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USD has eased lower. AUD and NZD both rally. GBP has another mixed day as EUR again struggles to find support.

By Nick Parsons

The British Pound had a much better day than might have been expected on Thursday, rising against most currencies except the newly-buoyant Australian Dollar and Canadian Dollars. Its best performance came – in order - against the NZD, EUR and USD.

Ahead of an EU Leaders’ Summit today, Prime Minister Theresa May had dinner in Brussels yesterday evening to lobby for swift agreement on the terms of a post-Brexit transition period. According to Press reports, May told the leaders that the British government “makes no secret of wanting to move on to the next phase and to approaching it with ambition and creativity”. “I believe this is in the best interests of the UK and the European Union,” May said. “A particular priority should be agreement on the implementation period so that we can bring greater certainty to businesses in the UK and across the 27.”

It seems unlikely that anything concrete will emerge from these discussions. Instead, both sides will issue constructive Press releases claiming progress is being made, deadlines are tight, goodwill exists and negotiations can proceed in the New Year. Move along please, nothing to see here…

At its final meeting of the year, the Bank of England’s MPC voted unanimously 9-0 in favour of no change in Bank Rate. Its accompanying Statement read very cautiously, stressing that the pace of future rate hikes would be very gradual and limited in extent. It reiterated its judgment that that “inflation is likely to be close to its peak, and will decline towards the 2% target in the medium term.” Interest rate changes – if they are made – are more likely to be announced in months when there is also a Quarterly Inflation Bulletin and Press Conference. The cycle for this is February, May, August and November so we shouldn’t have to worry about a rate hike at the January MPC meeting.

The Pound opens in London this morning at USD1.3440 and EUR1.1405, with GBP/AUD at 1.7495 and GBP/NZD at 1.9135.

A quick look at the US Dollar index tells you that the USD had a good day on Thursday. A closer look behind the scenes, shows this is not strictly true. The EUR had a very poor day and as it comprises 57% of the index (which we highlighted here earlier this week), so the USD index was able to fight back. Having tumbled from a high on Tuesday afternoon in New York of 93.81 to 92.95 in Sydney yesterday morning. the USD index climbed back to 93.30; regaining almost exactly half its losses over the period.

No matter how many times the Fed Statement is read and re-read (and your author has been doing this for longer than is healthy!) it is extremely difficult to pin the blame for any of the Dollar’s declines on the text therein: “the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong.” Its new economic projections revised up 2018 GDP forecasts from 2.1% to 2.5% with further more modest upgrades to the outlook in 2019 and 2020. Though two of the nine voting members dissented, there were no downward revisions to future ‘dot points’ and the belief that inflation would indeed pick up was again reiterated.

We’d say the US Dollar fell despite the Statement, not because of it. And if we may re-quote Dr. Yellen’s very last sentence from her very last FOMC Press Conference, “let me emphasize the correlation is not causation.” OK, she was talking about the shape of the yield curve rather than currency markets but it’s a point that always bears repetition when looking at the multiple drivers of foreign exchange each day.

The US Dollar index opens this morning at 93.12 and a busy week of economic data finishes with the Empire manufacturing survey and November’s industrial production.

 

Thursday was another day of broad-based losses for the EUR which completely unwound all of Wednesday gains against the US Dollar and finished firmly in bottom spot on the one-day FX performance table. EUR/USD fell from a high of 1.1844 to 1.1765 with GBP/EUR up from 1.1350 to 1.1400.

Yet again, the currency’s fall came despite very positive incoming economic data; this time another very strong set of ‘flash’ PMI data in the Eurozone. Markit’s Press Release was full of seasonal good cheer. “The eurozone economy picked up further momentum at the end of 2017, with December seeing the fastest growth of business activity for nearly seven years. The best factory output and order book gains since 2000 pushed the manufacturing headline PMI to a record high, while an upturn in service sector to growth to the highest since early-2011 underscored the broad-based nature of the current surge in activity”.

