CAD seems comfortable on US 80 cents despite 10% weekly fall in oil price

Key Movers

After the previous Friday’s spookily prescient 666-point sign of things to come for the Dow Jones Industrial Average, there were two daily 1,000-point declines last week. Friday looked set for another huge drop before the index then bounced sharply off its 200-day moving average to end the day almost 900 points off its midday low. The US Dollar generally does well in times of equity market turmoil and last week was no exception. From its opening level of 88.90 last Monday morning in Sydney, the USD index against a basket of major currencies rose steadily to a high on Thursday of 90.25; its best level since before Treasury Secretary Mnuchin’s comments in Davos two weeks’ earlier. Overnight in Asia and Europe, as the equity market has edged cautiously higher, so the USD has given back around two-tenths of a point to 89.90.

None of the scheduled Fed speakers last week seemed at all concerned by the stock market. Federal Reserve Bank of New York President William Dudley said recent declines weren’t that big and don’t yet change his outlook for the U.S. economy. “This wasn’t that big a bump in the equity market… The stock market had a remarkable rise over a very long time with extremely low volatility…. My outlook hasn’t changed just because the stock market’s a little bit lower than it was a few days ago. It’s still up sharply from where it was a year ago. Having a bump up like this has virtually no consequence on my view of the economic outlook”. This view was largely echoed by Kaplan, Harker, Evans and others. Indeed, there are few signs from the front end of the US money market curve that a 25bp rate hike at the March FOMC meeting is in any more doubt. Two weeks ago, with the stock market at a record high, the market-derived probability of a hike was 76%. Today, it has edged down only very marginally to 74.7%.

To the extent that the 2.9% increase in average hourly earnings was the ‘trigger’ for the stock market sell-off, investors will now be acutely sensitive to any inflation data. On Tuesday we have the NFIB small business survey which contains a question on earnings. Last month’s Press Release breathlessly enthused that, “2017 was the most remarkable year in the 45-year history of the NFIB Optimism Index… With a massive tax cut this year, accompanied by significant regulatory relief, we expect very strong growth, millions more jobs, and higher pay for Americans.” NFIB Chief Economist Bill Dunkelberg said, “There’s a critical shortage of qualified workers and it’s becoming a real cost driver for small businesses… They are raising compensation for workers in order to attract and keep good employees, but that’s a positive indicator for the overall economy.” It may not be so good for the stock market which will be on edge, also, ahead of Wednesday’s CPI numbers. The USD index opens in North America at 89.90 with 10-year US bond yields at 2.88%.


The euro had a remarkably calm week stuck between the opposing forces of stock market turmoil which was good for the USD and further strong economic data in the Eurozone. Indeed, since last Wednesday lunchtime, EUR/USD has remained on a 1.22 ‘big figure’ with the volatility elsewhere in global asset markets completely passing it by. Overnight in Asia and Europe, the pair has edged modestly higher in line with a recovery in stock index futures but with no economic data scheduled for release today, the focus away from equities might still be on political developments in Germany.


Whilst there is relief that Germany has avoided a fresh, destabilizing Federal Election, there is concern amongst analysts and investors that Angela Merkel might have conceded too much to the left-wing SPD. Reports suggest that the SPD will be handed the Finance, Labour and Foreign Ministries - a major victory for the Social Democrats - while CSU leader Horst Seehofer, one of the most conservative figures on Merkel's side, would become Interior Minister. Over the weekend, a cartoon in Der Spiegel magazine showed Angela Merkel naked while SPD politicians run away with her clothes, whilst Die Zeit had a cartoon of German eagle crash landing on its head… In a prime-time ZDF television interview on Sunday, Ms. Merkel defiantly brushed aside any suggestion of quick change. “I ran for a four-year term. I promised those four years and I’m someone who keeps promises. I totally stand behind that decision.” Giving Finance to the Social Democrats is “acceptable” and “European policy will be formulated jointly” within the government, limiting the SPD’s ability to set the agenda, Merkel said.

There are plenty of ECB speakers this week, chief amongst them Bundesbank President Jens Weidmann who last Thursday said, “The favourable economic outlook lends credence to the expectation that wage growth and therefore domestic price pressures will gradually increase in keeping with a path towards the Governing Council’s definition of price stability… If the expansion progresses as currently expected, substantial net asset purchases beyond the announced amount do not seem to be required”. As for the currency, ““The recent appreciation of the euro seems unlikely to jeopardise the expansion… Research suggests that the exchange rate pass-through, which is to say the impact of exchange rate movements on inflation, has declined.”. The EUR opens in North America this morning at USD1.2270 and EUR/CAD1.5410.


The British Pound spent most of Wednesday morning steadily falling and by lunchtime in Europe was by some distance the worst-performing of all the major currencies. GBP/USD stood just below 1.39 immediately before the US CPI numbers then dropped to a low just a few pips above 1.3800. It was then the quickest of all the major currencies to reverse its losses and went on to a day’s high just below 1.4000; more than a full cent above where it had been prior to the US data release. Overnight in Asia, it has regained a 1.40 ‘big figure’ for the first time in a week, reaching a high in Europe of USD1.4070.

