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EUR jumps after manufacturing PMI. AUD dipped below 80 US cents but claws its way back. USD index down near Davos lows.

By Nick Parsons

Having spent fewer than 20 days in the past year above 80 US cents, AUD/USD was always going to require a much weaker US Dollar or stronger domestic economic data to sustain its recent climb higher. It hasn’t really had either of those and at one point on Thursday in the Northern Hemisphere, the AUD traded down on to a 79 cents handle for the first time in over a week. As has been the case with many currencies recently, though, just as they seem technically poised to break lower, there’s a sharp bounce higher. 40 pips isn’t a massive move, but it was enough to return the AUD on to 80 cents as investors nervously await Friday’s US employment report.

The first day of the month brings manufacturing PMI surveys around the world and Australia’s version – which is co-produced by Markit and CBA – was the first of 29 which were released on Thursday. The headline PMI fell from 57.1 in December to a four-month low of 55.4 in January. The Press Release seemed far more upbeat than the actual numbers and noted, “Growth of Australia’s manufacturing sector was sustained during January, underpinned by strong expansions in both output and new orders. In turn, greater inflows of new business encouraged firms to raise employment… In line with greater production requirements, firms hired additional staff. Although the rate of job creation eased slightly, it remained relatively marked. Payroll numbers have expanded in each month since September 2016”.

The RBA’s commodity price index increased by 7.1% in SDR terms in January, after increasing by 4.5% in December. Coking coal and iron ore prices led the increase, whilst the rural and base metals sub-indices also increased in the month. In Australian dollar terms, the index increased by 4.6% in January. Commodity prices were certainly one of the factors which helped the AUD rise last month, along with lower volatility across asset classes. We’ve already seen a big jump in volatility over the past few days and if commodities don’t sustain recent rises, then the outlook for the AUD will look much less positive. The Australian Dollar opens in Asia today at USD0.8035, with AUD/NZD at 1.0870 and GBP/AUD1.7750.

The New Zealand Dollar has done pretty well after its mauling a week ago. For a few hours around lunchtime in Europe on Wednesday, NZD/USD was back on a 74 cents ‘big figure’ though it couldn’t sustain this level post-Fed and has subsequently eased back in to the high 73’s having at one point in Europe been as low as USD0.7340. Against its Aussie cousin, however, the Kiwi has performed very impressively. The AUD/NZD cross on Monday hit a 7-week high of 110.70 but is now down at 1.0875; back exactly to where it was before the soft NZ CPI figures last Wednesday evening.

We wrote on Wednesday how the New Zealand Government had got a boost from credit ratings agency Standard and Poor’s, which reaffirmed its existing sovereign rating for New Zealand, saying, "The economy is wealthy and resilient, reflecting decades of structural reforms… Our ratings reflect solid fiscal performance and our expectation that higher government spending will not materially weaken the country's fiscal profile." Yesterday, investors seemed particularly impressed by an opinion poll showing support for the governing Labour Party surged to its highest level in more than a decade and approval ratings jumped for pregnant Prime Minister Jacinda Ardern. Support for Labour has surged 5.4 points since September’s fiercely contested election to 42.3 percent, its highest since it last held government in 2007. The number of respondents naming Ardern as their preferred Prime Minister also jumped 8.3 points to 38 percent since the last poll in September, overtaking National Party leader Bill English on 26 percent.

Today will be a day with plenty of economic numbers locally. We’ll have consumer confidence, building permits and the always-fascinating net migration statistics for December. Ahead of all this, the New Zealand Dollar opens in Asia at USD0.7390 and AUD/NZD1.0870.

The British Pound continues to experience relatively wide daily trading ranges. As recently as Tuesday morning, GBP/USD was below 1.4000 before then jumping almost 2 cents. After a half cent drop post-Fed, in early European trading on Thursday it added nearly another cent to a high of 1.4265; its best level since the day of the ECB meeting last week.

There has been little or nothing on the UK data calendar which is obviously GBP-positive. The manufacturing PMI survey saw a further easing in the rate of expansion of the sector. At 55.3 in January, the index was down further from November’s 51-month high and at its lowest level since June last year. The Press Release noted, “The UK manufacturing sector reported an unwelcome combination of slower growth and rising prices at the start of 2018. Encouragingly, despite the slowdown, the latest survey is consistent with production rising at a solid quarterly rate of around 0.6% in January, with jobs also being added at a faster pace. However, output growth has slowed sharply since last November’s high, and the more forward-looking new orders index has slipped to a seven-month low. The trend in demand will need to strengthen in the near-term to prevent further growth momentum being lost in the coming months”.