As for the ECB meeting, new staff economic projections showed upward revisions to growth forecasts. 2018 GDP is now seen at 2.3% (previously 1.8%) with 2019 at 1.9% from 1.7%. 2018 CPI was nudged up from 1.2% to 1.4% though 2019 and 2020 were left unchanged at 1.5% and 1.7% respectively. The Introductory Statement was basically a “copy/paste” job from October and Mr Draghi had so little to say the Press Conference actually finished 7 minutes ahead of schedule.

EUR/USD opens in London this morning at 1.1785 with GBP/EUR at 1.1400.

The Australian Dollar is now on track for five consecutive daily gains; something it hasn’t done for several months. Those traders who observed the squeeze in the Kiwi Dollar on Monday and thought it might be prudent to scale back their Aussie shorts too most definitely did the right thing. From a low point of USD0.7502 last Friday, AUD/USD is up 175 pips and stands this morning at a 5-week high.

There have been no fresh economic numbers in Australia today, leaving traders locally to focus entirely on events at the WACA in Perth. The Aussie bowlers did even better than their currency this week; recovering from 368-4 to knock England out for 403; 6 wickets lost for just 35 runs. We wonder if this match can make it to a fifth day on Monday or whether investors can give the Government’s Mid-Year Fiscal and Economic Outlook (MYEFO) their full and undivided attention. Budgets in Australia don’t have the same drama as their British equivalent though they do give the Government a good opportunity to make soothing noises to the international ratings’ agencies about economic growth and debt sustainability.

The AUD opens in London this Friday morning at USD0.7675 with the AUD/NZD cross up almost exactly a cent from yesterday morning at 1.0970.

The Canadian Dollar did extremely well on Thursday and knocked the AUD off top spot in the one-day performance table. We’ve been flagging up here all week the fascinatingly-titled speech from Bank of Canada Governor Stephen Poloz on “things that keep me awake at night”. He did not disappoint. He is always a wonderfully thought-provoking speaker, never afraid to go against the prevailing G7/BIS consensus and full of insight into the policy-making process. He is a very under-estimated Central Banker; erudite but self-deprecating in equal measure.

His speech to the Canadian Club in Toronto can be summarized briefly, the three issues were cyber threats, high house prices and “The tough job market for young people”. He also threw in a wonderful dismissal of bitcoin: “the term “cryptocurrency” is a misnomer: “crypto,” yes, but “currency,” no. For something to be considered a currency, it must act as a reliable store of value, and you should be able to spend it easily. These instruments possess neither of these characteristics, so they do not constitute “money.”

Overall, the context of his speech was that the Canadian economy is doing extremely well and is at a “sweet spot” in the economic cycle. “The economy has made tremendous progress over the past year, and it is close to reaching its full potential. We are very encouraged by this, and we are growing increasingly confident that the economy will need less monetary stimulus over time.”

Needless to say, currency markets loved this speech. USD/CAD tumbled a full cent to a one-week low of 1.2735. It opens in London this morning at 1.2770 with GBP/CAD at 1.7160.

The New Zealand Dollar rarely travels in a straight line. After three consecutive days of gains at the beginning of the week which took it back to US 70 cents for the first time since October 19th, on Thursday it retraced around half a cent to 0.6980. Overnight, it has bounced back on to 70 cents, helped in part by the strength of its Aussie cousin.

Finance Minister Grant Robertson managed to avoid any traps set for him by a TV interview with CNBC. He said the New Zealand Dollar – the word’s 11th most widely traded currency – had slipped from very high levels and "We want a sustainable exchange rate that gives our exporters a fair go". Being careful not to give any hostages to fortune, he noted, "I am comfortable with the general trend but specific targets for the exchange rate are not ones for the finance minister."

In other news overnight, Stats NZ has projected New Zealand's labour force (which includes both employed and unemployed people will keep growing, driven by an increasing population and people working into older ages. Currently 2.6 million people are in the labour force. The new projections indicate a total labour force of around 3.0 million in 2030 and 3.5 million in 2068. People aged 65 years and over (65+) will make up an increasing share of the labour force. In 1991, just 1 percent of the labour force was aged 65+. Currently the 65+ share is 6 percent; this is projected to increase to 9 percent in the late 2020s.

NZD/USD opens in London this morning at 0.7020 with NZD/EUR at 0.5960 and GBP/NZD at 1.9135.