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USD hits best level of the New Year. EUR weighed by German politics, GBP calm after govt reshuffle.

By Nick Parsons

After a mixed week in which it raced up to a high of USD1.3608, then came back down equally rapidly to 1.3500 before finishing on Friday evening at USD1.3565, the GBP had another up and down day on Monday.

Talk of an imminent Cabinet reshuffle by Prime Minister Theresa May initially pulled the rug from under the pound during the European morning and GBP/USD reached a low of 1.3528. In fact, the Government reshuffle proved to be much less far reaching than most commentators had either hoped or feared. There were no changes in any of the three big jobs - Chancellor of the Exchequer, Foreign Secretary or Home Secretary – but plenty of movement lower down the pecking order; the immediate impact of which was not particularly obvious. But, to the extent that it didn’t increase the chances of rebellion or mutiny, investors nerves were somewhat soothed by the lack of major changes. The pound regained its morning losses by the end of the European afternoon and stood where it had begun at 1.3560.

This morning, as the reshuffle is examined more closely, the consensus amongst political pundits is that it exposed the weakness of the Prime Minister and laid bare the few options open to her. The Times notes, “An event that could have been used to clarify the direction of the government after a difficult few months served only to highlight the incoherence at Number Ten” whilst the Daily Telegraph, calling it the night of the blunt stiletto, says “Theresa May’s hopes of asserting her authority with a Cabinet revamp fell flat after senior ministers derailed her reshuffle by refusing to budge from their jobs”.

It will be interesting to see whether the foreign exchange market’s reaction yesterday afternoon proves correct or is now reversed. Meantime, the GBP opens in Europe this morning at USD1.3570 with GBP/AUD at 1.7285 and GBP/NZD1.8885.

There are two ways of looking at the Dollar’s performance in this early part of the New Year: the bearish view is that with all the good news on the economy, the stock market and a rising trend of yields across the maturity spectrum, it still couldn’t rally and made a fresh 14-week low last week of 91.44 on its index against a basket of major currencies. The bullish view is that for all the growing political storm around President Trump, a disappointing labour market report and a stream of negative forecasts for it from major financial institutions, it is up off the lows with some recent positive momentum.

It will obviously take some time to see which of these views proves correct though, in the very short-term at least, the bulls can take some comfort from Monday’s price action. At 91.56, the low of the Sydney session was above Friday’s 91.50 low and from that point it moved steadily higher to make it back on to a 92 ‘big figure’ for the first time in more than a week.

The Dollar’s rise on Monday came despite a generally very dovish speech on the US economy from Federal Reserve Bank of Atlanta President Raphael Bostic. He urged his colleagues to be patient in raising interest rates, citing some indications that the public’s expectations on inflation could slip below the central bank’s 2 percent target. He said, “I am comfortable continuing with a slow removal of policy accommodation. However, I would caution that that doesn’t necessarily mean as many as three or four moves per year.”

Overnight in Asia, the USD has slipped around one-tenth from Monday’s close and its index against a basket of major currencies opens in Europe this morning around 91.95.


The EUR had a poor day on Monday, slumping to the bottom of the one-day performance table despite further upbeat survey indicators. The day brought a better than expected consumer confidence index of 116 (f/c 114.8) industrial sentiment of 9.1 (f/c 8.4) and business climate of 1.7 (f/c 1.51). For good measure, retail sales in the Eurozone rose 1.5% m/m in November, above the consensus estimate of a 1.3% monthly increase. We mentioned here yesterday the growing concerns about the political situation in Germany and that this was likely to weigh down on the EUR. This is precisely what happened as EUR/USD slipped to a 2018 low of USD1.1962.

The German chancellor Angela Merkel said it would be “an enormous challenge” to bridge political divisions within her own Christian Democrats and with the left-wing SPD in order to re- create the coalition that ran the country from 2013 to 2017. A failure by Mrs Merkel to agree a Große Koalition, or “Groko”, will trigger new elections at a time when her own conservative alliance with the Bavarian Christian Social Union (CSU) is under strain and losing support to right-wing nationalists who took third place in September’s federal election with 5.8 million votes.

The leaders of both the SDP and CSU have said that their political careers would be over if coalition negotiations failed and Germany were once again plunged into divisive elections. Talks are scheduled to continue until Thursday and the longer they go on, the more nervous will foreign exchange markets become. The EUR opens in London this Monday morning at USD1.1965, with GBP/EUR at 1.1345.

