US stocks plunge. AUD/USD falls for a 6th straight day ahead of RBA meeting. GBP finally tumbles on politics and poor UK data.
Tuesday 6 February, 2018
Daily Currency UpdateThe Aussie Dollar had a much better day than many people had feared on Monday, rising against all the major currencies we track closely here apart from the resurgent US Dollar. AUD/USD hit a best level of 0.7950 before then losing half a cent to 0.7900 as an extremely volatile session in the US equity market saw the DJIA follow Friday’s 666-point drop with a 1,000+ point loss to erase all the gains for 2018. AUD/USD has now fallen for 6 days in a row, dropping a total of 2.2%. Context Analysis point out that in the 737 trading days since 2 April 2015, the sequence of falls has extended to 7 days only once; on 23 December 2016.
There was certainly nothing in the Australian services PMI report to offer much comfort to the AUD. The PMI registered 53.8 in January, down from 55.1 in December, to signal the slowest pace of expansion in Australian service sector output since last October. Both incoming new orders and employment increased to the weakest extents since data collection began 21 months ago. On the price front, output charges rose at the slowest rate since July 2017 amid a softer upturn in input costs. Despite the general weakness in the survey, confidence strengthened in January to a four-month high. Around two-thirds of monitored companies forecast output to rise over the next year, with positive sentiment attributed to planned expansion into foreign markets, organic business growth and new marketing initiatives.
We’ll see what the RBA has to say – if anything – about the value of the currency when it sits down to its first Board meeting of the new year next today and on Friday when it releases its latest Quarterly Statement of Monetary Policy. The Australian Dollar opens in Asia at USD0.7900, with AUD/NZD at 1.0860 and GBP/AUD1.7705.
Key MoversAfter the dramas of the last couple of weeks, the Kiwi Dollar had a relatively quiet Monday, with the entire range against the US Dollar from the low (0.7275) to high (0.7327) only slightly more than half a cent. Measured against its Australian cousin, AUD/NZD rose around 20 pips from Friday’s closing level whilst GBP/NZD was down a full cent to 1.9230.
In economic data, the ANZ Commodity Price Index – when measured in global terms – rose 0.7% m/m in January, after a 3-month slide. The lift was broad-based with meat, dairy, forestry and aluminium prices all rising; the only fall was seen in milkfat products. Because the NZD continued to squeeze higher against major trading partners in January (NZD TWI up 1.8% m/m), this pushed the NZD commodity price index down 2.9% m/m. Only aluminium prices managed to increase in local currency terms. Whether measured globally or locally, the annual rates of price growth were 4.1% and 4.8% respectively.
Today in New Zealand is the Waitangi Day national holiday which marks the signing on February 6th 1840 of a treaty whose effect was to secure British sovereignty over the islands of New Zealand, which was proclaimed on May 21st that year. Markets are closed locally, though the NZD will continue to be traded elsewhere in the Asia-Pacific region. The first RBNZ policy meeting of the year is on Thursday this week. Analysts are unanimous that there will be no change in interest rates. Nor are they generally expecting much change to the Central Bank’s forecast track for interest rates, though the markets’ view on the timing of the first hike in early 2019 is a bit later than the RBNZ has so far penciled-in. The New Zealand Dollar opens in Asia today at USD0.7275 and AUD/NZD1.0860.
The pound had a poor day on Monday as the combination of domestic political uncertainty, the resumption of formal negotiations and poor incoming economic data finally took its toll. The Asian session has been pretty quiet and in early trading in London, GBP/USD actually managed to rally to a high of 1.4145. By mid-afternoon it was down below 1.4000 and though it managed to find some support around last week’s 1.3995 low, the subsequent bounce was far from impressive. The GBP finished firmly at the bottom of our one-day performance table.
The UK service sector PMI fell from 54.2 in December to just 53.0 in January; the slowest upturn in services output for 16 months. Growth was reportedly curtailed by the loss of existing clients and lingering concerns surrounding the UK’s exit from the EU. January data pointed to a slowdown in growth of services activity across the UK, which stemmed from relatively weak gains in new work. Job creation nonetheless picked up as companies retained positive expectations surrounding the outlook. Although the latest results revealed an easing of inflationary pressures, rates of increase in both input costs and output charges remained above their long-run trends.
In a meeting at Downing Street between UK Brexit Minister David Davis and Chief EU negotiator Michel Barnier, Mr Davis claimed with a completely straight face that, “the UK government has published a great deal about what it wants. It wants a comprehensive free trade agreement, and a customs agreement, allowing trade to be as frictionless as possible. It is perfectly clear what the UK wants”. For his part, Mr Barnier said, “Without the customs union, outside the single market, barriers to trade and goods and services are unavoidable… the time has come for the UK to make a choice”. This, of course, is the very opposite of what the Prime Minister wants. Any clear choice or hard decision will immediately inflame half her Cabinet and will heighten pressure for her to quit as Prime Minister. There is no ‘unity candidate’ waiting in the wings because there is no unity on the Government side in the House of Commons. At some point, if the UK political situation continues to deteriorate, a ‘Corbyn discount’ may even have to be priced into the pound. For today, the GBP opens in Asia at USD1.3995, GBP/AUD1.7715 and GBP/NZD1.9230.