In its annual review of the UK economy, the IMF noted, “Economic growth has moderated since the beginning of 2017, reflecting weakening domestic demand. The sharp depreciation of sterling following the referendum has raised consumer price inflation, squeezing household real income and consumption. Business investment has been constrained. In the medium term, growth is projected to remain at around 1.5 percent under the baseline assumption of continued progress in Brexit negotiations that lead to an understanding on a broad free trade agreement and on the transition process.” Executive Directors noted that “output growth remains positive and labor market performance strong, notwithstanding the moderation in economic activity that reflects the impact of the exchange rate depreciation on consumption and the heightened uncertainty following the decision to leave the European Union (EU). This uncertainty will continue to weigh on growth, and the outlook depends crucially on the outcome of the negotiations with the EU”. We have seen already this year that the GBP can rally on the prospect of positive Brexit outcomes, but the price action during the Foreign Secretary’s speech yesterday is a timely reminder of what can happen in the opposite case.

There have been no official UK statistics today. The next focus of market attention will be the January retail sales figures which are released on Friday morning. The British Pound opens in North America at USD1.4050, GBP/EUR1.1260 and GBP/CAD1.7545.


The Australian Dollar swung just as wildly as most of the world’s major currencies yesterday. AUD/USD stood at 0.7860 just before the inflation numbers and, as stocks tumbled, it fell almost a full cent. Two hours later, the pair had regained all its losses and more and by the close of business in New York it was back on a 79 cents big figure for the first time since February 5th. This morning in Europe it rose as high as 0.7965; the highest in almost two weeks.


The latest Labour Force figures were released overnight. Employment increased 16,000 to 12,453,500. Full-time employment decreased 49,800 to 8,460,900 and part-time employment increased 65,900 to 3,992,600. Since January 2017, full-time employment has increased by 293,200 persons, while part-time employment has increased by 110,100 persons. Seasonally adjusted monthly hours worked in all jobs decreased by 24.1 million hours (or 1.4%) between December 2017 and January 2018 to 1,708.2 million hours. This follows a decrease of 8.6 million hours (or 0.5%) from November to December 2017, and four consecutive increases up to November. The average number of hours worked per employee per week fell to a new record low of 31.7. Employees are on average working 2.7% fewer hours than a year ago and that will limit the boost to household incomes from rising employment.

CBA have already changed their interest rate forecasts to remove the two hikes they previously had penciled-in for 2018. Westpac haven’t yet done this but note, “the Bank’s forecasts are not entirely out of line with our own view and, arguably, consistent with steady rates over the next few years.” NAB, meantime, still has two 25bp hikes in its forecast profile for H2 2018. Amongst the offshore commentators, Capital Economics today say, “while the continued strength of the labour market will provide at least some support to income and consumption growth this year, without much more wage inflation the RBA isn’t going to raise interest rates. We expect the RBA will keep interest rates at 1.5% until the second half of 2019.”. The Australian Dollar starts in North America this morning at USD0.7920, with AUD/NZD at 1.0735 and AUD/CAD0.9895.


The New Zealand Dollar traced out pretty much the same pattern as its Australian cousin in the wild period either side of the US CPI figures. The NZD/USD pair stood at 0.7325 just before the numbers then plunged around three-quarters of a cent. Two hours later it was more than a cent off the low at a 10-day high and finished the day as the top performer of all the major currencies we track here with NZD/USD in the high-73’s and the all-important AUD/NZD cross down near a 6-month low of 1.0735. NZD/USD briefly touched 74 cents in Europe this morning for the first time in two weeks but was unable to consolidate at this level.


Overnight we’ve seen new figures on house sales from the Real Estate Institute of New Zealand. In a snappy Press Release they say that, “As the mercury rose during January to produce the hottest month on record, sales volumes across New Zealand rose when compared to the same time last year for the first time in 19 months”. The number of properties sold in New Zealand during January 2018 increased by 2.7% when compared to January 2017 (4,366 up from 4,251). The number of properties sold in Auckland increased 0.9% year-on-year to 1,157 up from 1,147. REINZ said, “January can often be a quiet month for the industry as people spend much of their time at the beach. However, clearly the warmer weather has helped sales, as it’s the first time we’ve seen a positive year-on-year sales increase in seven months. There were some really positive figures from around the country, with 11 out of 16 regions experiencing an increase in sales when compared to the same time last year.” The median house price for New Zealand increased by 7.1% to $520,000, up from $485,500 in January 2017. Auckland’s median price decreased by 1.2% to $820,000 down from $830,000 at the same time last year.

Tomorrow we’ll get to see New Zealand’s manufacturing PMI survey. The New Zealand Dollar opens this morning in North America at USD0.7375 and NZD/CAD0.9215.