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US Dollar steadies after week-long drop. NZD lower after QSBO, AUD slips a little as commodity prices fall.

By Nick Parsons

It is now more than 24 hours since the Aussie Dollar made a fresh cycle high; hardly a crisis, but a sign perhaps that a more two-way market is now being seen. For the first half of January, all news was good news and AUD/USD rose to levels not seen in almost 4 months. In the Northern Hemisphere on Tuesday, there were the first tentative signs that investors might now be taking a fresh look. AUD/USD slipped to USD0.7940 in the New York morning before recovering around 25 pips into the close.

Certainly, some of the gloss has been taken off precious metals and other industrial commodities. As we write, gold is less than $10 off its recent $1343 peak but silver yesterday was down 1.3% and palladium lost just over 3%. Elsewhere, base metals were all lower with losses extended to as much as 2.9% for nickel. Copper dropped 2.2% to $7,054 on the London Metal Exchange Tuesday; the biggest drop since December 5th. The metal rose 7.2% in December, capping the biggest annual gain in eight years, but prices are down 2.6% so far in 2018.

In a week which will be dominated locally by the December employment report on Thursday, there’s still plenty of second and even third tier data to keep the statistics enthusiasts occupied. yesterday we saw monthly motor vehicle sales; the final time the Australian Bureau of Statistics publishes this series. In December there were a seasonally-adjusted 36,339 passenger vehicles registered, 42,240 SUV’s and 25,164 ‘other vehicles’ to give a total of 103,743. This was a 0.2% increase m/m and a 4.5% rise y/y.

The ABS also released figures on dwelling approvals. These showed 21,055 units were approved; an 11.7% monthly increase and a 17.1% y/y gain. This was driven largely by high-rise apartments in Victoria which jumped 38% after a 21% rise in October, while the rest of Australia was relatively flat, down 2.0% in the month following October’s 8.3% drop.

This Wednesday morning, the AUD opens in Asia at USD0.7960 with AUD/NZD at 1.0940 and GBP/AUD1.7330.

Given its recent volatility, it should come as little surprise that having been in joint top spot with the Aussie Dollar on Monday, the NZD ended Tuesday back at the bottom of the performance table. Having reached the dizzy heights of US 73 cents, it slipped back at one point almost 50 pips from Monday’s 0.7313 high. This drop came after a pretty downbeat Quarterly Survey of Business Optimism published by the New Zealand Institute of Economic Research (NZIER) which has conducted a comprehensive quarterly survey of business opinion ever since 1961.

This latest QSBO shows a sharp drop in business confidence following the General Election, with a net 11 percent of businesses expecting economic conditions to deteriorate over the first half of 2018. Business confidence had fallen in the previous quarter ahead of the General Election, and it appears uncertainty over new Government policies have made businesses even more downbeat. The decline is more modest when it comes to businesses’ own demand. A net 10 percent of businesses reported a lift in own trading activity in the December 2017 quarter, an easing from the net 13 percent in the previous quarter. As the NZIER puts it, “Businesses may be worried about the outlook for the New Zealand economy under the new Labour-led Government, but for now this is not reflected in demand in their own business”.

The decline in business confidence was broad-based across the sectors, with retailers and manufacturers particularly downbeat. However, the pessimism was not reflected in activity indicators. Domestic sales remain solid in the retail and manufacturing sector. The building sector also reported solid output and new orders. Across the regions, the pessimism was evident in the urban regions including Auckland, Wellington and Canterbury. In particular, a net 33 percent of Wellington businesses expected a worsening in economic conditions over the coming months.

The NZD opens in Asia this morning at USD0.7270 with AUD/NZD at 1.0940.

After its breathless rally since last Thursday lunchtime, the GBP paused for breath yesterday. Whether this is just a pause before the next leg higher of course remains to be seen. For now, it has failed to hold on to the USD 1.38 big figure and though it is up half a cent against a weaker NZ Dollar, it is little changed against the AUD. Having dipped to a low of USD1.3747, the GBP rallied in the New York afternoon to close around 1.3790.

We mentioned yesterday the collapse of one of the UK’s largest construction companies, Carillion, which employs around 43,000 people and has been working on a host of government-funded infrastructure projects as well as many contracts for hospitals, schools, prisons and the Army. We said, “this is a story which is sure to get bigger over the coming days”. We’re now hearing about the second-round impacts on a host of subcontractors and small business, many of whom are now unsecured creditors and likely to lose huge amounts of money. It is an added uncertainty the UK economy could do without right now.

As for the Brexit negotiations which are set to resume soon, a report in today’s Guardian newspaper claims that, according to senior diplomatic sources, “repeated representations have been made to EU officials by Oslo over their fears that an overly generous offer to the UK will fuel calls in Norway to renegotiate its ties with the bloc”. Norway makes larger financial contributions to the EU per capita than the UK and accepts free movement of people in order to have access to the single market. But it has no decision-making role in Brussels’ institutions. A senior official said: “The Norwegians are following this very closely to make sure that we are not giving the UK a much more favourable deal.”

