Home Daily Commentaries USD still on the defensive despite higher stocks and bond yields. Australia’s official statisticians have some festive fun.

USD still on the defensive despite higher stocks and bond yields. Australia’s official statisticians have some festive fun.

Daily Currency Update

The Dollar had a roller-coaster day on Tuesday. Having opened in Sydney at 93.25, its USD’s index against a basket of major currencies fell to 93.07 but rallied in the European afternoon to 93.20; not quite reversing all the decline but with a steadier tone nonetheless. Its’ rally came as US bond yields rose above their recent trading ranges with 10-year Treasuries up at 2.45% from 2.38% on Monday. From 4pm London time, however, and even as US bond yields sustained their earlier climb, the USD turned lower once more and closed with its index at the day’s low of 93.04. Overnight in Asia and in the European morning, the USD has been stuck around this level, unable to gather much support either from higher bond yields or a rallying stock market.
The US Senate has now approved the $1.5 trillion tax bill, which includes permanent tax breaks for corporations and temporary tax cuts for individuals, by a final vote of 51-48. Once enacted, the legislation will represent the most drastic change to the US tax code since 1986. The bill lowers the top individual tax rate from 39.6% to 37% and slashes the corporate tax rate to 21%, a dramatic fall from its current rate of 35%. Speaking at a Press Conference after the vote, Senate majority leader Mitch McConnell hit back against criticism that the tax overhaul was unpopular among the public. “If we can’t sell this to the American people, we ought to go into another line of work.” Let’s see if this line comes back to haunt him at some point in the future.
For this Wednesday morning, the US Dollar index opens in Europe at 93.05. The only item on today’s US economic calendar is existing home sales which are expected to have risen 0.9% m/m in November to an annualized pace of 5.52m.

Key Movers

Price action in the Canadian Dollar over the past 48 hours is worth examining as a case study in what can happen in foreign exchange markets at this time of year. The CAD spent all of Monday trapped in a 30 pip range from USD1.2848 to 1.2878 and an overnight trading range in Asia on Tuesday which saw it stuck between just 1.2860-1.2873. By noon in London yesterday the pair stood at 1.2860 but barely 2 hours later it was at 1.2891 and on its way to a high in New York of 1.2912; its highest in almost 5 months.
We’d love to be able to explain what was behind the move but, as with the US Dollar on Monday, there was little or no fundamental driver. It’s certainly likely that ‘stop-loss’ orders were triggered above the end-November high of 1.2900 and the November 1st high of 1.2905 but the pair then gave back 40 pips of its rapid gain equally quickly. At this time of year as markets become increasingly less liquid, such seemingly random price action is an ever-present risk and careful consideration should be given when placing orders either to exit or enter currency transactions. Bear in mind, too, that the price spike came in what was the ‘home market’ for USD/CAD. Imagine what can happen in overseas time zones…
There’s still plenty to come on the Canadian economic data calendar this week. Today is wholesale trade, Thursday is CPI and retail sales and on Friday it’s the monthly GDP numbers for October. The Canadian Dollar opens in North America this morning at USD1.2860 with GBP/CAD at 1.7230.

The Canadian Dollar opens in North America this morning at USD/CAD1.2860 with GBP/CAD at 1.7200.

The euro had a very good day on Tuesday, rising back on to a US 1.18 big figure at the end of the Sydney session and staying on it for pretty much the whole day. It hit a best level of 1.1829 in the European time zone; the same as Monday’s high. By the end of the day, however, and as the US Dollar weakened, it went on to hit a high of 1.1846 and finished as the strongest of the major currencies. In European trade this morning it has very marginally extended yesterday’s gains, reaching a best of USD1.1852 in very quiet conditions.
A look at pricing in the FX options market shows just how quiet things are. As Bloomberg notes, in the run-up to the holiday season, and especially in the days around Christmas, liquidity in the market drops considerably, increasing the risk that a currency faces abrupt moves even on small volumes. “One-week implied volatility in the euro-dollar dropped for an eighth day on Tuesday and traded as low as 4.73 percent, a level unseen since August 2014. A close below 5 percent would mark a record low for this time of year since the euro came into circulation.
One-week structures expire on December 27 and thus cover a series of major US economic data including gross domestic product, durable goods, income and spending numbers, and the Federal Reserve’s preferred gauge of inflation PCE. Clearly, the market is not pricing any directional risk from these indicators or, indeed, any unforseen exogenous shock.
The EUR opens in North America this morning at USD1.1845 and CAD1.5225.

