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US Dollar at a fresh 3-month low; on track to lose almost 9% in 2017. GBP and EUR end the year with positive momentum.

By Nick Parsons

Like its cricketers, the British Pound had a much better day than might have been expected on Thursday, lagging behind the EUR and CAD but gaining against all the various dollars. It reached a best level of USD1.3454 early in the London morning but after a 25-pip retracement was back up to the highs in the New York afternoon; overnight it has extended gains up to 1.3465; its best level since the EU/Irish/Brexit deal spike back in early December.

The strength in the GBP comes despite some pretty weak figures on UK housing market activity. British banks approved the fewest mortgages in 15 months in November, when the Bank of England raised interest rates for the first time in more than a decade. Banks approved 39,507 mortgages for house purchase last month, down from 40,417 in October and 5% fewer than in November 2016, trade association UK Finance said yesterday.

More comprehensive lending figures from the Bank of England are due next Thursday and despite the Chancellor’s attempts to boost the number of first-time property buyers, it is very unlikely there will be any significant pick-up, if at all, until later in the Spring. A recent survey from the Royal Institution of Chartered Surveyors said that activity in the housing market remained subdued in November and that homeowners were holding off moving unless absolutely necessary for reasons such as death, divorce or new employment. New instructions to sell fell for the 22nd month in a row, while the number of sales agreed fell for the third consecutive month.

The pound opens in Europe this morning at USD1.3465 with GBP/EUR unchanged from yesterday morning at 1.1265 and GBP/AUD at 1.7265.

On this last full working day of the year, we wish all our clients a happy, peaceful and prosperous New Year 2018.

The US Dollar is once again lower. Last week its index against a basket of major currencies fell from 93.50 to 92.85 and it has now fallen every day since Christmas. After a very brief opening rally on Tuesday, the index fell to a 3-week low of 92.73. On Wednesday in Europe it traded down to 92.51; the lowest level since December 1st and yesterday in New York it hit 92.24; the weakest since September 25th. After the briefest of rallies overnight in Asia, it is down to 92.20 at the London open this morning.

With just one trading day left in 2017, the USD index against a basket of major currencies is on track to lose just almost 9%; the first annual decline since 2012. Its high for the year was way back on January 3rd when EUR/USD hit a low of 1.0341. Since that point, the euro is now up more than 13%, its biggest advance since 2003, and is the largest G-10 gainer against the US currency this year.

Today, of all days, brings the potential for some big price swings; the end of the month, the quarter and the calendar year when global portfolio hedges are rebalanced to account for relative performance changes. To some extent the high correlation of assets across geographies should reduce the need for portfolio rebalancing but with a long weekend ahead, this may be the time for clients to lock-in their FX needs if the levels are attractive.

Away from the fluctuations in currencies, we offer a word of warning for any clients planning to visit the US for New Year. An arctic blast has sent most of the US Northeast and Midwest into a deep freeze that has set record lows in several places. For most of the region encompassing New England, northern Pennsylvania and New York, the National Weather Service issued wind chill advisories or warnings as temperatures were expected to be below 10 degrees fahrenheit in a wide area. For upstate New York, east of Lake Ontario, the NWS warned of “dangerously” cold wind chills of minus 5 F to minus 30 F through Friday, whilst Erie - a city of about 100,000 on the shores of Lake Erie in northwest Pennsylvania - is already buried under more than 65 inches from a record-breaking storm earlier this week. Wrap up warm this weekend…

The US Dollar index opens in Europe this morning at a 2-month low of 92.20. The 2017 low was 91.00 on September 5th…

 

The EUR finished equal top of the FX pile with the CAD on Thursday; rising almost three-quarters of a cent from Wednesday’s New York close to reach a high of USD1.1958; matching the best level it touched on November 27th. Overnight it eased back very slightly to 1.1938 before rallying back to 1.1955.

The ECB’s Monthly Economic Bulletin expanded on the thinking outlined in the latest staff projections presented at the last Council Meeting. It is perhaps the most upbeat assessment in recent memory. “The euro area economic expansion continues to be solid and broad-based across countries and sectors. Real GDP growth is supported by growth in private consumption and investment as well as exports benefitting from the broad-based global recovery. The latest survey results and incoming data confirm robust growth momentum in the near term. Compared with the September 2017 ECB staff macroeconomic projections, the December 2017 projections revised the outlook for GDP growth upwards substantially. Euro area real GDP is foreseen to grow by 2.4% in 2017, 2.3% in 2018, 1.9% in 2019 and 1.7% in 2020.”