UK CPI figures this morning showed the first fall in the annual rate since June last year. The Office for National Statistics said the fall in inflation from 3.1% to 3.0% came mainly from air fares, along with a fall in the prices of a range of recreational goods, particularly games and toys. These were partially offset by an increase in tobacco prices, reflecting duty increases that came into effect following the Autumn Budget, along with an increase in petrol and diesel price. It’s only a tiny fall in inflation, but the figures do at least give some hope that the peak in CPI might now have been seen.

The British Pound opens in Asia this morning at USD1.3790, AUD1.7330 and NZD1.8965.

Tuesday was on track to be first day in a week that the US Dollar actually managed to rally. On Monday it tumbled to an intra-day low of 89.98 - the lowest since December 19th 2014 – and though it steadied a little into the close, it was still down around half a point on the day and more than 2 points below last Thursday’s high. Yesterday, its index against a basket of major currencies held on to a 90 ‘big’ figure across all three time-zones but lost around 25 pips in the last couple of hours to end on its lows around 90.0.

As US cash equity markets played catch-up to futures after their holiday closure on Monday, so the 26,000 milestone for the DJIA was duly passed in the New York morning; just 8 trading days after it first reached 25,000. What is interesting in the price action, however, is that the index failed to hold on to 26k and from 10.40am Eastern Time in the US, it moved back on to a 25k handle and then erased all its prior gains. Moreover, the VIX measure of equity market volatility jumped to a 5-week high of 12.1 even as a research note from Morgan Stanley observed that, “over the last two weeks investors have bought the 2nd largest amount of S&P 500 futures since at least 2010, while at the same time net holdings of S&P 500 calls are the highest and the net holdings of S&P 500 puts are the lowest since at least 2010”.

There’s not much economic data scheduled today but plenty of Fed-speak, both written and verbal. The Federal Reserve releases its Beige Book summary of economic conditions whilst Evans and Mester are talking on the economy, monetary policy and communication.

Ahead of all that, the US Dollar index opens in Asia at 90.00 whilst US 10-year bonds are unchanged in yield at 2.54%.

The EUR ended Tuesday a touch higher against the USD, even though it had been lower than Monday’s close for all but the last hour of trading in New York. It touched a session low in the European afternoon of USD1.2205 before rallying around 70 pips into the close.

In an interview with the Börsen-Zeitung in Germany, ECB Governing Council member Ardo Hansson – the Head of the Central Bank of Estonia – said the ECB’s bond-buying program should be ended after September 2018 if there were no nasty surprises: "If growth and inflation are more or less in line with the projections, it would certainly be conceivable and appropriate to end the purchases after September. Why not?... The last step to zero is not a big deal anymore. You do not have to do a lot of fine-tuning. I think we can go to zero in one step without any problems.” As for the euro, the appreciation of the single currency “is not a threat to the inflation outlook up to now, and one shouldn’t overdramatize it.”

According to an interview to be published Wednesday, ECB Council Member and Bundesbank President Jens Weidmann told the Frankfurter Allgemeine Zeitung “I would hold that appropriate from today’s point of view.”

We’ve been highlighting for the last few days, the lack of any push-back from ‘ECB sources’ after the bombshell dropped last Thursday. Yesterday evening, we finally got it. According to a Reuters story, “three sources on or close to the ECB’s policy-making Governing Council said any fundamental change to the guidance was likely to come only later, with the March meeting, when policymakers get updated economic forecasts, seen as a more likely option. ‘We need more thorough analysis before making any change,’ one of the sources said”.

Ahead of today’s final Eurozone CPI figures, the EUR opens in Asia at USD1.2270, AUD/EUR0.6485 and NZD/EUR0.5925.

Having gone from being the strongest currency in the first week of the New Year 2018 to the weakest in the second week, the Canadian Dollar has been very steady over the first two days of this third week. Indeed, for the last 24 hours USD/CAD has traded sideways in a 45 pip range from just 1.2405 to 1.2550.

In a Reuters poll on Monday, just eight of 31 analysts surveyed said they expect the BoC to hold rates steady on Wednesday as it waits for inflation to pick up and to see how the next round of NAFTA negotiations later this month proceed. The median forecast in the Reuters poll is for one rate increase apiece in the third and fourth quarters, bringing the benchmark to 1.75 percent by the end of 2018. Analysts predict another hike in the first quarter of 2019. Economic growth is expected to average 2.2 percent this year, slightly higher than the 2.1 percent forecast in the previous poll in October. Expectations for 2019 were unchanged at 1.8 percent.

Over the past 25 years, Canada’s main policy rate has been on average around 25bp higher than the US rate. At the moment it’s 0.375 percentage points below, so there could be some catching up to do. The Bank of Canada estimates its so-called neutral rate - which allows the economy to run neither too hot nor too cold - at about 3%. The Federal Reserve sees its neutral rate at 2.75%, according to the median estimate in their most recent projections in December.

As the long wait to Wednesday’s meeting continues, the CAD opens in Asia this morning at USD1.2435, AUD/CAD0.9895 and NZD/CAD0.9045.