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Roller-coaster day for the USD as bond yields rise but stocks fall. EUR was best performer on Tuesday. AUD and NZD hold on to Monday’s gains.

By Nick Parsons

Tuesday really was an up and down day. Everything was going well for the Australian Dollar until late in the London morning. It had risen to a best level of USD0.7680 and looked on track to test last Friday’s high of 0.7688 before succumbing to a modest USD rally which saw the dollar index rise around a quarter point off its low. By the end of the European day, AUD/USD had fallen 30 pips to 0.7648 but in the last 2 hours of New York trading, the Aussie had recovered to 0.7665; almost exactly where it had begun 24 hours earlier.

The Minutes of the RBA’s December 5th Board meeting showed the Bank was generally upbeat on the labour market, noting conditions had remained positive and had been stronger than expected over the previous year. Employment had increased a little in October and growth over the previous year had been well above average. Full-time employment had risen sharply and was growing at around its fastest pace in a decade. The unemployment rate had edged lower to be 5.4 per cent in October, which was its lowest level since 2013, and unemployment rates had been on a downward trend in most states. Forward-looking indicators of labour demand suggested employment growth would be somewhat above average over the next few quarters.

For all the strength in employment, however, “growth in consumption was expected to have slowed in the September quarter and the outlook for household consumption continued to be a significant risk, given that household incomes were growing slowly and debt levels were high.” The RBA, it is clear, will not be raising rates until wages pick up: “How far and when stronger conditions in the economy and labour market might feed through into higher wage growth and inflation remained important considerations shaping the outlook.”

The AUD opens in Asia this morning at USD0.7660 with AUD/NZD at 1.0960 and GBP/AUD1.7465.

Like its Aussie cousin, the New Zealand dollar enjoyed a good morning in Europe, seemingly on track to retest the multiple highs of the last few days at USD0.7025 and 0.7027 and 0.7028. At noon in London it reached a best level of 0.7015 before turning sharply lower as the US Dollar rallied. By the close of business in Europe, NZD/USD was down at 0.6982 but in the last couple of hours of New York trading it recovered just a little to close at 0.6990.

Yesterday we saw ANZ’s business confidence survey. It was this which did the greatest damage to the Kiwi Dollar a month ago when the headline measure plunged 29 points to an 8-year low of -39. Unfortunately, there was no discernible pick-up in December: a net 37.8% of respondents expected the economy to deteriorate over the year ahead. Digging into the details of the survey reveals one bright spot. Business expectations for their own firms to grow in the next year picked up to a net 15.6% of respondents, from 6.5% in November. The historical average for this series is +28. As the ANZ noted in their Press release, “The economy is doing the hard yards at the moment. Positive forces remain, but the turn in housing, flattening off in net migration and lack of capacity in the construction sector are all dampening near-term growth."

Today there are effectively two sets of trade figures to analyse: the monthly merchandise trade numbers November and then the Q3 balance of payments data. The consensus (such as it is) appears to be for a monthly deficit around -$350m after -$871m the previous month. This would improve the rolling 12m deficit (a favoured measure in NZ if not elsewhere around the world) to around -$2700m from -$2986. For the quarterly snapshot, it is expected that the current account deficit as a percentage of GDP will drop from 2.8% in Q2 to 2.6% in Q3.

NZD/USD opens in Asia this morning at 0.6990 with AUD/NZD at 1.0960.

After Monday’s very strong performance, the GBP ended broadly unchanged on Tuesday. At one point towards the middle of the European afternoon it was firmly at the bottom of the one day performance chart but a late session rally left it net little changed on the day.

To recap for our Antipodean readers, Theresa May said on Monday that, “the guidelines published by President Tusk on Friday point to the shared desire of the EU and the UK to make rapid progress on an implementation period, with formal talks beginning very soon… We will now work with our European partners with ambition and creativity to develop the details of a partnership that I firmly believe will be in the best interests of both the UK and the EU”.

The phrase “very soon” was not defined and – as we pointed out here - there appears no desire on the EU side to work with creativity. Within just a few hours, the European Union’s chief Brexit negotiator, Michel Barnier, said Britain cannot have a special deal for the City of London. “There is no place for financial services. There is not a single trade agreement that is open to financial services. It doesn’t exist.” He said the outcome was a consequence of “the red lines that the British have chosen themselves. In leaving the single market, they lose the financial services passport.”