Having hit 88.27 on Thursday evening – just a tiny fraction above its Davos low – the USD index rallied to 88.85 by Friday’s close. Yesterday it extended this rally to a best level of 89.27; the highest for almost two weeks. The move came amidst continued volatility in US stock markets. The DJIA index recovered from an initial 350-point drop to be down just 30 points before lunchtime then plunged over 1000 points in the afternoon. Amidst the big swings in equities, bond yields moved lower with 10-year Treasuries between 2.83-2.85% throughout much the day before the late sell-off in stocks sent the yield down to 2.80%.
In economic news, the ISM non-manufacturing index jumped 3.9% in January from an already-high 56.6 in December. This was the 96th consecutive month of expansion in activity and if the headlines were good – the index was at its highest level since August 2005 – the details were even better. New orders jumped over 8 points to 62.7; the highest since January 2011 whilst employment surged to 61.6; the highest since records began in 1997. Overall, the majority of respondents’ comments were positive about business conditions and the economy. They also indicated that recent tax changes have had a positive impact on their respective businesses.
New Federal Reserve Bank Governor Jerome Powell was sworn in yesterday and there was no shortage of analysts pointing out comparisons between the situation today and when new Chairman Alan Greenspan took office on August 11th 1987; barely two months from the stock market crash of Black Monday, October 19th, that year. There are plenty of Mr Powell’s colleagues set to give speeches this week; Messrs, Bullard, Evans, Dudley, Kaplan and Harker will all be offering their views on the economy. It will be interesting to see if the speakers have soothing words for stock market investors or focus, instead, on the continued normalisation of US monetary policy. The USD index opens in Asia around 89.25.
The EUR managed to extend Tuesday’s gains and reached a best level of USD1.2470 by mid-afternoon Wednesday. It then abruptly turned around to lose a quick 60 pips as traders awaited the Statement from Janet Yellen’s last FOMC meeting and reflected on comments from ECB executive board member Benoit Coeure, in Dublin for the European Financial Forum. In a TV interview he said, “We have agreements that we should not target our exchange rates… we want to see exchange rates that reflect economic conditions in different places. We are not going to change it.”
Mr Coeuré said the ECB has been clear that it expects interest rates to remain at the current level, very low, for an extended period of time, and well past the horizon for asset purchasers. "Well past means well past. So that is not a discussion we are having, and we really expect interest rates to remain very low for an extended period of time." After Germany’s softer than expected CPI on Tuesday, France came to the rescue yesterday with an above-consensus 1.5% y/y increase in inflation, largely driven by an increase in service sector prices. This meant that the Eurozone aggregate numbers showed a very small drop to 1.3% which was higher than the median estimate of 1.2%. The core rate of inflation excluding food and energy rose from 0.9% to 1.0% and though it’s still some way below where the ECB would like, it is at least now moving in the right direction.
With the inflation numbers now behind us, attention at the start of this new month today will be on the manufacturing PMI’s across the Eurozone. The ‘surprise factor’ is limited by the pre-release of flash estimates in France and Germany but we’ll get fresh information on how other Eurozone countries are faring at the start of 2018. The EUR opens in Asia this morning at USD1.2415, AUD/EUR0.6485 and NZD/EUR0.5925.
Having been in a 1.2280-1.2390 range for almost a week, USD/CAD dipped yesterday back on to a 1.22 ‘big figure’ and in the North American morning extended the move down to 1.2263; a level not seen since late-September last year. After watching President Trump’s State of The Union address, the absence of anything inflammatory on trade in general or NAFTA in particular helped improve sentiment towards the CAD earlier in the European day and there was a decent rebound in monthly GDP at 08.30am local time.
Stats Canada reported that real gross domestic product increased 0.4% in November, with widespread growth across industries as 17 of 20 industrial sectors increased. Goods-producing industries rose 0.8% after declining 0.5% in October. November's gain was mainly due to increases in the manufacturing and mining, quarrying and oil and gas extraction sectors, partly as a result of restoration in production capacity. Indeed, the manufacturing sector was up 1.8% in November, the largest monthly increase since February 2014 as the majority of subsectors grew. Separate figures showed prices for products sold by Canadian manufacturers, as measured by the Industrial Product Price Index (IPPI), edged down 0.1% in December, mainly due to lower prices for energy and petroleum products and primary non-ferrous metal products.
There are more Canadian numbers to come Thursday when we get the leading indicator and the manufacturing PMI report. The Canadian Dollar opens in Asia this morning at USD/CAD1.2300, AUD/CAD0.9905 and NZD/CAD0.9050.
- AUD/NZD: 1.0800 - 1.0900 ▼
- GBP/AUD: 1.7600 - 1.7850 ▼
- AUD/USD: 0.7810 - 0.7990 ▼
- AUD/EUR: 0.6460 - 0.6520 ▼
- AUD/CAD: 0.9850 - 0.9960 ▼