EUR soars as ECB Minutes signal change of language on forward guidance. USD dumps, NZD and AUD make fresh 2018 highs.
Friday 12 January, 2018
Daily Currency UpdateAUD/USD rose more than 40 pips on Thursday but could still only make it to third place on the one-day performance table behind the NZD (yet again!) and the EUR. After an early boost locally from retail sales figures (see below) which took it from USD0.7840 to 0.7875, it then traded pretty much sideways until late in the New York afternoon when it reached a fresh 14-week high of 0.7895; the best since late September.
Australian retail turnover rose 1.2% in November 2017 after a 0.5 per cent rise the previous month. This was way ahead of consensus expectations for a more modest +0.4% m/m gain. The Australian Bureau of Statistics noted, “rises were led by the household goods (4.5%) and other retailing industries (2.2%). Seasonally adjusted sales in both these industries are influenced by the release of the iPhone X and the increasing popularity of promotions in November, including Black Friday sales." There were also rises for clothing, footwear and personal accessory retailing (1.6%) and cafes, restaurants and takeaways (0.4%) Department stores fell (-1.1%) whilst food was unchanged in the month.
After news earlier this week of higher job vacancies and strong recent readings on employment, we’d wondered if it was time for consumers to dip into their pockets and actually spend some cash. They certainly did so in November and the detailed figures show they did so from their computers or smartphones: Online retail turnover contributed 5.5% to total retail turnover in original terms. This was the largest contribution from online sales in the history of the online series.
As well as the strength of local economic data, the AUD was also given a boost from higher gold prices as the USD came under more general selling pressure. The yellow metal rose another $5 per once to $1322; the highest since October 13th 2017, whilst silver, platinum and aluminium all registered gains. AUD/USD hasn’t been on a US 80 cents big figure since September 20th but given the foreign exchange market’s love of round numbers, this is the level which will be increasingly talked about now.
This morning, the AUD opens in Asia at USD0.7893 with AUD/NZD at 1.0880 and GBP/AUD1.7150.
Key MoversAt the risk of repeating ourselves once more, the New Zealand Dollar was again top of the one-day performance table on Thursday and has now occupied this spot for five of the past six trading days. This time, however, it had to share the honours with the euro. The Kiwi reached a high in the New York afternoon of USD0.7255; the highest since September 26th when it was just beginning its post-Election slide all the way down to 0.6800 in late November.
Given that the remarkable rally in the NZD has come without the support of any fresh incoming economic news (apart from Wednesday’s QV house prices), it hardly seems relevant to highlight November building permits data later this morning. But, with investors lucky or smart enough to have been long of Kiwi during the recent run, the approach of the weekend and the publication of official statistics might be the excuse for a bit of profit-taking.
Statistics New Zealand always provide a fascinating amount of detail in their economic releases and they are an endless source of information and entertainment for your author. We know that not only did October’s numbers show a 9.6% m/m drop after 2.5% decline in September, but that within the total of 2,549 new dwellings there were 1,806 houses, 445 townhouses, flats, and units, 220 retirement village units and 78 apartments. And that, Ladies and Gentlemen is nationally, not just in the capital city!
It would be a wild exaggeration to say the market is awaiting these figures with any great interest and the Kiwi Dollar opens in Asia this Friday morning at USD0.7255 with AUD/NZD at 1.0885.
The GBP had a day of two halves on Thursday; weak in the morning after the publication of the BoE Credit Conditions Survey (see below) but then rallying hard against the USD – but not the AUD, NZD or EUR - during the London afternoon. The pound hit a fresh 2018 low of 1.3461 just before the ECB lit a fire under the EUR but by the close of business in Europe it had gained more than three quarters of a cent to a high of 1.3547.
The Bank of England Quarterly Survey of Credit Conditions for Q4 2017 was perhaps more encouraging from a regulatory perspective than in terms of the economic outlook as it shows some behavioural changes on the part of both borrowers and lenders. Lenders reported that the availability of secured credit to households was unchanged in the three months to mid-December 2017 and expected no change over the next three months to mid-March 2018. The availability of unsecured credit to households was reported to have decreased again in Q4, such that reductions were reported in all four quarters of 2017. Lenders expected a significant decrease in Q1. Credit scoring criteria for granting total unsecured loan applications tightened again in Q4, and lenders expected them to tighten significantly further in Q1.
On the demand side, lenders reported that household demand for secured lending for remortgaging increased significantly in Q4. At +49, the net percentage balance suggested the largest quarter-on-quarter change in demand for this type of lending since the falls reported in early 2009. While demand for credit card lending was reported to be broadly unchanged in Q4, demand for other unsecured lending was reported to have fallen significantly. This is the first material reported fall in demand for either component of unsecured lending since the fourth quarter of 2015.
Good news, then, from a financial stability perspective, but maybe not so good in terms of driving the UK economy forward into 2018. There are no UK economic statistics on Friday and the British Pound opens in Asia this morning at USD1.3535, AUD1.7145 and NZD1.8645.
