USD remains firm as 10-year yields break above 3.0%. Stock markets lower again after Tuesday plunge
Thursday 1 January, 1970
Daily Currency UpdateThe US Dollar was all-conquering on Monday, driven by a potent cocktail of higher bond yields, worries over inflation and near-record short positions in the currency. Its index against a basket of major currencies rose for a fifth consecutive day, rallying to an intra-day high of almost 90.55; its highest since January 12th. The move has been so dramatic because it was largely unanticipated and flies in the face of many (indeed most) bank strategists who have been calling the USD relentlessly lower all year. It is doubtful that many people who bought dollars yesterday did so with a smile on their face. Instead, they were more likely closing out loss-making short positions.
US 10-year bond yields have risen 16bp over the past month to a four-year high yesterday of 2.99% with 2-year yields up 22bp to 2.47%, their highest level since September 8th 2008. Fresh worries about inflation and the outlook for Fed monetary policy have been the main driver of this move and as long as equities have not crumbled in the face of tighter financial conditions, so the move up in yields has gathered pace. Nevertheless, we’d note that the S+P 500 index is now down 50 points over the last week and the DJIA has fallen 500 points over the same period. So far, 17% of the companies in the S&P 500 index have reported their numbers but this week 179 are scheduled to give earnings releases. If equities take a sudden lurch lower, then the rally in bonds and the USD might well run into some resistance.
Markit’s version of the PMI surveys is usually ignored by investors who prefer to focus on the ISM number but the ‘flash estimate’ of the PMI on Monday was studied closely for its reading on price pressures. The composite PMI index rose from 54.2 in March to 54.8, driven by accelerated growth at both manufacturing and service sector firms. Markit noted that, “Average cost burdens continued to rise in April, with the rate of input price inflation edging up slightly... Average prices charged meanwhile increased at a pace broadly in line with that seen in March, albeit one that was weaker than seen for input costs”. As well as new home sales and the Richmond Fed manufacturing index, the highlight for today will be the April consumer confidence numbers. The USD index opens this morning in North America around 90.50.
Key MoversThe Canadian Dollar couldn’t keep up with a buoyant US Dollar on Monday, but it still ended the day higher against the EUR, AUD and NZD. USD/CAD opened around 1.2760 and after a very quiet session in Asia (not unusual for the CAD) it began to move higher during the European morning, eventually reaching a high in the New York afternoon of 1.2855; its highest since April 3rd. Its price action so far today has mirrored the other majors, with an initially stronger USD than a reversal back to last night’s levels, albeit all within relatively narrow trading ranges.
Bank of Canada Governor Stephen Poloz yesterday appeared before the House of Commons Standing Committee on Finance, though this wasn’t until 3.30pm local time; only half an hour before the close of North American markets. His published Statement largely repeated what had been said after the BoC meeting last week. “After a lackluster start to 2018, we project a strong rebound in the second quarter. All told, we expect that the economy will grow by 2 percent this year, and at a rate slightly above its potential over the next three years, supported by both monetary and fiscal policies. The composition of growth should shift over the period, with a decline in the contribution from household spending and a larger contribution from business investment and exports. Inflation should remain somewhat above the 2 percent target this year, boosted by temporary factors. These factors include higher gasoline prices and increases to the minimum wage in some provinces. Their impact should naturally unwind over time, returning inflation to 2 percent in 2019. Of course, this outlook is subject to several important risks, and a number of key uncertainties continue to cloud the future, as was the case in October.”
In his subsequent Q&A session, Governor Poloz said that, “Given what our outlook is, we’ve got monetary conditions roughly where they should be, and in that context, the fact that inflation is rising above 2 (percent) for now is due to temporary factors and we can see through them.” Poloz said policymakers are watching wages, which he said will pick up as job vacancies continue to grow, and will, in turn, encourage more people to enter the workforce. “We are just now in the last six months reaching wage movements that are actually positive in real terms, above 2 percent. And so that’s a really important bridge to cross and when we get up to the 2.5-to-3-percent zone, then we have got more scope for getting faster reintegration of people back into the workforce.” The Canadian Dollar opens in North America at USD/CAD1.2845, AUD/CAD0.9765 and GBP/CAD1.7910.
