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Wednesday’s CPI is the most important number of the week for the AUD

Monday 29 January, 2018

Daily Currency Update

The Aussie Dollar began last Monday just below US 80 cents, having broken above this psychological level a couple of time the previous week, but on both occasions having failed to hold there. By the end of last week, a combination of decent local economic news (the Westpac leading index) and US Treasury Secretary Mnuchin’s words on the benefits of a weaker dollar helped cement the AUD onto this new ‘big figure’. Indeed, from Wednesday afternoon local time the Aussie Dollar never looked back and it went on to reach a high on Friday of USD just below 0.8135; its best level since January 2015 when it was around three-quarters of the way through its multi-year decline from an all-time high around USD1.10 to just 70 cents. As Australians head back to work at the end of the Summer holidays and a long weekend, so too economic news flow begins to pick up. On Tuesday its the monthly NAB Business Survey but more important will be Wednesday’s quarterly CPI numbers. It is a constant source of wonder – though probably linked to internal politics around funding – that the official statisticians don’t produce monthly inflation numbers. It means the government and central bank have to rely on private sector estimates for a timely read on price pressures, then have a whole series of official numbers (headline, trimmed mean, weighted median etc) which can sometimes be difficult to interpret. Anyhow, the general consensus is that headline CPI will rise around 0.7% q/q to take the annual rate up to 2.%. The RBA doesn’t have a Board meeting in January so its meeting on Tuesday February 6th will be its first chance for two months to publicly review all the incoming data. Too great a focus on the AUD/USD exchange rate would be misleading as it’s more of a story around the US Dollar, whilst the AUD/NZD cross rate is pretty much unchanged from the day of the last RBA meeting back in early December. As for its other pairs, the AUD is around one cent firmer against both the GBP and EUR than it was when the RBA last met to decide official interest rates. Whilst any comment they make on exchange rates will be seized on by analysts, it’s probably still the case that monetary policy in 2018 will be determined more by growth in wages than by what’s happening to the external value of the Aussie Dollar. The Australian Dollar starts this new week having closed on Friday at USD0.8105, with AUD/NZD at 1.1025 and GBP/AUD1.7460.