‘Fake news’ from China meant a very lively 24 hours for the US Dollar even before the ECB’s bombshell (see below) hit the foreign exchange market and sent the USD tumbling once more. On Wednesday, recall, it was slammed lower in the European morning after reported comments that officials who are reviewing China's FX holdings have recommended slowing or halting buying of US Treasuries. Yesterday morning, China’s State Administration of Foreign Exchange (SAFE) put out a statement saying, “We are also aware of the news through some media reports. We think the report might have cited wrong sources or may be fake news…”
Having recovered from 91.60 to a high in London of 92.17, the US Dollar Index against a basket of major currencies fell sharply throughout the New York session, not helped by a very soft set of US PPI figures. The Labor Department said its producer price index for final demand slipped 0.1% last month. That was the first drop in the PPI since August 2016 and followed two straight monthly increases of 0.4%. In the 12 months through December, PPI rose 2.6% after accelerating to 3.1% in November. There isn’t a perfect – or even a very good – correlation between PPI and CPI on a monthly basis. Indeed, if there was, there’d be no need to publish CPI figures separately or for markets ever to worry about them: all the fresh information value would be in the PPI!
We’ve said before that the FX market reaction is often to shoot first and ask questions later so it would have been a brave analyst who stood up in the middle of a busy dealing room to announce that these figures don’t matter. The market has passed its verdict that soft PPI means expectations for CPI on Friday should be lowered. That’s probably a wrong assumption but we’ll see tomorrow.
For this Friday morning, the US Dollar index opens in Asia this morning around 91.55.
The euro was quietly trading in the USD1.1940’s in the European morning on Thursday, caught between the usual opposing forces of very strong economic data and worries about German politics. Then, at lunchtime, the ECB released its usually bland account of the last monetary policy meeting of the Governing Council. Buried deep in the report, the ECB dropped a bombshell on to financial markets. Bear with us here please as it’s a bit technical…
“The language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in the coming year. In particular, as progress was made towards a sustained adjustment in the path of inflation, the relative importance of the forward guidance on policy rates would increase, as suggested by Mr Praet in his introduction. From this perspective, the Governing Council’s forward guidance framework would evolve naturally, in line with the established sequencing between the APP and interest rate guidance. It was suggested that the Governing Council’s communication should be adjusted gradually over time to avoid sudden and unwarranted movements in financial conditions.”
In plain English, the ECB had previously stuck with a public view that there is no need to change forward guidance for some considerable time and that a change in interest rates would not come until well after the end of QE (or the Asset Purchase Programme as it calls it). Indeed, the interest rate market was still not fully pricing an ECB rate hike until early 2019. But, if it is now saying it will need to alter its guidance, then the FX and interest rate markets jumped to the logical conclusion that this is the precursor to a shift in ECB interest rate policy. Hence, the EUR jumped from 1.1940 to a high of 1.2050 and to joint top of the one-day leader board with the NZD.
It will be interesting to see if they now follow through with the usual tactic of sending out “ECB sources” to try to row back on these new market expectations… For now, the EUR opens in Asia this morning at USD1.2035, AUD/EUR0.6555 and NZD/EUR0.6020.
The Canadian Dollar has had a very poor week so far week as investors start to question whether a lot of good news is already ‘in the price’ and whether a rate hike at next week’s BoC monetary policy meeting really is a done deal. USD/CAD touched a low of 1.2375 last Friday but surged late in the New York afternoon to a high of 1.2578 and up to 1.2585 on Thursday. The catalyst for this latest sell-off was concern over the renegotiation of the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico.
A report by the Reuters news agency on Wednesday afternoon, citing two government sources, and picked up immediately by all the Canadian newspapers and TV channels said that Canada is increasingly convinced that President Donald Trump will soon announce the United States intends to pull out of NAFTA. President Trump has long called the 1994 treaty a bad deal that hurts American workers.
According to the Reuters report, “the US negotiating team has set proposals that have alarmed their Canadian and Mexican counterparts. Among the most divisive are plans to establish rules of origin for NAFTA goods that would set minimum levels of U.S. content for autos, a sunset clause that would terminate the trade deal if it is not renegotiated every five years, and ending the so-called Chapter 19 dispute mechanism”. A White House spokesman said “there has been no change in the president’s position on NAFTA”. Officials are due to hold a sixth and penultimate round of negotiations in Montreal from January 23-28.
In a new world of media engagement and direct communications with an audience, it is increasingly difficult to separate fact from fiction, and to determine what is real and what is fake news. This story’s sources are no doubt genuine, but their motives are unknown. Was it intended merely to extract further concessions or a genuine warning about future progress? A NAFTA 6-month termination letter from President Trump could just be an elaborate luff to gain negotiation leverage. We simply don’t know.
Whatever the case, the CAD opens in Asia this morning at USD/CAD1.2520, AUD/CAD0.9885 and NZD/CAD0.9085.
- AUD/NZD: 1.0850 - 1.0930 ▼
- GBP/AUD: 1.7110 - 1.7190 ▼
- AUD/USD: 0.7805 - 0.7990 ▼
- AUD/EUR: 0.6530 - 0.6595 ▼
- AUD/CAD: 0.9830 - 0.9980 ▼