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GBP lower ahead of Cabinet reshuffle. AUD hit by lower iron ore forecasts. USD edges higher but NZD is top performer so far.

By Nick Parsons

The British Pound had a mixed week and finished just above the mid-point of its range against the US Dollar. GBP/USD began the new year amidst a general sense of optimism around the prospects for a Brexit trade deal. With many banks recommending long-GBP as their top currency trade for 2018, it raced up to a high early on Wednesday morning of 1.3608. From then on it was a rapid slide back down to 1.3500 on a combination of poor UK construction data and very strong US numbers. On Thursday, the GBP was well-bid as the UK Services PMI Business Activity Index rose in December but Friday brought a very poor - but not unexpected - set of new car registration data and the GBP finished at USD1.3565, AUD1.7265 and NZD1.8920.

It is reported in The Times this morning that, “Britain experienced its worst year for consumer spending in five years in 2017, after expenditure dropped in the run-up to Christmas as declining real wages and economic uncertainty continued to put a strain on household finances”. Figures being published by Visa and IHS Market today show that retail spending fell by 1% in December on an annual basis, with total expenditure falling for seven of the past eight months. Compared with November, spending fell by 2.6%, contributing to a 0.3% drop for the whole of 2017; the first annual decline since 2012.

With few top-tier UK economic statistics this week, attention will most likely be on domestic politics. Prime Minister Theresa May is said to be announcing a major Cabinet re-shuffle on and the media locally will be consumed with what it may or may not mean for economic policy and Brexit negotiations. Ahead of these numbers, the GBP opens in Europe this morning at USD1.3550 with GBP/AUD at 1.7265 and GBP/NZD1.8880.

The first week of the New Year wasn’t short of news for the US Dollar, though its index against a basket of major currencies ended only a couple of tenths lower around the mid-point of its weekly trading range. On Tuesday the Dollar index fell to a 14-week low of 91.44, Wednesday it rallied back up to 91.92 and on Thursday it was back down to 91.50 before ending the week at 91.66.

Away from the Fire and Fury of US politics, Friday’s labour market report was generally viewed as a bit of a disappointment. Non-farm payrolls rose just 148,000, compared with the 190,000 consensus estimate. The jobless rate was at 4.1% for a third month, while average hourly earnings increased by 2.5% from a year earlier, after a 2.4% gain in November that was revised downwards. The December numbers, while below forecast, brought the 2017 total to 2.06 million jobs; below 2016 but slightly more than analysts had been expecting at the start of Donald Trump’s first year as president.

Overnight in Asia, the USD has strengthened very marginally as both EUR/USD and GBP/USD are between 10-15 pips lower than Friday’s close. All eyes now will be on Friday’s CPI to see whether or not the strength in the economy and labour market is at last feeding through into higher prices. The US Dollar index opens in Europe this morning around 91.75.

 

The EUR had a very mixed first week of the year; at one point reaching a fresh 3-year high against the US Dollar but then slipping back on Friday to be below the mid-point of its weekly trading range. Indeed, for all the optimism around the Eurozone economy, the EUR rose only against the USD and was down against all the other major currencies we follow here. Overnight in Asia it has edged a little lower against the USD to be back where it was on Thursday morning at 1.2020.

For this coming week, the calendar is quite busy with a string of second-tier economic releases but a growing concern for currency traders is the progress – or otherwise – of talks to form a coalition government in Germany. According to Press reports, two-thirds of Germans believe her best days are behind her, according to the Deutschlandtrend survey for ARD television, while satisfaction with her slipped to 52%, down from 63% in October. Ms Merkel’s husband, Joachim Sauer, retired from his professorship in October, and she is said to have thought long and hard about running for a fourth term.

Chancellor Angela Merkel has been the dominant figure on the European political scene for the last decade and uncertainty about her future is likely to weigh down on the EUR despite the solid economic news. This morning brings EU Consumer Confidence and the Business Climate Indicator and we’ll also get to see November retail sales data.

