US Government shutdown ends after just 3 days. GBP/USD nudging 1.40, AUD can’t hold 80 US cents. All eyes on Davos.

Key Movers

The Pound was by some distance on Monday the best performer of all the major currencies we follow here. It moved back up on to a 1.38 big figure during the European morning and on to a best level in the New York afternoon of 1.3988; a fresh high for 2018 and the highest since the day after the referendum in June 2016. Overnight, it hasn’t quite broken the $1.40 level but has held on to nearly all of yesterday’s gains, other than against the NZD.


Although the IMF has raised its forecast for global growth ahead of the World Economic Forum in Davos, Switzerland, the Fund has cut its forecast for UK growth in 2019 to 1.5%, down from 1.6% previously. In response, the UK Treasury issued a short statement that, “We are building a Britain that is fit for the future by improving skills, backing innovation and investing in infrastructure to deliver a stronger economy and guarantee a better future for the next generation.”


Prime Minister Theresa May and Chancellor Philip Hammond will be at the WEF. They will be joined by several of their Cabinet colleagues - Greg Clark, Liam Fox and Matt Hancock - while Bank of England governor Mark Carney, Lord Mayor of the City of London Charles Bowman and shadow chancellor John McDonnell will also be there. A Downing Street spokesman said a bilateral meeting between Mrs May and President Trump would take place in the margins of the forum, though no further details have yet been made public.


The UK public sector borrowing figures today are rarely a market mover but at 11am the latest CBI Monthly survey is released, doubtless accompanied by its usual dire warnings about what will happen to the UK economy if it doesn’t get a transitional post-Brexit deal. On Wednesday we get the latest month unemployment and average earnings numbers and on Friday it’s the Q4 GDP numbers where consensus looks for a +0.4% q/q increase compared to the +0.5% rise which the Bank of England expected in its November Quarterly Bulletin.


The British Pound opens in London this morning at USD1.3985, AUD1.7510 and NZD1.9080.


The USD didn’t actually make a fresh low on Monday. Its index against a basket of major currencies held on to a 90 ‘big figure’ across all three time-zones even before news came of an end to the government shutdown after just 3 days. Overnight in Asia it dipped to 89.98 and opens in Europe at exactly 90.00.
Just after midday in Washington, Senate Democratic leader Chuck Schumer announced that his party would support a short-term spending measure – which funds the government through 8 February - while extending for six years a popular health insurance program, Chip, that provides coverage to 9 million children. A preliminary vote to advance the bill passed 81-18. Sixteen Democrats and two libertarian-minded Republicans voted against it. Republican House speaker Paul Ryan said that if the Senate passed the spending bill, the House would pass it. He had refused to negotiate on an immigration deal – a key sticking point – while the government remained shut down.

Of course, this only kicks the can another 2 ½ weeks down the road and if no agreement can be made on the so-called ‘Dreamers’ immigration programme, then the government will shut down again on February 9th. In the meantime, stocks have surged to yet another record high, whilst 10-year Treasury bond yields made a fresh cycle high of 2.66%. How long stocks and bond yields can continue to rise simultaneously is now the big question gripping asset managers and private investors around the world.

The US Dollar index opens in London at 90.00 whilst US 10-year bonds yield 2.64%. 


The USD didn’t actually make a fresh low on Monday. Its index against a basket of major currencies held on to a 90 ‘big figure’ across all three time-zones even before news came of an end to the government shutdown after just 3 days. Overnight in Asia it dipped to 89.98 and opens in Europe at exactly 90.00.


Just after midday in Washington, Senate Democratic leader Chuck Schumer announced that his party would support a short-term spending measure – which funds the government through 8 February - while extending for six years a popular health insurance program, Chip, that provides coverage to 9 million children. A preliminary vote to advance the bill passed 81-18. Sixteen Democrats and two libertarian-minded Republicans voted against it. Republican House speaker Paul Ryan said that if the Senate passed the spending bill, the House would pass it. He had refused to negotiate on an immigration deal – a key sticking point – while the government remained shut down.


Of course, this only kicks the can another 2 ½ weeks down the road and if no agreement can be made on the so-called ‘Dreamers’ immigration programme, then the government will shut down again on February 9th. In the meantime, stocks have surged to yet another record high, whilst 10-year Treasury bond yields made a fresh cycle high of 2.66%. How long stocks and bond yields can continue to rise simultaneously is now the big question gripping asset managers and private investors around the world.


The US Dollar index opens in London at 90.00 whilst US 10-year bonds yield 2.64%.


After some deliberately unsubtle verbal intervention from ECB Council members which held the euro down last week, the Single European Currency bounced back a little on Monday. EUR/USD rose from 1.2220 to a best level during the day of 1.2265 and has edged higher still overnight. There were no fresh economic numbers in the Eurozone yesterday, but there were a couple of sovereign credit ratings upgrades for investors to digest.