During the European morning on Monday, EUR/USD began to slide and a move down through last week’s low first opened up a swift move down to 1.2230 and then down further in New York to a test of its 100-day moving at 1.2206. Overnight, the pair has been on a 1.21 ‘big figure’ for the first time since March 1st though it has bounced back a little without testing that day’s low of 1.2170. EUR/CAD is down around a quarter of a cent from last night’s closing level at 1.5685.
This morning saw the release of the revamped German ifo index. Without getting bogged down in too many technical details, the headline index now combines both services and manufacturing (though the ifo still reports separate figures for each sector) and the base year has been moved from 2005 to 2010. This does mean that the main business climate index should be less volatile going forward, reflecting the more modest cyclical swings in services, compared to manufacturing. The Press Release from the ifo today leaves no room for doubt about the economic situation. It notes, “High spirits among German businesses have evaporated. The Business Climate Index for Germany fell to 102.1 points in April from 103.3 points in March. The indicator for the current business situation fell and expectations also deteriorated. The German economy is slowing down.” By sector, the manufacturing business climate deteriorated for the third consecutive month. Assessments of the current business situation declined but nevertheless remain at a high level. Business expectations dropped to their lowest ebb since August 2016. In services, meantime, the index dropped markedly. This was primarily due to far less optimistic future business expectations.
Ahead of the ECB Council meeting in Frankfurt on Thursday this week, there are scheduled speeches in both London and Paris but they will not be about monetary policy and should have no impact on foreign exchange markets. The EUR opens in North America today at USD1.2215 and EUR/CAD1.5685.
Looking just at the GBP/USD exchange rate, it would seem the British Pound had a terrible day on Monday. In fact, it finished in second place on our one-day performance table, rising against every currency except the buoyant US Dollar. Having finished on Friday at USD1.3995 - its first time in a fortnight below 1.40 – the GBP succumbed to more general USD strength and traded as low as 1.3940; its lowest level since March 19th. Overnight in Asia and again in Europe this morning, the so-called ‘cable’ rate has hit 1.3920 but has twice subsequently rebounded to be back just above Monday evening’s closing level.
This morning’s UK economic figures didn’t directly tell us much about current economic activity but provided an interesting snapshot of government finances in the last month of the financial year. Public sector net borrowing excluding public sector banks was £1.3bn in March, below March 2017’s £2.1bn and consensus estimates of a much higher £3.0bn. This was the lowest March net borrowing since 2004 and means that public sector borrowing totaled £42.6bn in 2017/18, well below the Office for Budget Responsibility (OBR) forecast of £45.2bn March given in the Spring statement last month. It is the lowest annual net borrowing since the financial year ending March 2007 but still means that total public sector net debt is now £1,798.0bn, which was equivalent to 86.3% of gross domestic product.
As Brexit news comes back on to the radar after a very quiet month, European Commission vice-president Valdis Dombrovskis, who is responsible for financial stability, said at conference in London this morning that Brussels must have the power to approve British financial regulations after Brexit if the City wants to preserve access to EU markets. He said that future access would depend on a system of “equivalence” under which Brussels would exercise “unilateral and discretionary” powers to judge whether UK regulations met its standards. It is hardly the sort of news the free-trade members of Theresa May’s government or backbench MP’s would wish to hear. The British Pound opens in North America this morning at USD1.3950, GBP/EUR1.1420 and GBP/CAD1.7910.
Both Antipodean currencies were hit hard on Monday and finished equal bottom of our one-day performance table. AUD/USD fell both in Europe and in New York yesterday to reach a low of 0.7600; the weakest since December 13th. Overnight in Asia, the pair has fallen even further to a low just below 0.7590 before rebounding slightly to be clinging on to a US 76 cents ‘big figure’. AUD/CAD, meantime, has been down to a low of 0.9750 though the AUD is steady against the EUR and higher versus the NZD.
