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USD holding just above recent lows ahead of US employment report. GBP awaits car registration numbers after EUR/USD hits fresh 3-year high

By Nick Parsons

After a very strong start to the New Year, the GBP has been spinning its wheels as it tries to gain traction. On Wednesday morning it reached USD1.3608; its highest since the day after the EU referendum back in June 2016. From that point on, however, it was downhill all the way and the pair tumbled more than a full cent with the pound losing ground against every one of the major currencies we track here. Yesterday, it regained around half its losses after a better than expected set of PMI services numbers and overnight in Asia has made further progress though GBP/USD at 1.3560 is still around 45 pips below the week’s best levels.

The UK Services PMI Business Activity Index registered 54.2 in December, up from 53.8 in the previous month, to signal the second-fastest upturn in service sector output since April 2017. Higher levels of business activity have now been recorded for seventeen months running, supported by the resilient economic backdrop and rising consumer spending. However, service providers noted that Brexit-related uncertainty continued to hold back clients’ willingness to spend at the end of 2017. New business volumes increased at a solid pace in December, but the latest upturn was the slowest recorded since August 2016. Reports from survey respondents suggested that subdued business investment and cost consciousness among clients were factors that had weighed on sales growth in December.

Today we’ll get to see new car registrations both for the month of December and the full year 2017. Contrary to perceptions about the UK car manufacturing, based on memories of the chaos in the 1970’s and subsequent decline, the automotive industry is one of the economy’s key sectors. It employs more than 800,000 people, 165,000 in manufacturing. The Treasury is dependent on a healthy new car market, relying on £5.5 billion in annual revenues from vehicle excise duty and even more from VAT on sales. The market expects new car registrations around 2.55m; a 5.6% drop from 2016 levels.

Ahead of thse numbers, the GBP opens in Europe this morning at USD1.3560 with GBP/AUD at 1.7290 and GBP/NZD1.8960.

The good news for the US Dollar is that it didn’t make a fresh low yesterday! On Tuesday its index against a basket of major currencies hit a low of just 91.44 but then on Wednesday following strong ISM data and after the FOMC Minutes were published, it managed to reach 91.92. On Thursday it began to turn lower once more and in the London afternoon it slipped back to a low of just 91.49. Overnight in Asia it has risen very marginally to 91.60.

The big story of the day in the United States was further strength in the economic numbers and yet another record high for stock markets. The Dow Jones Industrial Average jumped past 25,000 for the first time on Thursday morning, on track to make the fastest run ever to a fresh 1000-point milestone. If the DJIA closes above 25,000, the jump from 24,000 would have taken 23 trading days, ahead of the 24-day spans that took the index to 11,000 in 1999 and 21,000 in March last year.

On the economy, the latest ADP employment report was much stronger than consensus expectations, showing 250,000 jobs were created in December against forecasts of a more modest, but still impressive, 190,000 gain. ADP’s Press released noted, “Throughout the year there was significant growth in services except for an overall loss of jobs in the shrinking information sector. Looking at company size, small businesses finished out 2017 on a high note adding more than double their monthly average for the past six months. The job market ended the year strongly. Robust Christmas sales prompted retailers and delivery services to add to their payrolls. The tight labor market will get even tighter, raising the specter that it will overheat.”

Today brings the official labour market report as well as the ISM services index and November’s trade balance. The US Dollar index opens in Europe this morning at 91.60; barely 15 pips above its recent low.

 

The euro was Thursday’s second-strongest currency after the New Zealand Dollar. Having reached a more than 3-year high of USD1.2077 on Tuesday, then slipped steadily on Wednesday, yesterday it rallied to a fresh cycle high of 1.2082 after publication of the Eurozone aggregate and individual countries’ PMI services reports. Overnight in Asia it has traded broadly sideways against the USD in a very tight range from 1.2067 to 1.2077.

The final Eurozone PMI Composite Index posted 58.1 in December, up from 57.5 in November, to register its highest reading since February 2011. The headline index has signalled growth for 54 successive months, with the average level during quarter four the best since the opening quarter of 2011. The trend in new business also strengthened in December. Manufacturers saw the steepest increase since April 2000, underpinned by improved domestic demand and near-record growth in new export orders. Service providers, meanwhile, registered the fastest increase in new work for over a decade.

The positive economic environment led to improved business confidence in the euro area. Optimism rose to its best since September, after strengthening to a joint-record high in Germany and three-month highs in France, Spain and Ireland. We said yesterday that “whilst the German data are very impressive, they have rather lost their power to surprise on the upside, given that expectations are already so elevated.” Nonetheless, the Markit Press Release was remarkably upbeat, saying, “A stellar end to 2017 for the eurozone rounded off the best year for over a decade, continuing to confound widely-held fears that rising political uncertainty would curb economic growth… Manufacturing is enjoying its best growth spell since data were first collected over two decades ago while the service sector closed off its best year since 2007.” The language is enough to melt the heart of even a hardened trader !!

