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Quiet overnight markets see currencies in familiar ranges. US passes tax reform bill, Australian statisticians have some festive fun

By Nick Parsons

The pound opens in London this morning within 10 pips of where it was 24 hours ago against the US Dollar. Twice yesterday it failed just short of 1.34 but having sold off during the afternoon to just 1.3337 – and at one point looking likely to be the weakest currency on the day - it rebounded quite smartly in the New York session.

The UK Government yesterday held its first formal cabinet meeting to discuss its preferred end-state after the Brexit negotiations. A Downing Street spokesperson said the meeting was “good, clear and detailed” and that the Prime Minister hopes for a deal that “secures the best possible trading terms with the EU, allows the UK to set rules that are right for our situation and facilitates ambitious third-country trade deals”.

According to this source, 25 ministers spoke at the final cabinet meeting of the year, which lasted an hour and 25 minutes, making a range of contributions that Downing Street said were not restricted to their specific briefs. A quick calculation shows they averaged a little over three minutes each; barely enough time to make an argument and probably not enough to start one with each other.

The meeting, of course, was hailed as a success. “As we have said throughout, we are confident of negotiating a good deal for financial services and, as we have always been clear, that will be in the EU’s interest as well as ours,” the spokesman said.

With no economic data scheduled for release in the UK today, we have at lunchtime the very last Prime Ministers’ Questions of the year at midday. It will be interesting to see whether the Opposition can effectively attack the Government or whether the spotlight will instead fall on its own internal contradictions on Brexit. Ahead of that, the pound opens in Europe at USD1.3390with GBP/AUD at 1.7475 and GBP/NZD at 1.9235.

The Dollar had a roller-coaster day on Tuesday after Monday’s difficult to explain drop. We reminded readers seeking to understand its decline of the wise words of Janet Yellen that “correlation does not imply causality”. It was certainly interesting to do a Google search on Monday evening and look at the multiple versions of “US Dollar drops as….”.

Having opened in Sydney at 93.25 yesterday, the USD’s index against a basket of major currencies fell to 93.07 but rallied in the European afternoon to 93.20; not quite reversing all the decline but with a steadier tone nonetheless. Its’ rally came as US bond yields rose above their recent trading ranges with 10-year Treasuries up at 2.45% from 2.38% on Monday. From 4pm London time, however, and even as US bond yields sustained their earlier climb, the USD turned lower once more and closed with its index at the day’s low of 93.04.

Overnight, the US Senate approved the $1.5 trillion tax bill, which includes permanent tax breaks for corporations and temporary tax cuts for individuals, by a final vote of 51-48. Once enacted, the legislation will represent the most drastic changes to the US tax code since 1986. The bill lowers the top individual tax rate from 39.6% to 37% and slashes the corporate tax rate to 21%, a dramatic fall from its current rate of 35%. Speaking at a Press Conference after the vote, Senate majority leader Mitch McConnell hit back against criticism that the tax overhaul was unpopular among the public. “If we can’t sell this to the American people, we ought to go into another line of work.” Let’s see if this line comes back to haunt him at some point in the future.

For this Wednesday morning, the US Dollar index opens in Europe at 93.05. There’s not much on today’s US economic calendar though existing home sales are expected to have risen 0.9% m/m to an annualized pace of 5.52m.

 

The euro had a very good day on Tuesday, rising back on to a US 1.18 big figure at the end of the Sydney session and staying on it for pretty much the whole day It hit a best level of 1.1829 in the European time zone; the same as Monday’s high. By the end of the day, however, and as the US Dollar weakened, it went on to hit a high of 1.1846 and finished as the strongest of the major currencies.

Having stubbornly refused to take any encouragement from last week’s crop of positive data, the release of the German ifo Survey this time did provide some support. According to the ifo Press release which was unusually full of seasonal cheer, “Sentiment among German businesses is excellent ahead of Christmas, but no longer quite as euphoric as last month. The ifo Business Climate Index edged downwards to 117.2 points in December from 117.6 (Seasonally adjusted) points in November. This was due to less optimistic business expectations. Assessments of the current business situation, by contrast, were more positive this month. German businesses are full of festive spirits.

In manufacturing the index dipped down from its record high. Manufacturers are no longer quite as optimistic about the months ahead. However, they are more positive about their current business situation, primarily due to an upturn in orders. Both indices close the year way above their long-term average. Manufacturers expect prices to continue to increase”.

