit deal. We wrote on Thursday morning that, “To the extent that it leaves the door open to a rejection of Brexit, this could perhaps be interpreted as a GBP positive, albeit not one which we’d put much weight on right now.”

On Friday, it became clear that Prime Minister would be unlikely to dictate either the terms or the timetable for discussions on Phase 2 of the Brexit negotiations. Her EU counterparts refuse to be rushed and are arguing that no progress can be made until the UK Government sets out definitively what it wants to achieve. With the USD buoyant as the tax reform passage seemed set to pass and US stock markets surged, the British Pound plunged on Friday afternoon, ending the week almost on its lows at USD1.1315. From its recent high against the AUD it was down 5½ cents to 1.7425 whilst GBP/NZD was down just over 7 cents at 1.9055.

The week ahead will again be dominated by Brexit, this time as the UK Government (542 days after the referendum!) is finally going to have a Cabinet meeting to decide what it wants from the negotiations. A long time has passed since Foreign Secretary Boris Johnson’s confident claim that he was “pro-cake and pro-eating it”.

The GBP opens in Sydney this morning at USD 1.3321, AUD1.7415 and NZD1.9040. Their cricketers open at 132-4 in Perth. We wrote here on Friday that, “Those who love a bet will be wondering whether the currency or the sportsmen crumble first.” As it turned out, backing the double would have been the best bet…

The Dollar had a very volatile week but its index against a basket of major currencies ended almost exactly where it had begun at 93.50. On Monday the S&P 500 Index ended the day up 0.3% at 2,659; a new record close, led by the telecoms, technology and energy sectors. Tuesday brought the dollar’s high for the week at 93.81 as the Fed began its two-day FOMC meeting but then came news from a highly controversial Senate election in Alabama; a deeply conservative southern State. Mr. Trump had given enthusiastic support to a former judge, Roy Moore, who faced a series of allegations about misconduct and who had previously said that he does not believe that Barack Obama was born in the US and that Muslims should not be allowed to serve in Congress. Mr. Moore was defeated by Democrat Doug Jones; a move which not only questioned the President’s judgment, but reduces the Republican majority in the Senate to just one seat.

The Fed Statement on Wednesday noted, “the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong.” In its new economic projections, it revised up 2018 GDP forecasts from 2.1% to 2.5% with further more modest upgrades to the outlook in 2019 and 2020. Though two of the nine voting members dissented, there were no downward revisions to future ‘dot points’ and the belief that inflation would indeed pick up was again reiterated.

Despite what looked to be a very non-controversial Statement and subsequent Press Conference, the Dollar extended its decline in the last 2 hours of trading in New York, with the index falling to a 1-week low of 93.00. Thursday was pretty uneventful for the USD and Friday also got off to a sluggish start. From the New York opening on Friday, however, stocks began to surge on news that the last Republican hold-out on tax reform was now going to offer his support after being offered some concessions on child care provisions. The S+P 500 index jumped a stunning 25 points to a fresh closing high, dragging the USD index up three-tenths to end a volatile week exactly where it had begun at 93.30.

The US Dollar index opens this morning in Asia at 93.50 with all eyes on the passage through Senate of the tax reform bill. Vice President Mike Pence has delayed a trip to the Middle East as the Republican majority is so slim the party can’t afford even to have one Senator away…

The Euro had another disappointing week, failing to gain any upside traction even as incoming data continued to show the economic recovery in the Eurozone to be broadening and deepening. It opened in Asia on Monday morning at USD1.1765 but at its best spent barely 15 minutes on a 1.18 big figure before turning lower on Tuesday to the week’s low of 1.1724 as Press in Italy reported that President Sergio Mattarella will dissolve Parliament this month and set a March 4 election date. Given this uncertainty, 10-year Italian bond yields jumped 10bp. Although there was no contagion into other peripheral Eurozone bonds, investors haven’t recently needed much of an excuse to sell EUR and the Italian news was the trigger for Tuesday’s underperformance.

Wednesday’s post-FOMC Dollar sell-off saw EUR/USD jump more than a cent, and on Thursday it reached its best level of the week at 1.1843, helped by very strong purchasing managers surveys: “The eurozone economy picked up further momentum at the end of 2017, with December seeing the fastest growth of business activity for nearly seven years. The best factory output and order book gains since 2000 pushed the manufacturing headline PMI to a record high, while an upturn in service sector to growth to the highest since early-2011 underscored the broad-based nature of the current surge in activity”.

At the ECB meeting, new staff economic projections showed upward revisions to growth forecasts. 2018 GDP is now seen at 2.3% (previously 1.8%) with 2019 at 1.9% from 1.7%. 2018 CPI was nudged up from 1.2% to 1.4% though 2019 and 2020 were left unchanged at 1.5% and 1.7% respectively. The significance of the CPI forecasts is that on a 2-year horizon, inflation is not yet back at the ECB’s target of “close to but just below 2%”. This provides the justification for continuing the very accommodative monetary policy.

By Friday’s close, the EUR had given up all of Thursday mornings gains and more; ending in New York at the session lows of USD1.1751 as the USD surged in a very illiquid market.

EUR/USD opens in Asia this morning at 1.1745 with AUD/EUR at 0.6505. There’s no a great deal of economic news this week, though the highlight will be Tuesday’s German ifo survey and today’s final Eurozone CPI numbers.

The Canadian Dollar spent the first few days of the week in a fairly narrow range, pulled up and down solely by movements in crude oil prices. It began at USD1.2855, reached a high of 1.2884 on Tuesday evening and a post-FOMC low of 1.2798. The highlight of the week, however, was a keenly-anticipated speech on Thursday from Bank of Governor Stephen Poloz which had the fascinating title “Things that keep me awake at night”.

Overall, the context of his speech was that the Canadian economy is doing extremely well and is at a “sweet spot” in the economic cycle. “The economy has made tremendous progress over the past year, and it is close to reaching its full potential. We are very encouraged by this, and we are growing increasingly confident that the economy will need less monetary stimulus over time.”

Needless to say, currency markets loved this speech. USD/CAD tumbled a full cent to a one-week low of 1.2735 and it was the best performing currency of the entire day, gaining even against a buoyant Australian Dollar. On Friday, however, the CAD was unable to resist in the face of the US Dollar’s late surge and USD/CAD ended the week very little changed from where it had begun at 1.2870.

For the week ahead, there’s still plenty to come on the Canadian economic data calendar. Wednesday is wholesale trade, Thursday is CPI day and on Friday it’s the monthly GDP numbers for October (just one day after NZ finally gets round to publishing Q3 GDP data). First up today, though, are numbers on international securities transactions and consumer confidence. The Canadian Dollar opens in Asia this morning at USD1.2870 with AUD/CAD at 0.9850 and NZD/CAD at 0.9005.