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NAB monthly survey out this morning. USD rallies ahead of President Trump’s State of the Union speech Tuesday evening NY time

By Nick Parsons

The Aussie Dollar joined in the holiday mood last Friday on Australia Day, rising to a high of USD0.8135; its best level since January 2015. But, just as everyone heads back to work and the holiday memories fade, so too the AUD has come back down to earth. It’s still pretty elevated by standards of the last year and it’s spent less than 20 of the last 250 trading days at 80 cents or above but is now down almost half a cent from Friday evening’s high.

This morning locally, we have the latest NAB monthly business survey. Last time around, the business conditions index fell 9 points to +12 index points – albeit still well above the long-run average (+5). Meanwhile, business confidence was in line with long-run average levels, at +6 (down from +9 in October), although there had been a notable downward trend in the series since around the middle of the year. NAB commented at the time that, “there was nothing in this month’s Survey that would prompt us to alter our view of the Australian economy. We remain cautiously optimistic that Australia will see temporarily above trend economic growth in coming quarters”.

The next RBA Board meeting is on Tuesday February 6th and its members will have both the NAB Survey and quarterly CPI numbers to discuss in some depth. That said, it’s probably still the case that monetary policy in 2018 will be determined more by growth in wages and household consumption than what’s happening to business conditions. The Australian Dollar opens in Asia today at USD0.8095, with AUD/NZD at 1.1065 and GBP/AUD1.7375.

It seems a long time ago that the NZD/USD hit a high around 0.7430; the first time it had been on a US 74 cents ‘big figure’ since early-August 2017. In fact, it was only last Wednesday but the Kiwi Dollar has been hit hard in the wake of the quarterly CPI numbers. It has fallen around 1¼ cents against the US Dollar: whilst the AUD/NZD cross yesterday hit 110.70; its highest level since December 5th.

The main economic numbers locally today are the December merchandise trade report. The previous month brought an unexpectedly large deficit of $1,193; the first deficit for a November month since 2005 and compared to an average November deficit of $447 over the past five years. Even if the erratic ‘aircraft import’ was stripped out, the November deficit was still $930m. Analysts locally are looking for a very small surplus in December.

Later this week, on Thursday we have the ANZ job advertising figures and at the end of the week, the always fascinating numbers on net migration and visitor arrivals. The New Zealand Dollar opens this morning in Asia at USD0.7315 and AUD/NZD1.1060.

The British Pound’s remarkable 11-day sequence in which it never tested the previous day’s low against the US Dollar was good while it lasted, but has now come to an end. At one point, GBP/USD was almost 9 cents higher than its starting point around 1.3460 on January 11th having reached a best level last Thursday around 1.4330. Yesterday it didn’t just break below Friday’s low of 1.4145, but traded all the way down to 1.4035; the first ‘down day’ for the GBP in 2½ weeks.

The first few weeks of the new year have been mercifully free of Brexit news, but it is a subject which is now set to return with a vengeance; with just under 14 months left until the UK formally exits the European Union on March 29th 2019. Though the legislation has passed the House of Commons, this week it goes for debate to the House of Lords whose constitution committee has already said that the bill as it currently stands risked “undermining legal certainty” and should be substantially changed. The chair of the committee today said yesterday, “We acknowledge the scale, challenge and unprecedented nature of the task of converting existing EU law into UK law, but as it stands, this bill is constitutionally unacceptable.”

In what will be a relatively quiet week for UK economic data, Bank of England Governor Mark Carney is due to give evidence to the House of Lords Economic Affairs Committee on Tuesday afternoon. During his Q+A session at Davos last week, he attempted to quantify the loss of GDP which resulted from the EU referendum result 18 months ago and might well come in for some tough questioning over this. The GBP opens lower in Asia this morning at USD1.4075, GBP/AUD1.7375 and GBP/NZD1.9225.