The EUR opens in London this Monday morning at USD1.2010, with GBP/EUR at 1.1275.

The Australian Dollar was on a US 78 cents big figure for all but a few minutes of the holiday-shortened week, moving steadily higher to reach a best level on Friday of 0.7874; its highest since October 20th. Overall, the AUD ended the week higher against the USD, GBP and EUR but down against the NZD and CAD.

There were two main drivers of the Aussie Dollar: commodity prices and the Chinese economy. 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. On Thursday it was flat and on Friday it finally closed lower; breaking a remarkable streak which had not seen a down day since the Fed hikes rates in December.

The Australian Government’s Department of Industry, Innovation and Science today said it expects iron ore prices to average $51.50 a tonne this year, down 20% from 2017, because of rising global supply and moderating demand from top importer China as its steel sector shrinks. The forecast price decline will continue into 2019, when the steelmaking raw material will average only $49 a tonne, the Department said. Today, the price of iron ore is around $75 per tonne and it hasn’t been below the $52 forecast since June 2017. The report warned, “The iron ore price is expected to experience some ongoing volatility in early 2018, as the market responds to uncertainty regarding the impact of winter production restrictions on iron ore demand.”

Private sector forecasts for iron ore have been mostly higher: UBS and Citibank, for example, both see prices averaging around $64 per tonne for 2017 and the official numbers have weighed down on the Australian Dollar overnight. It opens in Europe this morning at USD0.7840 with GBP/AUD at 1.7275.

The Canadian Dollar had yet another very good week, finishing way at the top of the performance table after further gains in energy prices and a second consecutive labour market report which was considerably stronger than consensus expectations. Having briefly dropped below USD/CAD1.2500 on Thursday, the pair tumbled at one point to 1.2372 on Friday; the lowest since September 27th.

Both Brent crude oil and US benchmark West Texas Intermediate rallied last week as the political unrest in Iran (the third largest OPEC producer which pumps around 3.8m barrels per day) came into focus. Brent crude reached $68.10 on Thursday whilst WTI rose to $62.07, a level not seen since June 2015.

One month ago, it was the November employment numbers which first lit a fire under the CAD with a 79,500 monthly increase in jobs. Friday’s report showed that in December, the jobless rate fell to 5.7%, the lowest in the current data series that begins in 1976. The number of jobs rose by 78,600, smashing expectations and bringing the full-year employment gain to 422,500, the best annual increase since 2002. Since September, the Canadian economy has added 193,400 jobs; the biggest 3-month gain in over 40 years.

The yield on 2-year Canada bonds jumped 6bp to 1.77% on Friday, close to a seven-year high whilst the market-derived probability of a rate hike at the Bank of Canada’s next meeting on January 17th surged to 70%, from 40% in the week. The CAD opens in London this morning at USD1.2400 with GBP/CAD at 1.6810.

The New Zealand Dollar is again showing some of the day-to-day volatility which characterized it in early December when it would regularly swing from being the day’s strongest currency to the very worst. Last Wednesday, it under-performed with the AUD/NZD cross moving up to a 1-month high of 1.1050 and the NZD/USD pair struggling to hold on to a US 71 cents big figure. On Thursday, however, it surged to the top of the FX pile with AUD/NZD down to 1.0985 and NZD/USD back up to 0.7160. Friday saw it extend gains against both the AUD and the USD to end the week the second-best performer after the Canadian Dollar. This morning in Asia it is back out in front on the leaderboard, with AUD/NZD at a nearly 3-week low of 1.0935.

There’s very little economic data scheduled for release in New Zealand this week and the currency will likely be driven by offshore events and news flow. The day-to-day volatility we have seen for almost a month now is unlikely to subside and clients may find it useful to leave firm orders in advance to benefit from any large swings in their favour, rather than using up precious intellectual capital by following choppy markets in real-time.

After the first trading session of the week, the New Zealand Dollar opens in Europe this Monday morning at USD0.7175 with GBP/NZD at 1.8890.