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US CPI figures will be this week’s economic highlight. Watch, too Thursday’s retail sales numbers for the AUD.

By Nick Parsons

The Australian Dollar remained on a US 78 cents big figure for all but a few minutes of the first week of the new year 2018. The trend was solidly upwards, though, and from a starting point of exactly USD0.7800, it moved steadily higher to reach a best level on Friday of 0.7874; its highest since October 20th. Overall, the AUD ended the week higher against the USD, GBP and EUR but down against the NZD and CAD.

There were two main drivers of the Aussie Dollar: commodity prices and the Chinese economy. The Bloomberg Commodity Index, which tracks returns on 22 raw materials, posted an unprecedented 14 days of gains to Wednesday, closing at the highest since February last year. On Thursday it was flat and on Friday it finally closed lower; breaking a remarkable streak which had not seen a down day since the Fed hiked rates in December.

As for China, which is Australia’s number one export destination, the PMI data released on Thursday (which covers both manufacturing and services) signaled a solid upturn in Chinese business activity at the end of 2017. At 53.0, the Composite Output Index picked up from 51.6 in November to indicate the fastest rate of activity growth for a year.

There’s no doubt that the latest trade figures released on Friday were disappointing. We have not seen back-to-back monthly deficits in Australia since October 2016 and unless there is a substantial pick-up in December (which is still possible given what happened to commodity prices during the month), then net trade could be an overall drag on Q4 GDP.

For the week ahead, the most important numbers for the AUD are probably Thursday’s November retail sales. After three very poor months (-0.1% in October and 0.0% in both September and August), it should be time for some pick-up in consumer spending, especially as the latest allegedly must-have smartphones finally went on sale.

With AUD/USD now less than 2 cents away from the 2017 high, it may now need better domestic data, continued support from higher commodity prices or a further collapse of the USD if it is to build on recent gains. The AUD opens in Sydney this morning at USD0.7860 with AUD/NZD at 1.0965 and AUD/CAD0.9760.

The New Zealand Dollar is again showing some of the day-to-day volatility which characterised it in early December when it would regularly swing from being the day’s strongest currency to the very worst. Last Wednesday, it under-performed with the AUD/NZD cross moving up to a 1-month high of 1.1050 and the NZD/USD pair struggling to hold on to a US 71 cents big figure. On Thursday, however, it surged to the top of the FX pile with AUD/NZD down to 1.0985 and NZD/USD back up to 0.7160. Friday saw it extend gains against both the AUD and the USD to end the week the second-best performer after the Canadian Dollar.

As with the Australian Dollar, the lift to the Kiwi came not from domestic economic data, but the strength of the Chinese PMI numbers. Buried beyond the headlines, the report noted, “Average input costs faced by services companies in China increased at a solid and accelerated rate in December. Furthermore, the rate of inflation was the joint-quickest since February 2013 (on par with March 2017). Raw materials, transportation and salaries were all cited as having gone up in price in the latest survey period.” One country’s input costs are, of course, another country’s exports and both NZ and Australia send a large portion of their goods in to China; industrial metals for Australia, dairy and lumber for New Zealand.

There’s very little economic data scheduled for release in New Zealand this week and the currency will likely be driven by offshore events and news flow. The day-to-day volatility we have seen for almost a month now is unlikely to subside and clients may find it useful to leave firm orders in advance to benefit from any large swings in their favour, rather than using up precious intellectual capital by following choppy markets in real-time.

The Kiwi Dollar opens in Asia this morning at USD0.7170 with AUD/NZD at 1.0965.

The British Pound had a mixed week and finished just above the mid-point of its range against the US Dollar. GBP/USD began the new year at 1.3515 and amidst a general sense of optimism around the prospects for a Brexit trade deal and with many banks recommending long-GBP as their top currency trade for 2018, it raced up to a high early on Wednesday morning of 1.3608. From then on it was a rapid slide back down to 1.3500 on a combination of poor UK construction data and very strong US numbers. On Thursday, the GBP was well-bid as the UK Services PMI Business Activity Index rose in December but Friday brought a very poor - but not unexpected - set of new car registration data and the GBP finished at USD1.3565, AUD1.7265 and NZD1.8920.

Contrary to popular perceptions about the UK car manufacturing, based on memories of the chaos in the 1970’s and subsequent decline, the automotive industry is one of the economy’s key sectors. It employs more than 800,000 people, 165,000 in manufacturing. The Treasury is dependent on a healthy new car market, relying on £5.5 billion in annual revenues from vehicle excise duty and even more from VAT on sales. The latest figures showed UK car sales declined in 2017 after five years of rapid growth. Total sales for last year were 2.54m new vehicles, a decline of 5.6% on 2016. The Society of Motor Manufacturers and Traders (SMMT), the UK automotive industry’s trade body, has forecast a further 5% to 7% decline in sales in 2018.