For today, the EUR opens in Europe this last day of the year at USD1.1955, GBP/EUR1.1265 and AUD/EUR0.6530. Its high for the calendar year 2017 so far has been USD1.2036 on September 8th.

The Aussie Dollar has enjoyed a really good festive season. Boxing Day saw AUD/USD hit a high of 0.7730 - its best level in 2 months. On Wednesday during the New York morning, the pair extended its gains to a near 10-week high of 0.7777 and yesterday it touched 0.7807; the highest since October 24th. Having subsequently sold off a quarter of a cent, this morning in London it is back on a US 78 cents handle.

The AUD is still viewed as a commodity currency, even when it doesn’t produce some of the commodities which are going up in price! For sure, gold is up 4.1% since December 11th and iron ore is up 22% in exactly two months. Copper is up just over 12% in less than 3 weeks, aluminium is up 13% in just under a fortnight whilst zinc is up 7% since December 7th. When commodities all rise strongly together, so too does a “commodity currency”.

There is a very wide spread of views as to what 2018 holds in store for the Australian Dollar. Morgan Stanley, for instance, sees AUD/USD at 0.67 by the end of next year whilst BoA Merril Lynch has 0.77 and UniCredit goes for 0.82. We’d note that in an environment of generally low asset market volatility and strongly rising commodity prices, the extra yield available in Australia looks very attractive. Experience also teaches us that it looks very attractive until it doesn’t and that reversals can be swift and sudden. No asset class is more fickle and subject to the whims of fashion than foreign exchange. As the old saying goes, “it never looks more bullish than at the top of the market”.

The AUD opens in Europe this morning at USD0.7803 with AUD/NZD at 1.0985 and GBP/AUD1.7250.

The Canadian Dollar had a very strong day on Thursday, equal top performer with the EUR. NYMEX crude which slipped a little to $59.55 on Wednesday, is this morning up at $60.25; the highest since June 2015. Brent crude futures - the international benchmark - are also up, rising 45 cents or 0.7% to $66.61 a barrel. Brent broke through $67 earlier this week for the first time since May 2015. Since the start of the year, Brent and WTI have risen by 17 and 12 percent, respectively, although the price rises from mid-2017 are much stronger, at nearly 50%.

A Reuters survey of 32 economists and analysts forecast Brent crude would average $59.88 a barrel in 2018, up from the $58.84 forecast in the previous monthly poll. US light crude was expected to average $55.78 a barrel next year, up from the $54.78 forecast in the previous monthly poll. Strong OPEC compliance with the supply pact should lend support to prices, analysts said. However, price rises will be capped by booming shale output in the United States, which is not participating in the global deal to curb production. US oil production, which has risen more than 16 percent since mid-2016, is expected to surpass 10 million bpd next year, some analysts said.

We’ve been highlighting that the technical picture has definitely shifted in the CAD’s favour after the decisive close below USD/CAD1.2760 and it will be a currency to keep a close eye on in the first few days of 2018. The Canadian Dollar opens in Europe this morning at a 10-week low (CAD stronger) of USD1.2560 with GBP/CAD at 1.6910 and EUR/CAD at 1.5015.

The New Zealand Dollar is still keeping up with the strength in its Aussie cousin with the AUD/NZD cross in a 1.0970-1.1000 range since Friday last week. NZD/USD reached a best level of 0.7040 on Tuesday, by yesterday it had extended gains to 0.7097; the strongest in 10 weeks and overnight it has just reached a US 71 cents big figure for the first time since October 18th.

Whilst the gains in the Australian Dollar are largely linked to commodity prices, this most certainly is not what has been driving the New Zealand Dollar higher recently. Instead it is a combination of factors: a global investor base which was running short or underweight positions in the currency after the uncertainties of the September election, the announcement of a new but highly experienced Governor at the RBNZ and the extra yield available on New Zealand’s money and bond markets which looks attractive in an environment of generally low asset market volatility.

We’d note the short position appears now to have been unwound, the change of personnel at the RBNZ is no longer news and the yield advantage in NZ is pretty slim by historic standards. This doesn’t of itself signal the top for the Kiwi Dollar as momentum is itself a powerful force in foreign exchange markets. After a very strong run recently, however, clients with foreign exchange business to transact would be well-advised to think whether now is the time to lock-in their FX requirements.

The New Zealand Dollar opens in Europe this morning at 0.7104 with GBP/NZD at 1.8955.