Hold the front page - the US Dollar didn’t fall yesterday! The USD index reached a low point on Thursday last week of 88.20 before rallying into the NY close and then holding around half of its gains on Friday. It opened on Monday morning in Sydney around 88.75 and at one point during the European afternoon managed to break on to an 89 ‘big figure’ for the first time in four days. Its gains we’re broad-based and saw the USD rise against every major currency to take a rare top spot on our one-day performance table.

US economic data on Monday were pretty much in line with consensus expectations. They may be a bit obscure for some of our readers, but the personal consumption and spending figures are very important to the Fed for two reasons: First, they feed directly into estimates of GDP and second, they are accompanied by so-called a PCE deflator which is the measure of inflation the Fed is targeting. Whereas the RBA in Australia and the RBNZ in New Zealand have CPI targets, the US Fed has a PCE target. The headline measure of PCE inflation was 1.7% with the core ex-food & energy number as expected at 15%.

After the US numbers were published, the Atlanta Fed updated its GDPNow model. It had overstated the Q4 numbers last week but its first estimate of Q1 2018 is a very punchy 4.2% which would more than make up for any disappointments last Friday. Its’ next update will come on Thursday after the ISM survey and official numbers on construction spending. For Tuesday, consumer confidence is the main data point but the big event of the day will be President Trump’s State of the Union address at 9pm EST. The speech is titled, “Building a safe, strong and proud America”. With US 10-year bond yields up at a fresh cycle high of 2.71%, the USD index opens in Asia today at 89.00.

EUR/USD hit a 3-year high of 1.2530 during the ECB Press Conference last Thursday before then falling one and a half cents to 1.2375 on President Trump’s comments to CNBC about wanting a stronger Dollar over the longer-term. On Friday it couldn’t regain the highs and in the early evening in New York yesterday fell to a low of 1.2345.

Speaking in Brussels on Monday, The ECB’s chief economist Peter Praet said the European Central Bank will only stop pumping cash into the euro zone economy when it is confident that inflation is heading towards its target without its extra help. Praet is one of the key supporters of the ECB’s €2.55 trillion bond-buying programme and was responding to calls by officials – notably in Germany and the Netherlands – to stop the scheme later this year. Despite these dovish remarks, German 5-year bond yields yesterday moved back into positive territory for the first time since late-2015 whilst 10-year bunds were up 6bp to 0.69%.

Today in the Eurozone brings Q4 GDP figures where consensus estimates are for a +0.6% quarterly increase. We’ll also get German CPI figures which will then see analysts firming up their forecasts for the Eurozone CPI numbers on Wednesday. The EUR opens in Asia this morning at USD1.2385, AUD/EUR0.6535 and NZD/EUR0.5910.

USD/CAD has settled in the lower part of a 1.2280-1.25 range. The CAD has been helped by continued strength in oil prices (WTI crude was back above $66 yesterday morning) and a sense that negotiations around NAFTA seemed to be proceeding well; albeit behind closed doors.

Trade ministers from Canada, Mexico and the United States ended the sixth round of NAFTA negotiations in Montreal on Monday, agreeing some progress was made but acknowledging that tough challenges still lie ahead to strike a new deal. US Trade Representative Robert Lighthizer said while some progress was made, he hoped it would accelerate and achieve major breakthroughs. "This round was a step forward, but we are progressing very slowly," he said. This was because trilateral negotiations are more "complicated and contentious" than bilateral talks. Nevertheless, in his closing remarks, Lighthizer said, “Some real headway was made here today… We're committed to moving forward."

After the relief that NAFTA talks haven’t completely collapsed despite plenty of outstanding differences between the three negotiating teams, investors can now focus on upcoming economic data releases. We get the monthly GDP and industrial production numbers on Wednesday and the manufacturing PMI survey on Thursday. The Canadian Dollar opens in Asia this morning at USD/CAD1.2325, AUD/CAD0.9980 and NZD/CAD0.9025.