Fitch upgraded Spain’s credit rating to “A-” with a stable outlook late on Friday, citing a broad-based economic recovery and limited impact on the economy from Catalonia’s independence bid. It was Spain’s first “A” rating from one of the top three ratings agencies since the euro zone debt crisis. S&P Global Ratings, meantime, lifted Greek long-term foreign currency ratings for the first time in two years on improvements in government finances and the fiscal outlook.


Yesterday in Brussels, there was a meeting of the Eurogroup finance ministers which also extended an invitation to Mario Draghi and Benoit Coeure of the ECB. As European Commission President Jean-Claude Juncker pointedly tweeted, “Congratulations and best wishes @mariofcenteno for assuming the Presidency of the #Eurogroup. I look forward to fixing our roof while the sun is shining.”


Ahead of the ECB meeting on Thursday, we have the German ZEW survey today and then the preliminary Eurozone ‘flash’ PMI surveys on Wednesday and the ifo survey on Thursday morning.


The EUR opens in Europe this morning at USD1.2260 and GBP/EUR1.1405.


Monday was very much an up and down day in the Northern Hemisphere for the Australian Dollar. As is so often the case when there is a big uncertain geopolitical event and the currency already has some positive momentum, it can benefit simply from its geographical separation; it’s a long way away from bad things. In this case, it was the width of the Pacific Ocean which distanced the AUD from the US government shutdown and after AUD/USD printed a low locally in Sydney just above USD0.7980, it was then bid up all the way to 0.8021 before stories began to circulate of a Democratic agreement to end the US government debacle and the pair slipped back to 0.8005.


There are no major economic data releases locally this week, with only the Westpac leading index and skilled vacancies numbers on Wednesday. The first RBA meeting of the new year is still more than a fortnight away and the currency is more likely to be impacted by news from the US and Davos, Switzerland than by anything at home.


Yesterday, the AUD was notably unmoved by figures showing auction clearance rates over the weekend in Melbourne and Sydney fell to 54% and 50%, from 67% and 61% respectively this time last year. A story in today’s AFR shows that Sydney residential vacancy rates picked up to 2.2% in December, their highest level since July 2013. Rising vacancy rates are expected to put downward pressures on rent, and the latest data shows Sydney rents fell 0.3% in December, to a median weekly rent of $599 for houses and $561 for apartments.


The AUD opens in Europe this morning at USD0.7985 with GBP/AUD at 1.7510.


With the Bank of Canada meeting finally fading into the rear-view mirror, USD/CAD has eased around half a cent from Friday’s New York close to be back at 1.2455.


The sixth round of talks on renegotiating the North American Free Trade Agreement, or NAFTA, is now underway in Montreal until January 29th. In its Statement announcing the rate hike, BoC said the future of NAFTA was the most significant downside risk the economy faced. Canada sends about 75 percent of its exports to the United States.


After spending the past two weeks all across the country speaking with ordinary Canadians in town hall meetings, Prime Minister Justin Trudeau must be the only leader going to the World Economic Forum in Davos to find the temperature warmer than at home! According to his office, one of the key pieces of Trudeau’s program will be the speech he delivers on Tuesday. “It will be an opportunity to present our international priorities and to talk about the five themes of the G7 that we’ve already unveiled”.


As well as the progress of NAFTA talks and headlines from Davos, currency traders will also be waiting Thursday’s November retail sales data and Friday’s CPI numbers. As for energy prices, WTI is back up to $64.00 per barrel; still below last week’s 3-year high of $64.75 but a dollar up from Friday’s low.


The Canadian Dollar opens in London this morning at USD1.2455 and GBP/CAD1.7410.


Monday was one of the quietest days for a while for the New Zealand Dollar. From its low point in Asia of USD0.7271 it managed to add just over half a cent to 0.7326 before news came around midday Washington time of an agreement to end the US government shutdown which gave a boost to the US Dollar and asset markets and took the Kiwi down to 0.7305. Overnight, it has been back up to 0.7344; its best level at any point since the September 23rd election.


After last Friday’s disappointment of the manufacturing PMI survey, today we saw the performance of services index. The previous monthly numbers out exactly a week before Christmas showed a slight lift in November from 55.7 to 56.4 and brought to an end a 2-month spell of weaker rates of expansion around and immediately after the September election. December’s index fell back to 56.0 though the Press release from BusinessNZ was pretty upbeat saying the services sector ended the year in solid expansion territory and noting the monthly average for 2017 of 56.9 was up on the 2016 average of 56.6. They drew attention, also, to the sub-index of new orders which showed strong expansion with an average over 60 points for 2017.


The main focus for the rest of the week will be Thursday’s quarterly CPI numbers which consensus estimates will be around +0.4% q/q and 1.9% y/y. The RBNZ’s published forecast is one-tenth lower on both measures.


The Kiwi Dollar opens in Europe this morning at USD0.7325 with AUD/NZD at 1.0895 and GBP/NZD1.9080.