Australian CPI figures are just like London buses - you wait ages for one to come along then four come at once! Dealing with all of them in turn, the quarterly increases showed headline CPI up 0.4%, the weighted and trimmed means both up 0.5% and the ‘core CPI’ which the RBA targets also up 0.5%. Whilst the headline rate was unchanged in year-on-year terms at 1.9%, the core rate rose from 1.9% to 2.0%; finally hitting the lower band of the RBA’s 1-3% target range for the first time in two years. The headline rate was very slightly below consensus expectations as seasonal increases in health and utilities were offset by lower retail and international travel prices whilst rents helped lift the core rate. Looking in detail at all the component parts of the CPI, the number of items which rose 0.6% or more during the quarter (and which NAB note correlates well with core inflation) fell from just over 40% to around 35%.
The analysts at AMP capital make the very good point that, "Inflation in the private sector part of the economy excluding volatile items is running at just 1.1 percent year-on-year… This is in contrast to inflation in the government-influenced parts of the economy where inflation is much higher with utilities prices up 9.3 percent over the year, along with health costs +4.2 percent, education +2.6 per cent and alcohol and tobacco costs +7 percent." Speaking at a housing conference after the numbers were published, RBA assistant governor Christopher Kent said, there is "no particular rush" to hike rates. While the next change in interest rate was likely to be up, he said progress on inflation and unemployment was expected to be only gradual. The Australian Dollar opens in North America this morning at USD0.7605, with AUD/NZD at 1.0675 and AUD/CAD0.9770.
After its very poor week, finishing down against every one of the major currencies we follow here, the New Zealand dollar did no better on Monday, finishing equal bottom of the table with its Aussie cousin. NZD/USD moved down on to 71 cents for the first time since March 29th and in New York trading the pair extended its decline to a low around 0.7150; its weakest since January 10th. This morning in London, the Kiwi has fallen even further to USD0.7110 but unlike the other majors, has managed only a feeble rally and is once again bottom of our one-day table.
The New Zealand Herald newspaper today makes a really excellent point about the Prime Minister’s trip to Europe last week which is worth quoting in full. “As citizens of a small and isolated nation, New Zealanders often seek validation from abroad. By that measure, Prime Minister Jacinda Ardern returned triumphant this week from a trip to Europe. Ardern met with the leaders of Germany and France and got support for a free trade agreement. She was applauded in Paris when she explained that in seeking a greener future, New Zealand had stopped issuing new permits for offshore oil and gas exploration. And she was named in Time magazine as one of the world's 100 most influential people. For many New Zealanders, an image defined the trip: Ardern wearing an indigenous Maori cloak and smiling as she and her partner Clarke Gayford arrived at Britain's Buckingham Palace. But back home, Ardern faces political pressures.”
Stats NZ released their always fascinating visitor arrivals data today. These showed 3.82 million visitors arrived in New Zealand in the year to March 2018; an increase of 276,200 (8 percent) from the previous year. The statisticians said, “Two-thirds of this rise was due to more visitors from Australia, China, the United Kingdom, and the United States… Over half of all overseas visitors were holidaymakers, and over one-quarter were visiting friends and family.” March 2018 broke the record for the number of overseas visitors for a March month – overseas visitor arrivals numbered 388,300, up 44,500 from March 2017. The top source of visitor arrivals in March 2018 was Australia, at 37% of all visitor arrivals followed by China and the US with 11% and the UK with 7%. The Kiwi Dollar opens in North America at USD0.7125 and NZD/CAD0.9150.
- USD/CAD: 1.2750 - 1.2880 ▼
- EUR/USD: 1.2170 - 1.2295 ▼
- GBP/USD: 1.3895 - 1.4030 ▼
- AUD/USD: 0.7550 - 0.7660 ▼
- NZD/USD: 0.7020 - 0.7195 ▼