As for politics, the Prime Minister spoke with UK journalists on her trip to China and said that EU citizens who arrive during the post-Brexit transition period must not have the same rights as those who came before. We wrote in our North American commentary on Thursday that, “It sounds like another row with the EU is brewing…” Sure enough, within a few hours, the European Parliament’s Brexit negotiator, Guy Verhofstadt, replied that, “The maintenance of EU citizens’ rights during the transition is not negotiable… We will not accept that there are two sets of rights for EU citizens. For the transition to work, it must mean a continuation of the existing acquis [EU law] with no exceptions.” The row looks more likely to escalate than to go away though for the moment hasn’t noticeably dampened enthusiasm for the GBP. The Pound opens in Asia this morning at USD1.4260, GBP/AUD1.7745 and GBP/NZD1.9290.

Like a prize fighter on the ropes, the US Dollar keeps getting knocked down each time it staggers to its feet. On Wednesday, its index against a basket of major currencies opened at 88.90 but was then pushed steadily down to a low point in the European afternoon of 88.52. After the latest FOMC Statement – which reads very slightly more hawkish than the December version – it climbed back Thursday morning to 88.98 before once again being punched lower to 88.40.

Whatever the many reasons analysts advance for the US Dollar’s decline – and many of them would sound more convincing if they had been made before it happened rather than an ex-post rationalisation – the performance of the US economy certainly isn’t one of them. The number of Americans filing for unemployment benefits unexpectedly fell last week, pointing to a tightening labor market and strengthening economy at the start of the year. Initial claims for state unemployment benefits slipped 1,000 to a seasonally adjusted 230,000 for the week ended January 27th. This was the 152nd straight week that claims remained below the 300,000 threshold; the longest such stretch since 1970. Separate numbers showed construction output rose almost twice as fast as expected with a +0.7% m/m gain whilst the January ISM manufacturing index dipped very slightly to a higher than expected 59.1 from a revised 59.3. This marked the 105th straight month of growth for the overall economy.

After this latest batch of economic data, the Atlanta Fed published updated estimates of its Q1 GDP forecast. Its first estimate was an already-punchy 4.2% but this has now been pushed up to 5.4%; the highest since Q1 2012. Of course, the model is not infallible and there is a well-established pattern of high numbers at the beginning of a quarter which then get revised progressively lower. As a starting point, though, it’s a pretty strong place to be. US 10-year bond yields are another 2bp to a recent high of 2.77% but’s of little help to the USD, whose index opens in Asia today at 88.40; just two-tenths above the Davos low last week.

The EUR dipped once more below USD1.24 at the end of yesterday’s Asian session but since then it’s been on an upward tear; rising a full cent off the low to be within touching distance of the 3-year high of 1.2530 reached during the ECB Press Conference last week. Indeed, the EUR finished at the top of our one-day performance table, rising against all the major currencies we track closely here.

In economic news, final Eurozone Manufacturing PMI printed at 59.6 in January, down from December’s record high of 60.6 and identical to the earlier flash estimate. The PMI has signaled expansion in each of the past 55 months. Markit’s Press Release noted, “The eurozone manufacturing sector made a strong start to 2018. Although January saw rates of growth in output and new orders ease from near-record highs at the end of last year, they remained among the best seen since the survey began in 1997.” Companies indicated that they were experiencing solid inflows of new business from both the domestic and export markets during January whilst manufacturing employment rose for the 41st successive month in January. The rate of jobs growth remained substantial and close to the survey record highs achieved in November and December of last year.

Given the first working day of the new month fell on a Thursday, we won’t get to see the service sector PMI numbers until Monday next week. For today, the EUR opens in Asia this morning at USD1.2495, AUD/EUR0.6430 and NZD/EUR0.5915.

The Canadian Dollar has held firmly on to a US 81 cents big figure since early Tuesday morning. In USD/CAD terms, this equates to 1.2345. On Wednesday, this pair extended the move down to 1.2263; a level not seen since late-September last year and Thursday it nearly matched this with a low print of 1.2270. It would have to fall all the way to 1.2195 for the CAD to hit 82 cents and during the whole of the last year, USD/CAD spent only a couple of weeks in September below that level.

The Canadian Manufacturing PMI picked up to 55.9 in January from 54.7 in December, to remain well above the 50.0 no-change threshold. Manufacturers reported a strong start to 2018, underpinned by faster rises in output volumes, new business intakes and staff recruitment. There were also signs that the resurgence in production schedules would continue in the months ahead, with incomplete workloads accumulating at the fastest pace since the survey began in October 2010. Improved demand conditions and sharp input cost inflation meanwhile led to the largest increase in factory gate prices for almost seven years. An incredibly upbeat Press Release noted, “The manufacturing sector is beginning to show signs of firing on all cylinders, as shown by the broad-based improvement in operating conditions during January… Canada’s manufacturing sector has now seen resurgent new business flows for three months running, underpinned by greater sales at home and abroad. Well balanced demand growth and an ongoing improvement in global economic conditions should help manufacturers sustain a strong rate of expansion in the coming months”.

There are no more Canadian numbers to come this week, which is probably a good thing as there don’t seem to be any superlatives left after the PMI report! The Canadian Dollar opens in Asia this morning at USD/CAD1.2275, AUD/CAD0.9860 and NZD/CAD0.9070.