The EUR opens in London this Friday morning at USD1.2065, with GBP/EUR at 1.1240.

For the last two or three weeks the AUD has been all about industrial commodities and precious metals. The Bloomberg Commodity Index, which tracks returns on 22 raw materials, posted an unprecedented 14 days of gains to Wednesday, closing at the highest since February last year. What is particularly striking is that the global commodity index has not had a down day since the Fed hikes rates in December. This remarkable run helped push AUD/USD up to a high overnight of 0.7868; the highest since October 20th. A poor set of monthly trade figures has since taken some of the shine off the Aussie Dollar and it is around a quarter of cent below its overnight high.

The trade figures were pretty disappointing. October’s tiny surplus was revised away to show a monthly deficit of -$302m. Consensus expectations for November were for a surplus of around $550m. Instead, the balance on goods and services was a deficit of -$628m. Taking the two months together, the overall ‘miss’ compared to expectations was a whopping $1.5bn.

Exports were largely flat on the month - just $141 million higher at $31.8 billion - as a two per cent rise in non-rural goods such as iron ore helped offset a fall in cereals and grain, as well as a 23% drop in notoriously volatile non-monetary gold exports. A 26% rise in metals exports was also partially offset by a two per cent drop off coal, coke and briquettes, as China's environmental focus weighed on thermal coal volumes. Imports, meantime, were up 1.0%, or $467 million, driven by an increase in capital goods, with aviation and telecommunications equipment leading the gains.

We have not seen back-to-back monthly deficits in Australia since October 2016 and unless there is a substantial pick-up in December (which is still possible given what happened to commodity prices during the month), then net trade could be an overall drag on Q4 GDP.

The Australian Dollar opens in London this morning at USD0.7840 with GBP/AUD at 1.7295.

After Wednesday’s pause which saw USD/CAD spent most of the day grinding higher in a 1.2505-1.2540 range, yesterday it was a story of renewed strength for the Canadian Dollar. It couldn’t quite crack the 1.25 mark in European trading but overnight in Asia it has been down to USD/CAD1.2485; the lowest level since October 20th.

The first economic data release of the new year showed Canadian producer prices increased in November at their fastest pace in nearly three years due to higher costs related to energy and petroleum. Industrial product prices (which measure the price manufacturers receive once their goods leave the plant) advanced 1.4% in November. The last time the index rose at a faster pace on a month-over-month basis was in February 2015. Meanwhile, the country's raw-materials price index also rose at an elevated pace, jumping 5.5% in November, following a 3.8% increase in October. This pushed the annual increase up to 14.2% in November, after 6.6% y/y the previous month. The increase in the RMPI was mainly due to higher prices for crude energy products (+25.4%), particularly conventional crude oil (+26.7%). Year over year, the RMPI excluding crude energy products rose 6.5%.

As we sit and moan about the wet and miserable start to the New Year in the UK, a quick look at the weather forecast shows the temperature in Toronto is not expected to rise above minus 10 degrees centigrade at any point over the next three days with lows of minus 25 degrees forecast on Friday. Rather than venturing outside, however, currency traders will be warmed by the heat from their computers as they await Friday’s labour force survey. Remember it was the November employment numbers which first lit a fire under the CAD with a 79,500 monthly increase in jobs.

December’s employment report on Friday is released at the same time as the US non-farm payrolls so it could be quite a volatile time around 1.30pm this afternoon. Before then, the Canadian Dollar opens in Europe this morning at USD1.2500 with GBP/CAD at 1.6950.

The New Zealand Dollar has continued to do well, both against its Aussie cousin and the US Dollar. Overnight, it extended recent gains to USD0.7161; its highest since October 19th and taking its cumulative gains since the low of 0.6800 on November 20th to more than 3 ½ cents. Against a slightly softer AUD, the cross is down at 1.0966; the lowest since December 21st.

It’s very cold in North America right now but in New Zealand it is very wet with an intense Summer storm hitting much of the North Island - a dramatic break in an unusually dry summer, which has led to drought in many farming regions and curbed production of milk. Auckland was hit by two months’ worth of rain in 24 hours on Friday, according to the National Institute of Water and Atmospheric Research, prompting authorities to shut major roads and cancel ferry services and dozens of flights. More than 20,000 households were left without power, including 12,000 in Auckland, according to local media.

As the weekend begins Down Under, the New Zealand Dollar opens in Europe this morning at USD0.7150 with GBP/NZD at 1.8955.