The EUR opens in Europe this morning at USD1.1835 and GBP/EUR1.1310. German PPI and Eurozone PPI data due today are very unlikely to be market moving data points.

Tuesday really was an up and down day for the Aussie Dollar. Everything was going well for the Australian Dollar until late in the London morning. It had risen to a best level of USD0.7680 and looked on track to test last Friday’s high of 0.7688 before quickly falling 30 pips to 0.7648. In the last 2 hours of New York trading, the AUD recovered to 0.7665; almost exactly where it had begun 24 hours earlier.

Overnight, there have been no ‘traditional’ economic data though the Australian Bureau of Statistics has had an outbreak of festive fun. In a Press Release entitled “Seasonally adjusted greetings from the ABS”, it looks at some of the numbers around Christmas. It noted “Many people are travelling at this time of year and in 2016, 47,800 Australians left for an overseas trip on Christmas Day itself”. ABS data shows the most popular overseas short-term travel destinations for Australians were New Zealand, the USA and Indonesia. In 2016-17, Australians spent on average $818 per domestic trip (with at least one overnight stay), and around $115 on a domestic day trip. International visitors, meanwhile, spent on average $4,347 per trip to Australia.

As for Christmas, the Household Expenditure Survey shows that on average Australians spent $202 a year on toys and $27 per year on Christmas decorations. The normally dry statisticians said, “Santa will be busy this Christmas visiting the 2 million Australian families with children under the age of 12. The 2016 Census shows that most children live in New South Wales (1.2 million), Victoria (947,408) and Queensland (795,908).”

We’ll leave the last word on population to the ABS without further comment: “if you are celebrating your birthday on Christmas Day you are in rare company as the last 10 years of data shows it is the second least common birthday, after February 29. However, the Christmas and New Year holidays are the most likely time for babies to be conceived.

The AUD opens in Europe this morning at USD0.7660 with AUD/NZD at 1.0990 and GBP/AUD1.7470.

Price action in the Canadian Dollar over the past 48 hours is worth examining as a case study in what can happen in foreign exchange markets at this time of year. The CAD spent all of Monday trapped in a 30 pip range from USD1.2848 to 1.2878 and an overnight trading range in Asia on Tuesday which saw it stuck between just 1.2860-1.2873. By noon in London yesterday the pair stood at 1.2860 but barely 2 hours later it was at 1.2891 and on its way to a high in New York of 1.2912; its highest in almost 5 months.

We’d love to be able to explain what was behind the move but, as with the US Dollar on Monday, there was little or no fundamental driver. It’s certainly likely that ‘stop-loss’ orders were triggered above the end-November high of 1.2900 and the November 1st high of 1.2905 but the pair then gave back 40 pips of its rapid gain equally quickly. At this time of year as markets become increasingly less liquid, such seemingly random price action is an ever-present risk and careful consideration should be given when placing orders either to exit or enter currency transactions. Bear in mind, too, that the price spike came in what was the ‘home market’ for USD/CAD. Imagine what can happen in overseas time zones…

For the rest of this week, there’s still plenty to come on the Canadian economic data calendar. Today is wholesale trade, Thursday is CPI and retail sales and on Friday it’s the monthly GDP numbers for October. The Canadian Dollar opens in London this morning at 1.2865 with GBP/CAD at 1.7215.

Overnight movements haven’t been large across the whole of the FX universe, though the New Zealand Dollar is, marginally, the weakest of the major currencies we track here.

The monthly trade deficit in November was a much bigger than expected -$1.2bn. This compares with consensus expectations of a much smaller -$350m deficit and an average of $447m for the previous five November months. The Kiwi statisticians always offer plenty of fascinating detail on their numbers. They note within an overall 27% rise in imports to $5.8bn, the value of car imports reached a new high of $513m. There were 26,700 passenger motor cars imported in November, at a higher average value than earlier in the year. Of those, 140 were new electric cars and around 170 were used electric cars.

On the other side of the trade ledger, exports rose 20% to $4.6bn, a new high for a November month. This was also the largest percentage rise in export values since January 2014, which also featured high dairy prices. Milk powder, butter, and cheese led the rise in exports this month, with butter prices up 82%. In November, China bought the most butter from New Zealand ($52 million worth) followed by Iran ($28 million worth).

NZD/USD opens in Europe this morning at 0.6970 with GBP/NZD at 1.9215.