With few top-tier UK economic statistics this week, attention will most likely be on domestic politics. Prime Minister Theresa May is said to be announcing a Cabinet re-shuffle on Monday morning and the media will be consumed with what it may or may not mean for economic policy and Brexit negotiations.

Ahead of that, the pound opens in Asia this morning at USD1.3565, AUD1.7255 and NZD1.8925.

The first week of the New Year wasn’t short of news for the US Dollar, though its index against a basket of major currencies ended only a couple of tenths lower around the mid-point of its weekly trading range. On Tuesday the Dollar index fell to a 14-week low of 91.44, Wednesday it rallied back up to 91.92 and on Thursday it was back down to 91.50 before ending the week at 91.66.

Away from the Fire and Fury of US politics, the big story of the week in financial markets was yet another record high for major equity indices. The Dow Jones Industrial Average jumped past 25,000 for the first time on Thursday morning, and by the close of business it had made the fastest run ever to a fresh 1000-point milestone. The jump from 24,000 took just 23 trading days, ahead of the 24-day spans that took the index to 11,000 in 1999 and 21,000 in March last year.

Friday’s labour market report was generally viewed as a disappointment. Non-farm payrolls rose just 148,000, compared with the 190,000 consensus estimate. The jobless rate was at 4.1% for a third month, while average hourly earnings increased by 2.5% from a year earlier, after a 2.4% gain in November that was revised downwards. The December numbers, while below forecast, brought the 2017 total to 2.06 million jobs; below 2016 but slightly more than analysts had been expecting at the start of Donald Trump’s first year as president.

After a very busy first week of 2018, all eyes now will be on Friday’s CPI to see whether or not the strength in economy and labour market is at last feeding through into higher prices. The US Dollar index opens in Asia this morning around 91.65.

The EUR had a very mixed week; at one point reaching a fresh 3-year high against the US Dollar but then slipping back on Friday to be below the mid-point of its weekly trading range. Indeed, for all the optimism around the Eurozone economy, the EUR rose only against the USD and was down against all the other major currencies we follow here. Having reached a more than 3-year high of USD1.2077 on Tuesday and slipped steadily on Wednesday, on Thursday it rallied to a fresh cycle high of 1.2082 after publication of the Eurozone aggregate and individual countries’ PMI services reports. It ended the week at USD1.2031, AUD/EUR0.6535 and NZD/EUR0.5960.

For the week ahead, the calendar is quite busy with a string of second-tier economic releases but a growing concern for currency traders might be the progress – or otherwise – of talks to form a coalition government in Germany. According to Press reports, two-thirds of Germans believe her best days are behind her, according to the Deutschland trend survey for ARD television, while satisfaction with her slipped to 52%, down from 63% in October. Ms Merkel’s husband, Joachim Sauer, retired from his professorship in October, and she is said to have thought long and hard about running for a fourth term.

Chancellor Angela Merkel has been the dominant figure on the European political scene for the last decade and uncertainty about her future is likely to weigh down on the EUR despite the solid economic news. The EUR opens in Asia this Thursday morning at USD1.2030, AUD/EUR0.6535 and NZD/EUR0.5960.

The Canadian Dollar had yet another very good week, finishing way at the top of the performance table after further gains in energy prices and a second consecutive labour market report which was considerably stronger than consensus expectations. Having briefly dropped below USD/CAD1.2500 on Thursday, the pair tumbled to 1.2372 on Friday; the lowest since September 27th.

As Sydney sweltered on its warmest day since 1939, the cold weather intensified across the US and Canada. Winter Storm Grayson hit the East Coast with heavy snow, intense winds, and record-setting low temperatures. The cold front sent temperatures below freezing in more than 92% of the Continental United States (have a look on YouTube for frozen iguanas in Florida) and on Saturday the temperature in Toronto was MINUS 21 degrees centigrade.

One month ago, it was the November employment numbers which first lit a fire under the CAD with a 79,500 monthly increase in jobs. On Friday, December’s figures showed the jobless rate fell to 5.7%, the lowest in the current data series that begins in 1976. The number of jobs rose by 78,600, smashing expectations and bringing the full-year employment gain to 422,500, the best annual increase since 2002. Since September, the Canadian economy has added 193,400 jobs; the biggest 3-month gain in over 40 years.

The yield on 2-year Canada bonds jumped 6bp to 1.77% on Friday, close to a seven-year high whilst the market-derived probability of a rate hike at the Bank of Canada’s next meeting on January 17th surged to 70%, from 40% in the week. It was a very happy New Year for the Loonie which opens in Asia this morning at USD12415, AUD/CAD0.9760 and NZD/CAD0.8895.