With no economic data scheduled for release in the UK today, the pound opens in Asia at USD1.3380 with GBP/AUD at 1.7460 and GBP/NZD at 1.9140.

The Dollar had a roller-coaster day on Tuesday after Monday’s difficult to explain drop. We reminded readers seeking to understand its decline of the wise words of Janet Yellen that “correlation does not imply causality”. It was certainly interesting to do a Google search on Monday evening and look at the multiple versions of “US Dollar drops as….” Your author was forced to spend 5 years of secondary education learning Latin (in the perhaps forlorn belief that this would improve his adult vocabulary) and is often reminded of the phrase “post hoc ergo propter hoc”. For the non-classicists, this translates as “after this therefore because of it” and is a trap into which many financial journalists frequently fall.

Having opened in Sydney at 93.25 yesterday, the USD’s index against a basket of major currencies fell to 93.07 but rallied in the European afternoon to 93.20; not quite reversing all the decline but with a steadier tone nonetheless. Its’ rally came as US bond yields rose above their recent trading ranges with 10-year Treasuries up at 2.45% from 2.38% on Monday.

From 4pm London time, however, and even as US bond yields sustained their earlier climb, the USD turned lower once more. A weaker equity market didn’t help investor sentiment but as we go to print the House of Representatives has just passed the tax reform bill 227-203, sending it to the Senate for approval.

The US Dollar index opens this morning in Asia at 93.0. There’s not much on Wednesday’s US economic calendar though existing home sales are expected to have risen 0.9% m/m to an annualized pace of 5.52m.

The euro had a very good day on Tuesday, rising back on to a US 1.18 big figure at the end of the Sydney session and staying on it for pretty much the whole day It hit a best level of 1.1829 in the European time zone; the same as Monday’s high. By the end of the day, however, and as the US Dollar weakened, it went on to hit a high of 1.1846 and finished as the strongest of the major currencies.

Having stubbornly refused to take any encouragement from last week’s crop of positive data, the release of the German ifo Survey this time did provide some support. According to the ifo Press release which was unusually full of seasonal cheer, “Sentiment among German businesses is excellent ahead of Christmas, but no longer quite as euphoric as last month. The ifo Business Climate Index edged downwards to 117.2 points in December from 117.6 (Seasonally adjusted) points in November. This was due to less optimistic business expectations. Assessments of the current business situation, by contrast, were more positive this month. German businesses are full of festive spirits.

In manufacturing the index dipped down from its record high. Manufacturers are no longer quite as optimistic about the months ahead. However, they are more positive about their current business situation, primarily due to an upturn in orders. Both indices close the year way above their long-term average. Manufacturers expect prices to continue to increase”.

The EUR opens in Asia this morning at USD1.1845, AUD/EUR0.6470 and NZD/EUR0.5900. German PPI and Eurozone PPI data due on Wednesday are very unlikely to be market moving data points.

The Canadian Dollar is not heavily traded in offshore markets, but price movements in Asia and Europe overnight became progressively smaller before a big break to the upside during North American hours. The CAD spent all of Monday trapped in a range from USD1.2848 to 1.2878 and an overnight trading range in Asia Tuesday which saw USD/CAD stuck between just 1.2860-1.2873. By noon in London yesterday the pair stood at 1.2860 but barely 2 hours later it was at 1.2891 and on its way to a high in New York of 1.2912; its highest in almost 5 months.

We’d love to be able to explain what was behind the move but, as with the US Dollar on Tuesday, there was little or no fundamental driver. It’s certainly likely that ‘stop-loss’ orders were triggered above the end-November high of 1.2900 and the November 1st high of 1.2905 but the pair then gave back 35 pips of its rapid gain equally quickly. At this time of year as markets become increasingly less liquid, such seemingly random price action is an ever-present risk and careful consideration should be given when placing orders either to exit or enter currency transactions. Bear in mind, too, that the price spike came in what was the ‘home market’ for USD/CAD. Imagine what can happen in overseas time zones…

The Canadian Dollar opens in Asia this morning at USD1.2885 with AUD/CAD at 0.9870 and NZD/CAD at 0.9005.