The Australian Dollar hasn’t been able to extend last week’s gains. Though it remains on a US 78 cents ‘big figure’, on Monday it slipped steadily lower and at one point was more than 40 pips below Friday’s peak of 0.7874, which was its highest since October 20th. Overall, it ended the first day of this week the second-weakest of all the major currencies we follow closely here but has recovered somewhat overnight to USD0.7855.

The main reason for the modest rally in the AUD was a better than expected set of numbers on building approvals; the first stage of any construction process. The number of dwellings approved rose a seasonally adjusted 11.9% in November 2017 and has risen for 10 months, according to the Australian Bureau of Statistics (ABS). Dwelling approvals have continued to rise in recent months, which has been driven by renewed strength in approvals for apartments. Approvals for private sector houses have remained stable, with just under 10,000 houses approved in November 2017. The value of total building approved rose 1.5%in November, in trend terms, and has risen for 11 months. The value of residential building rose 2.3 % while non-residential building rose 0.2%.

We said at the very beginning of trading on Monday that the AUD “may now need better domestic data, continued support from higher commodity prices or a further collapse of the USD if it is to build on recent gains.” Buildings approvals managed to tick the first of these boxes, even if the other two weren’t forthcoming.

The AUD opens in Europe this morning at USD0.7855 with GBP/AUD at 1.7285.

The Canadian Dollar has had a great start to the New Year 2018. USD/CAD tumbled at one point on Friday to 1.2372; the lowest since September 27th, though yesterday it stabilised in a range 1.2385-1.2435 and is close to the midpoint of that range after the overnight session in Asia.

After Friday’s Canadian employment report, the market-derived probability of a rate hike at the Bank of Canada’s next meeting on January 17th surged to 70%, from 40% earlier in the week. Yesterday, those rate hike odds hit 86% after the Bank of Canada published its Q4 Business Outlook Survey; the last real chance for the Central Bank to communicate something dovish ahead of next Wednesday’s monetary policy meeting.

The Business Outlook Survey indicator rebounded almost to its summer peak, consistent with widespread positive sentiment. “Firms plan to expand operations to accommodate sustained demand, which is evident in a rebound of investment and employment intentions since the autumn survey. Reflecting strong demand and tightening labour markets, indicators of capacity pressures and labour shortages picked up. Survey results suggest that economic slack is now largely limited to the energy-producing regions. Firms expect growth of input prices to rise, owing to gains in commodity prices. Pass-through of input costs and emerging wage pressures to output prices remains limited due to competitive forces. Inflation expectations are modest and unchanged from the third quarter”.

The Canadian Dollar opens in London this morning at USD1.2410, GBP/CAD01.6840 and AUD/CAD0.9745.

We have been warning for a while that the New Zealand Dollar was becoming more volatile, exhibiting some of the price action which characterized it in early December when it would regularly swing from being the day’s strongest currency to the very worst. For two of the last three trading days it has been top of the performance table even though there has been a complete absence of domestic economic or political news to drive the currency. Overnight, NZD/USD has extended recent gains to a fresh 12-week high of 0.7188 whist AUD/NZD is at 1.0925 having at one point on Monday fallen to 1.0918; its lowest since December 18th.

We haven’t had any fresh economic news but yesterday we did get the usual detailed and always fascinating annual summary of the past 12 months and 3-month weather outlook from New Zealand’s National Institute of Water and Atmospheric Research. Obviously for an economy so dependent on farming, forestry and agriculture the weather forecast is massively important. NIWA reported that 2017 was “a year of extremes” with New Zealand recording its fifth warmest year in more than a century. Annual rainfall was above normal across the country and for some regions including Auckland, Waikato and coastal Canterbury, as much as 149% higher.

Only the years 2016, 2013, 1999, and 1998 were warmer than 2017, whilst the nationwide average temperature was 13.1°C or 0.5°C warmer than average. The ‘Tasman Tempest’ in March and cyclones Debbie and Cook in April contributed to record or near-record rainfall yet by the end of 2017, 11 out of New Zealand's 16 geographical regions were experiencing meteorological drought and it was the second warmest December on record. For the 3 months January - March 2018, temperatures are forecast to be above average, with high confidence for all regions of New Zealand. Rainfall totals are most likely to be in the above normal range in the North Island and about equally likely to be near normal or above normal in the South Island.

The Kiwi Dollar opens in Europe this morning at USD0.7185 with AUD/NZD at 1.0925 and GBP/NZD1.8880.