The pound had a day of two halves Tuesday. Twice it failed just short of 1.34 but having sold off during the afternoon to just 1.3337 – and at one point looking likely to be the weakest currency on the day - it rebounded quite smartly in the New York session to end little changed on the day. The Asian session and European morning have been fairly quiet and overall the pound is contained within some pretty familiar trading ranges.
The IMF today released its annual report on the UK economy, with its Managing Director Christine Lagarde in London for a Press Conference. The IMF had been criticised 18 months ago for taking sides with former Chancellor George Osborne in the run-up to the EU referendum. Defending its forecasts, Ms Lagarde said today that, “the Brexit referendum result and the decision to invoke Article 50 are already having an impact on the economy even though the UK is not planning to leave the EU until 2019.
She added, “We feared that if Brexit was decided upon, it would most likely entail a depreciation of sterling, an increase in inflation, a squeezing in wages and a slowdown and a reduction of investment. What we are seeing is that that narrative we identified as a potential risk is being rolled out as we speak. It’s not experts talking, it’s the economy saying that. Our forecast is 1.6 per cent GDP growth this year and 1.5 next year, which relative to the upward revisions we are advocating for other advanced economies is a bit of a disappointment.”
The IMF’s statement concluded, “Despite a strong recovery in global growth and supportive macroeconomic policies, the impact of the decision to exit the European Union has weighed on private domestic demand. Business investment growth has been lower than would be expected in the context of strong global growth and high levels of capacity utilization, owing to heightened uncertainty about economic prospects.”

The Pound opens in North America this morning at USD1.3395 and EUR1.1310 with GBP/CAD at 1.7225.

The Australian Dollar has risen slightly in Asia overnight and in Europe this morning but hasn’t quite reach Tuesday’s high of USD0.7679 or last Friday’s 0.7688 peak. The best level seen so far today is 0.7675.
Overnight, there have been no ‘traditional’ economic data releases though the Australian Bureau of Statistics has had an outbreak of festive fun. In a Press Release entitled “Seasonally adjusted greetings from the ABS”, it looks at some of the numbers around Christmas. It noted “Many people are travelling at this time of year and in 2016, 47,800 Australians left for an overseas trip on Christmas Day itself”. ABS data shows the most popular overseas short-term travel destinations for Australians were New Zealand, the USA and Indonesia. In 2016-17, Australians spent on average $818 per domestic trip (with at least one overnight stay), and around $115 on a domestic day trip. International visitors, meanwhile, spent on average $4,347 per trip to Australia.
As for Christmas, the Household Expenditure Survey shows that on average Australians spent $202 a year on toys and $27 per year on Christmas decorations. The normally dry statisticians said, “Santa will be busy this Christmas visiting the 2 million Australian families with children under the age of 12. The 2016 Census shows that most children live in New South Wales (1.2 million), Victoria (947,408) and Queensland (795,908).”
We’ll leave the last word on population to the ABS without further comment: “if you are celebrating your birthday on Christmas Day you are in rare company as the last 10 years of data shows it is the second least common birthday, after February 29. However, the Christmas and New Year holidays are the most likely time for babies to be conceived.
The AUD opens in North America this morning at USD0.7670 with AUD/NZD at 1.0995 and AUD/CAD0.9866.

Overnight movements haven’t been large anywhere in the FX universe, though the New Zealand Dollar is, only very marginally, the weakest of the major currencies we track here.

The monthly trade deficit in November was a much bigger than expected -$1.2bn. This compares with consensus expectations of a much smaller -$350m deficit and an average of $447m for the previous five November months. The Kiwi statisticians always offer plenty of fascinating detail on their numbers. They note within an overall 27% rise in imports to $5.8bn, the value of car imports reached a new high of $513m. There were 26,700 passenger motor cars imported in November, at a higher average value than earlier in the year. Of those, 140 were new electric cars and around 170 were used electric cars.
On the other side of the trade ledger, exports rose 20% to $4.6bn, a new high for a November month. This was also the largest percentage rise in export values since January 2014, which also featured high dairy prices. Milk powder, butter, and cheese led the rise in exports this month, with butter prices up 82%. In November, China bought the most butter from New Zealand ($52 million worth) followed by Iran ($28 million worth).
NZD/USD opens in North America this morning at 0.6980 with NZD/CAD at 0.8980. In a busy week for New Zealand economic data, tomorrow brings the trade balance and finally on Thursday we’ll get Q3 GDP.

Expected Ranges

  • USD/CAD: 1.2840 - 1.2905 ▼
  • EUR/USD: 1.1780 - 1.1850 ▼
  • GBP/USD: 1.3315 - 1.3410 ▼
  • AUD/USD: 0.7645 - 0.7695 ▼
  • NZD/USD: 0.6925 - 0.7030 ▼