Key Movers

The New Zealand Dollar outperformed its Aussie cousin in the first part of last week before reversing all the gains and more in the final two days. AUD/NZD started around 1.0980 but fell all the way to 1.0860 on a combination of poor Australian consumer confidence numbers and a decent performance of services index locally. On Wednesday, as the USD slide accelerated and deepened after the Mnuchin comments in Davos, 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. After a much weaker than expected set of CPI numbers, however, the NZD went into reverse. NZD/USD immediately tumbled a full cent to around 0.7325 and then on to a low Thursday around 0.7290 with AUD/NZD back up to 1.09 then 1.10. The median published estimates were for a quarterly increase in CPI of 0.4% which would have left the annual rate at 1.9%. Instead, StatsNZ reported that prices rose just 0.1% in the December 2017 quarter to take the annual rate down to 1.6% as higher petrol prices, air fares, and housing-related costs were offset by lower prices for vegetables, new cars, and a range of household goods. Analysts were quick to revise down their interest rate expectations. ANZ said the data have pushed its expectations for the Reserve Bank of New Zealand to hike the official cash rate back from November 2018 to mid-2019. ASB said, “it reinforces that there is no need for the Reserve Bank to raise interest rates anytime soon," whilst amongst the offshore banks Morgan Stanley noted “the weakness seen in 4Q inflation should see the RBNZ on-hold over 1H18, possibly with an added emphasis on the need for a weaker currency”. There’s plenty of data to be released locally this coming week. December trade figures on Tuesday should rebound from a very poor performance in November whilst on the housing market, today brings residential lending data and Friday we get the building consents numbers. On Thursday we get the ANZ job advertising figures and at the end of the week, the always fascinating numbers on net migration and visitor arrivals. It’s a holiday in Auckland today which might keep activity low but the FX market is open locally and through the rest of the Asia time zone. The New Zealand Dollar opens this Monday morning having closed in New York on Friday at USD0.7360 and AUD/NZD1.1025.
The pound was rocket-fueled on Wednesday, continuing its remarkable run which has seen GBP/USD rise for 9 consecutive days without once testing or breaking the previous day’s low. From the day the ECB dropped its bombshell about possibly changing the language around forward guidance of monetary policy on January 11th, (ironically in an attempt to smooth market volatility) GBP/USD has risen almost 7 cents. By teatime in London yesterday the pair hit 1.4227; the highest since the EU referendum on June 23rd 2016. The 230 pip (1.6%) rally was the biggest gain seen in GBP/USD since 17 January 2017, 264 trading days earlier. As Context Analysis point out, “the 3.4 cent (2.5%) rally seen in GBP/USD so far this week marks the strongest start to a week in the 83 weeks since June 2016”. The latest economic data from the Office for National Statistics showed that in the three months to November 2017, the number of people in work increased, the number of unemployed people was little changed, and the number of people aged from 16 to 64 not working and not seeking or available to work (economically inactive) decreased. There were 32.21 million people in work, 102,000 more than for the previous 3-month period and 415,000 more than for a year earlier. The unemployment rate was 4.3%, down from 4.8% a year earlier and the joint lowest since 1975, whilst average weekly earnings in nominal terms (that is, not adjusted for price inflation) increased by 2.5% including bonuses and by 2.4% excluding bonuses, compared with a year earlier. There’s a pause on the UK data calendar Thursday then 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 Asia this morning at USD1.4215, AUD1.7610 and NZD1.9140.
In these first 3½ weeks of 2018, the USD index against a basket of major currencies has now fallen over 3 per cent; its worst start to any year since 1987. Wednesday was the worst day in 10 months for the USD which fell against every major currency and most of the world’s minor ones too. It opened at a 37-month low around 89.70 before the US Trade and Treasury Secretaries unleashed their own particular brand of Alpine diplomacy at the WEF in Davos. Less than 12 hours later, the USD index was on an 88 ‘big figure’. Though Treasury Secretary Steve Mnuchin initially stuck to a familiar script that, “longer term the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency," he went on to say that, “Obviously a weaker dollar is good for us as it relates to trade and opportunities.” Speaking alongside the Treasury Secretary, Commerce Secretary Wilbur Ross only inflamed the situation by saying that "Trade wars are fought every single day… a trade war has been in place for quite a little while, the difference is the U.S. troops are now coming to the rampart." This prompted Jack Ma, head of China’s Alibaba to say, “It’s so easy to launch a trade war, but it’s so difficult to stop the disaster of this war. Don’t use trade as a weapon, use trade as a solution to solve problems”. The mood hardly improved when Ross called China’s 2025 technology strategy a “direct threat” and hinted at action against Beijing, stirring fears of a genuine trade war. President Donald Trump himself said last August that, “the dollar is getting too strong” and the currency world will be watching to see if he aligns with or distances himself from this talk of trade war when he gives his Davos speech later this week. Amidst all the uncertainty and rising volatility in global stock markets, the US Dollar index opens in Asia at 88.90.
The euro couldn’t quite match the strength of the British Pound but it had another strong day on Wednesday, rising to USD1.24 for the first time since December 2014. Whilst the ECB worries about whether EUR strength will hinder progress towards its inflation objective by weighing down on the cost of imported raw materials and forcing exporters into more cost-cutting to remain internationally competitive, it seems to be doing no harm at all to the broader Eurozone economy. Yesterday’s ‘flash’ PMI surveys were remarkably upbeat. The headline Eurozone PMI rose to 58.6 in January, up from 58.1 December and its highest since June 2006. An acceleration of service sector growth to the fastest since August 2007 was partly countered by a slowdown in manufacturing output growth, though the latter remained very buoyant. The latest three months have seen the strongest factory output increase since 2000. The Press Release noted, “The eurozone started 2018 with a further acceleration of growth to a near 12-year high, accompanied by the largest payroll gain since 2000 and the highest price pressures for nearly seven years… Activity was buoyed by a further marked and broad-based increase in new business”. In Davos, meantime, German Chancellor Angela Merkel, French President Emmanuel Macron and Italian Prime Minister Paolo Gentiloni all did the ‘vision thing’, most especially Ms Merkel who reminded delegates that 2018 marks the 100th anniversary of the end of the first world war. The political actors a century ago ‘sleepwalked’ into a crisis, Merkel said. “This generation born after the second world war will have to prove they have learned the lessons of history. That means remaining committed to multilateralism, working together to solve problems”. The EUR opens in Asia at USD1.2405, AUD/EUR0.6510 and NZD/EUR0.5985.
As the USD has come under sustained selling pressure throughout the past 24 hours, so USD/CAD has moved lower. It has broken below the immediate post-BoC low last Wednesday of 1.2375 and fell to an intra-day low of 1.2320 around lunchtime in Europe; its weakest in exactly 4 months. When quoted the ‘other’ way round, then once USD/CAD hit 1.2345 the Canadian Dollar moved on to US 81 cents for the first time since September. Just as all negotiators like to claim victory, there was no shortage of Canadians lining up to take credit for the CPATPP. International Trade Minister François-Philippe Champagne said his country got a better deal than the one the other nations wanted to sign back in November. "When we were in Danang we stood up for Canada. We said for this agreement to work for Canada we need to address specific issues," he said. "You saw that we were forceful in our position and since then we have worked to get agreements with our partners, notably on the cultural sector ... to protect, defend and promote out culture across Canada." With NAFTA representatives already embarked on sixth round of talks in Montreal, they at least know Canada and Mexico are signing free trade deals with large new markets in the Pacific Rim though more immediately important for CAD currency traders – who will be digging out their charts to see that last September’s low was USD/CAD1.2104 – are November retail sales data on Thursday and then Friday’s CPI numbers. The CAD opens in Asia this morning at USD/CAD1.2325, AUD/CAD0.9955 and NZD/CAD0.9155.

Expected Ranges

  • AUD/NZD: 1.0910 - 1.1050 ▼
  • GBP/AUD: 1.7460 - 1.7830 ▼
  • AUD/USD: 0.8020 - 0.8220 ▼
  • AUD/EUR: 0.6450 - 0.6540 ▼
  • AUD/CAD: 0.9930 - 1.0000 ▼